First Circuit Finds Anti-Injunction Act Does Not Bar Challenge to IRS’s Use of John Doe Summons That Gathered Taxpayer’s Virtual Currency Transactions

In a major decision that considers the implications of last year’s CIC Services opinion the First Circuit in Harper v Rettig has held that the Anti-Injunction Act (AIA)  does not bar a constitutional challenge to IRS’s use of its John Doe Summons authority that allowed it to obtain information about a taxpayer’s virtual currency transactions.


IRS has been actively using its John Doe summons powers to get taxpayer information from virtual currency exchanges. One of those cases involved a summons on Coinbase as part of an investigation into the reporting gap between the number of virtual currency users Coinbase claimed to have and the number of U.S. bitcoin users reporting gains or losses to the IRS during 2013 through 2015.

After Coinbase refused to comply, the government moved to enforce the summons. Following a skirmish about the scope of that summons, and a district court’s decision to allow a third party to intervene under Federal Rule of Civil Procedure 24, the court issued an order enforcing the summons. I discussed some of the procedural skirmishes a few years back in A PT Anniversary and Court Finds IRS Summons on Coinbase Suggests an Abuse of Process.

Fast forward a few years. IRS has been using the information it received to contact taxpayers it believes have failed to properly report their income from the virtual currency transactions.  One of those taxpayers was James Harper. IRS sent Harper a letter that informed him of the requirements for reporting virtual currency transactions. It helpfully told him if he believed he had not accurately reported such transactions, he should file amended or delinquent returns. The letter also warned that if he had not “accurately report[ed his] virtual currency transactions,” then he “may be subject to future civil and criminal enforcement activity.”

Shortly after receiving the letter Harper filed suit in a federal district court in New Hampshire. One aspect of the suit involved a request for injunctive and declaratory relief, alleging that the IRS unlawfully obtained his financial information from virtual currency exchanges in violation of the Fourth and Fifth Amendments.

The District Court held that the AIA deprived the court of subject matter jurisdiction over the taxpayer’s claims for injunctive and declaratory relief. 

Harper appealed and claimed that the AIA did not bar his suit because his suit pertained to the information gathering function of IRS activity, rather than the assessment or collection process.

The government and district court distinguished CIC Services, noting that in that case the plaintiff sought to avoid the economic burdens of providing information about other taxpayers to the IRS and challenged its legal obligation to do so. According the government, and unlike in CIC Services, Harper “simply does not want the IRS to possess information bearing on his tax liability.”

Back when the Supreme Court issued its opinion in CIC Services PT had many posts that discussed the uncertain boundaries of that opinion, and whether courts may apply it more broadly than the circumstances of that challenge. See for example Bryan Camp in Supreme Court Reverses the Sixth Circuit in CIC Services – Viewpoint and my post Further Initial Thoughts on CIC Services.

In a relatively brief opinion, the First Circuit reversed, finding that CIC Services and the earlier Direct Marketing opinion opened the door to Mr. Harper’s challenge because the summons authority and IRS activities to enforce the summons “clearly fall with in the category of information gathering, which the Supreme Court has distinguished from acts of assessment and collection.” As such, the court held that Harper’s suit “challenges the IRS’s information-gathering authority and the Anti-Injunction Act limits our jurisdiction only in suits involving assessment and collection.”

The government sought to distinguish CIC Services and argued that the purpose of Harper’s suit was to restrain IRS assessment and collection power. According to the government

the substance of the suit’ is directed at the alleged harm of having the IRS retain and use information about [appellant]’s virtual currency transactions for use in determining [his] compliance with his income tax obligations,” and “[t]he ‘relief requested’ is the expungement of information that would allow the IRS to do so.” (Emphasis added.) See CIC Servs., 141 S. Ct. at 1589 (“In considering a ‘suit[‘s] purpose,’ [courts] inquire not into a taxpayer’s subjective motive, but into the action’s objective aim — essentially, the relief the suit requests.”)

The First Circuit disagreed:

As the Court observed in CIC Services, however, “[t]he Anti-Injunction Act kicks in when the target of a requested injunction is a tax obligation — or stated in the Act’s language, when that injunction runs against the ‘collection or assessment of [a] tax.'” Id. at 1590. Here, the target of the requested injunction is the IRS’s continued retention of appellant’s personal financial information, which appellant alleges the IRS acquired in violation of the Constitution and 26 U.S.C. §7609(f)

Drilling even deeper into the nature and purpose of the AIA vis a vis the relief Harper sought, the court viewed his suit as not attempting to limit IRS’s ability to redetermine his tax:

Contrary to the IRS’s suggestion that appellant’s suit is “a ‘preemptive’ suit to foreclose tax liability” (which would be barred by the Anti-Injunction Act), this suit, like the suit at issue in CIC Services, “falls outside the Anti-Injunction Act because the injunction it requests does not run against a tax at all.”  Rather, “[t]he suit contests, and seeks relief from, a separate legal” wrong — the allegedly unlawful acquisition and retention of appellant’s financial records. Like the plaintiff in CIC Services, appellant “stands nowhere near the cusp of tax liability,”  and “the dispute is [not] about a tax rule,” where “the sole recourse” in light of the Anti-Injunction Act “is to pay the tax and seek a refund,.” 


This case is remanded back to the district court to consider whether Harper has stated a claim on which relief can be granted. That is an uphill battle. The IRS appears to have lawfully obtained the information through the summons process, but this interim victory is important as it reflects at least one circuit’s view that courts are to liberally apply CIC Services and not limit it to situations when third parties are challenging IRS’s information reporting obligations.

FinCEN Moves To Include Convertible Virtual Currency On FBAR Form

We welcome back guest blogger James Creech, who describes an interesting development in the government’s efforts to track and tax virtual currency. Christine

Recently FinCEN has declared its intention to require convertible virtual currency (aka Bitcoin) to be reported on the FBAR. In order to begin the formal rulemaking process FinCEN published Notice 2020-2 stating that it intends to modify 31 C.F.R. 1010.350.

While not a formally a tax provision, filing delinquent FBAR’s and the IRS counterpart FATCA reporting were a main stay of the tax practice during the heyday of the offshore voluntary account disclosure program in the early to mid 2010s. As a result many practitioners would be well served by taking a second look at these proposed changes as more details become available.


One issue that has always appeared to be a challenge for reporting virtual currency on both the FBAR and the 8938 is identifying where the asset is held. The blockchain that stores the data on virtual currency is hosted on a decentralized network stored upon tens of thousands of computers all across the globe. The keys (analogous to a password) that control the underlying virtual currency could be anywhere as well. While it was generally accepted that keys stored on a desktop in the United States were not held in a foreign account, there were a number of edge cases that became much tricker to administer. For example how do you report a UK based exchange that might hold custodial assets in a server in Iceland? Or if bitcoin is stored locally on a phone does it become a foreign account if the taxpayer travels (with their phone) to Portugal for 9 months?

In recent days FinCEN has been laying the groundwork for a potentially wide application of FBAR reporting requirements.  On December 23, 2020 FinCEN published a notice of proposed rule making that would require virtual currency transactions from self custodial or unhosted wallets (wallets that do not use a financial institution to store the virtual currency) to be reported on Currency Transaction Reports (CTR) if the amount transferred to or from a financial institution was more that $3,000. Part of this proposed rule making was to expand the definition of unhosted wallets as having a high risk of money laundering similar to bank accounts held in Iran or North Korea. And while this is even further removed from tax, administrative law devotees will be interested in the fact that FinCEN’s comment period for these proposed rules was only 14 days which included Christmas and New Years. (If you would like to read comments I submitted they can be found here and they expand on the risk of loss concerns contained below)

Based upon how aggressive FinCEN has been towards unhosted wallets and CTR reports it will be interesting to watch how they treat unhosted wallets for purposes of FBAR reporting, and if the IRS follows suit by amended the requirements for FATCA reporting via Form 8938. It may be that FinCEN takes a hard line and definitionally declares that all unhosted wallets are foreign assets and as such need to be reported on a taxpayer’s FBAR. Those that fail to do so may be subject to the same draconian penalties of $10,000 (non willful) or 50% of the highest account balance (willful) as those who fail to report a Swiss bank account.

A Word of Caution

While FinCEN does have legitimate reasons for potentially using the broadest definition of unhosted wallets possible, such a mandate may cause security and liability issues for tax practitioners. Beyond the technological aspects, the biggest difference between virtual currencies and traditional assets is that virtual currencies users have a 100% risk of loss if the private keys used to transfer the underlying virtual currency are lost or stolen. There is no way for a user to recover compromised keys after a hack or to undo a fraudulent transfer that is a result of a phishing attack. For those reasons, high value virtual currency users have relied on a combination of robust data security using an unhosted wallets, coupled with personal anonymity to protect their assets. The logic behind anonymity is simple. Unless a thief knows that a particular user has enough virtual currency to steal they are not a target. Sophisticated attacks are costly and security developers can quickly fix exploits once they become known or widely used. As such criminals chose there targets carefully.

Why this matters to tax practitioners is that the information required to file the FBAR would also provide a roadmap for bad actors to target and steal virtual currency from your clients. Hacking a law firms internal system would mean that bad actors would have access to a list of clients along with where they lived, their contact information, what their net worth was, and in the case of any voluntary disclosures a narrative of their dealings in virtual currency. Such information could be used to then target the end user directly.

This informational burden would exponentially raise the stakes on tax practitioner data security. Having virtual currency information stored on a firm’s computer would be the digital equivalent of having large amounts of cash stored in the office in perpetuity. It would also significantly raise the need for specialized malpractice insurance because filing a FBAR for someone with $50 million in virtual currency is completely unlike filing an FBAR with someone with $50 million in a Swiss bank account. If the bank account information gets hacked there are still several layers of institutional security that might prevent the attacker from successfully gaining access to the assets, not to mention bank deposit insurance that would compensate for lost funds. If the firm’s virtual currency FBAR client list was hacked, and the information was used to successfully target the client, then the firm would be responsible for an uncompensated $50 million loss.

Given how anonymity is synonymous with criminality in the eyes of law enforcement it is likely that FinCEN will seek to require significant information when drafting the virtual currency FBAR rules. If this does happen tax practitioners need to be aware that simply going back to the old FBAR playbook will not be sufficient, and that there are very real second order consequences for both legitimate virtual currency users and the professionals that they use to comply with the law.

Coinbase Switches From 1099-K to 1099-MISC: A Better Mousetrap or Prelude to Litigation?

Welcome back to guest blogger James Creech. Today James looks into a recent announcement by Coinbase that they are changing their method of tax reporting. When I saw this (in a Law360 article by Joshua Rosenberg) I wondered how such a dramatic shift was possible under the tax laws. We are fortunate that James agreed to investigate the matter and illuminate us. Christine

Former Netscape CEO Jim Barksdale once said, “There are only two ways to make money in business: one is to bundle; the other is unbundle.”   Of the two options, virtual currency exchange Coinbase has chosen to go the bundling route.  At its beginning in 2012 Coinbase supported only a small number of virtual currencies and has steadily expanding its offerings over the last eight years.  Recently Coinbase has dramatically expanded its offerings to include tokens such as the stable coin DAI (don’t worry the technical side does not make a difference to this article) which offers rewards to its holders that functionally resemble interest.

These expanded offerings have caused Coinbase to rethink its third party tax reporting.  Prior to 2020 Coinbase reported transactions to the IRS using Form 1099-K.  The issuance of a 1099-K was due in large part to litigation between Coinbase and the IRS over the issuance of a John Doe Summons that asked for all information Coinbase had regarding US Taxpayers. (Les wrote about the litigation for PT, most recently here.) While the matter was decided in favor of the Government, Coinbase was able to limit the request to information that mirrored the 1099-K and has stuck with that reporting standard since 2017. 

For tax year 2020 that is all changing.  Coinbase is no longer going to issue 1099-K’s and will instead only issue 1099-MISC forms.


The switch from a 1099-K to a 1099-MISC could be dramatic for a large number of Coinbase users.  Form 1099-K reports gross transactions to the IRS if the taxpayer exceeds 200 transactions or a $20,000 threshold.  The standards for Form 1099-MISC reporting are much lower.  A 1099-MISC is required to be issued if a taxpayer receives more than $600 in payments during the year.  This switch could potentially provide the IRS the names of tens of thousands of taxpayers who thought that they could avoid paying tax on virtual currency gains because they fell under the $20,000 reporting threshold.

Coinbase’s decision to switch from Form 1099-K to Form 1099-MISC could be for a number of reasons.  First is that 1099-MISC is a more appropriate form to report payments akin to interest and that Coinbase decided it was more efficient only to issue one type of 1099.  The second could be that Coinbase made an internal decision that the shortcomings of the 1099-K were too great to ignore.  Since the 1099-K only reports gross transactions and not basis, many taxpayers who actively traded virtual currencies would have a very high dollar amount of transactions reported on the 1099-K but may only have small gains or could potentially have losses.  The responsibility of tracking basis and reporting gains and losses still falls on the taxpayer but now that the IRS is issuing CP2000’s based upon virtual currency exchange third party reporting they might have to spend time, effort, and resources rebutting an incorrect 1099.

The bigger unanswered question after this switch is does Coinbase even intend to report sales or other transactions to the IRS in 2020 and beyond?  The webpage announcing the switch to a 1099-MISC reporting standard states: “1099-MISC Eligibility To be eligible for a 1099-MISC, you must: 1. Be a Coinbase customer, 2. Have received $600 or more in cryptocurrency from Coinbase Earn, USDC Rewards, and/or Staking in 2020 and 3. Be subject to US taxes.”  Nowhere in this announcement are transactions such as sales or purchases mentioned. 

One reading of this press release is that Coinbase is beginning a taxpayer revolt against virtual currency third party reporting.  Recently Coinbase has acquired a reputation of being one of the more conservative technology companies.  For example, the company reaction to the Black Lives Matter protest over the summer was to simply ban its employees from speaking out on the matter or using BLM emblems as part of their internal communications.  This reaction was starkly different from most companies that put out a politely worded statement offering some sort of recognition of the importance of the events.  A further shift into libertarianism vis a vis refusing to provide information to the IRS might play well with the virtual currency community which tends to have an aversion towards any sort of government interaction.  Not to mention it would seem to offer a business advantage for any frustrated virtual currency user who had to spend significant time resolving issues based upon 1099-K’s lack of basis reporting.

If Coinbase does stop reporting transactions to the IRS it sets the stage for a reprise of the John Doe Summons litigation from a few years ago.  The IRS has made tax compliance in the virtual currency space a priority.  It has significantly upgraded its technical understanding of virtual currencies and dedicated significant resources to cracking down on unreported virtual currency income.  A resistant firm like Coinbase, and its users, would be the ideal target for the IRS to showcase their significant ability to identify virtual currency tax noncompliance just as it was in the original litigation.  Only time will tell what will happen, but the only sure thing at the moment is that there is not an ideal form for virtual currency third party reporting.

Virtual Currency, FBAR, and the Ripple Effect

We welcome back guest blogger James Creech. In this post James explains some of the current uncertainties surrounding virtual currency, particularly in how future IRS guidance might interact with legal positions taken by other federal agencies. Christine

Recently FinCen informed the AICPA Virtual Currency Task Force that Bitcoin and other Virtual Currencies do not trigger FBAR reporting even when held in an offshore wallet.

This guidance comes as a bit of a surprise for some tax practitioners. Conventional wisdom had been that there was a difference between Virtual Currencies being held in cold storage on a thumb drive in a foreign county, and those being held by a foreign third party who also retained the private keys to the Virtual Currency as a part of their service. It was believed that if the private keys were stored by the wallet service, and the wallet service could convert the Virtual Currency to fiat currency, then the account could be considered similar to an online poker account and reportable under U.S. v Hom, No. 14-16214, 9th Cir., (7/26/16).

While this will be welcome news for many taxpayers who hold foreign wallets, this guidance by FinCen has the potential to be more impactful on the tax consequences of Virtual Currencies than would initially be apparent. The IRS has long relied on other agencies to define key terms, and to more fully develop the legal nature of Virtual Currencies. This FinCen guidance may be the beginning of a deepening rift between agencies.


It is expected that the IRS will be releasing new Virtual Currency guidance shortly that will address some of the technological developments in the industry. One of the areas that could be addressed by this guidance is whether Virtual Currency held in foreign wallets is reportable on Form 8938. If the IRS decides that the Hom rational is correct and that foreign wallets are reportable this will create another significant distinction between the FBAR and Form 8938. For taxpayers this creates a higher likelihood of unfilled Form 8938’s due to taxpayer error and greater confusion between FBAR and Form 8938 requirements. I expect that this increased error rate will be higher than normal due to the fact that the Virtual Currency community relies heavily on industry blogs that many times are more interested in promoting virtual currency purchases rather than informing readers about compliance requirements.

For tax practitioners this split also raises questions of how much weight to put on the guidance of other administrative agencies. Because the IRS has issued so little guidance on Virtual Currency there are very few absolutes. We know that Virtual Currency is property because Notice 2014-21 clearly says so. What we don’t know is how far that definition goes, or if it can be treated like other specialized types of property. In the non-IRS context, the SEC has defined certain types of Virtual Currency as securities, and the CFTC has said that it is a commodity. It logically follows that if the IRS says a certain Virtual Currency is property, and the SEC says this Virtual Currency is a security, that a dealer in that particular Virtual Currency should be able to use a mark to market election under IRC 475. Given that Virtual Currencies as a whole suffered a bear market in 2018, a mark to market treatment might provide a desirable tax loss for many in the industry.

If there is a split in the FBAR and Form 8938 definitions, then assumptions that the IRS will allow taxpayers to import definitions from other agencies in order to tackle unaddressed issues lose some of their logic. It is impossible to overstate how important prior FinCen definitions are for IRS Virtual Currency guidance. The root definition of what is a Virtual Currency for IRS purposes is based in a 2013 FinCen definition of “convertible virtual currencies”. If the IRS does not see eye to eye with FinCen then there is a diminished likelihood that the IRS would adopt a CFTC definition and allow Virtual Currencies the same type of preferential tax treatments that they would allow for an established commodity. Of course the opposite reaction might also be true. If the IRS is the first agency to state that foreign wallets are reportable, we might see FinCen respond by adjusting their guidance to require FBAR disclosure as well. Either way, the pending IRS guidance will tell us a lot about how the IRS is thinking about Virtual Currencies and how it intends to incorporate guidance from other administrative agencies.

IRS Seeks Information via John Doe Summons Request on Bitcoin Users

Last week in federal district court in Northern California the Department of Justice filed a petition seeking authority to obtain records the records of all customers who bought virtual currency from Coinbase, a virtual currency exchange company, from 2013 to 2015. The John Doe summons request came on the heels of a TIGTA report on the challenges associated with the growing use of virtual currency, which I discussed here in TIGTA Issues Warning on Compliance Issues Associated With Use of Virtual Currencies.

We have not previously discussed John Doe summons requests. Essentially, a John Doe summons is a summons that does not identify the person with respect to whose liability the summons is issued. The government has used it extensively in its efforts to uncover the identities of taxpayers hiding assets in previously undeclared offshore accounts. (We discuss the use of John Doe summonses in Saltzman and Book IRS Practice and Procedure Chapter 13.05[2], and readers who want more should review the chapter’s discussion).


Sections 7609(c)(3) and (f) authorize the Service to issue a John Doe summons pursuant to an investigation of a specific, unidentified person or ascertainable group or class of persons. The summons requires district court approval in an ex parte proceeding. Before granting the summons, in addition to the investigation requirement the DOJ on behalf of the Service must also show a reasonable basis to believe that that person or group or class of persons may fail or may have failed to comply with any provision of the internal revenue laws; and that the identity of the persons and the information sought in the summons is not readily obtainable from other sources.

When the IRS seeks the use of a John Doe summons, the IRM provides that the Service should be far along in its development of the issues relating to the request:

The Service should no longer be in the information-gathering or research stage of a project when it decides to seek court authorization to serve a John Doe summons. The project research should be sufficiently developed to enable the Service to identify a specific tax compliance problem. The Service should be prepared to investigate the tax liabilities of specific taxpayers based on the information received from the John Doe summons.

IRM Necessary Purpose (Nov. 22, 2011).

To support the issuance of the John Doe summons request, the DOJ typically provides the district court declarations from IRS revenue agents who are in a position to provide information as to how the particular facts justify the issuance of the summons.

We have uploaded the declaration of the IRS Revenue Agent David Utzke that was filed in support of the John Doe summons request to seek the customer records. It makes for fascinating reading, detailing what IRS has learned to date on ways that US taxpayers are using the currency to (attempt to) disappear from the taxman and how the IRS in its constant game of a whack a mole is trying to figure out the ways that this technology will complicate IRS efforts to combat offshore evasion.

As the TIGTA report discussed, virtual currency usage complicates tax administration. Its use is growing (see paragraph 28 of the declaration where Revenue Agent Utzke estimates that the transaction value in dollars of bitcoin usage in 2015 exceeded $10 billion). I write this as I have just returned from a conference on how advances in technology and social knowledge can improve tax administration. Utzke’s declaration reveals what he has learned from investigating taxpayers who have used bitcoin as a way to hide income, including how some taxpayers shifted to bitcoin when IRS offshore efforts heated up a few years ago (see paragraph 32 for example). This first major public IRS effort to address the challenges of virtual currency reveals that with technological changes and advances come new ways that black-hatted taxpayers can game the system.

Update: For more on the John Doe summons request on Coinbase, see our Forbes blogging colleague Kelly Phillips Erb in IRS Wants Court Authority to Identify Bitcoin Users & Transactions

Jack Townsend at Federal Tax Crimes has an excellent and more detailed discussion of the summons request, including Coinbase’s likely opposition to the request, Jack’s initial take on the uphill battle the company faces, and the SOL impact of the John Doe summons request.

TIGTA Issues Warning on Compliance Issues Associated With Use of Virtual Currencies

Today is an historic day where the country and the world are absorbing what portends to be a sea change in America’s place in the world. It is hard to see what the direct impact a Trump presidency is going to have on tax administration. With control of the White House and both branches of the legislature I suspect that there will be an appetite and capacity for significant tax legislation.

At the same time, even apart from the political changes of the day, technological advancements suggest that tax administration is in the midst of a disruptive period. We have discussed some of those issues in looking at IRS Future State plans, as well as changes in Appeals as it shifts from person to person conferences and looks to virtual conferences as a way to connect with taxpayers and practitioners. One of the technological changes we have not discussed is the invention of bitcoin and the growth of virtual currencies. Those virtual currency developments highlight special challenges for tax administrators around the world, both with respect to traditional tax compliance issues and issues relating to bank secrecy that some tax agencies such as the IRS administer.


We have largely ignored the growth of virtual currencies, and while IRS issued a notice about them in 2014 (Notice 2014-21) it seems that IRS and Congress have likewise not focused sufficient energy on some of the issues associated with the use of bitcoin. At least that is the message in TIGTA’s As the Use of Virtual Currencies in Taxable Transactions Becomes More Common, Additional Actions Are Needed to Ensure Taxpayer Compliance.   In the report TIGTA warns that the spread of virtual currencies creates special challenges for tax administrators who rely heavily on the combination of self-reporting and third-party reporting to backstop income tax compliance. It also notes that IRS received significant comments in response to the issuance of its 2014 notice yet has failed to publicly address those comments or spend significant resources on educating the public on the difficult tax compliance issues that flow from the mining and use of virtual currency. IRS generally agreed with TIGTA’s recommendations but noted that it faces challenges in allocating scarce resources among competing priorities so there does not seem to be much agency urgency on these issues.

This is a brief post on a topic that deserves more attention. For those looking to wrap around the history and mechanics of bitcoin, I recommend a 2011 New Yorker article by Joshua Davis called The Crypto-Currency. A 2016 New Yorker article by Adrian Chen discussing the importance of the search for the mythic Saroshi Nakomoto, the creator of Bitcoin, connects the development and growth in virtual currency to a deep distrust of international and national monetary powers, a theme close to the surface in President-elect Trump’s messages. A Forbes piece by contributor Karl Whelan called How is Bitcoin Different From the Dollar also nicely summarizes and links some academic papers on the topic.

IRS in its 2014 notice provides that virtual currency is treated as property for U.S. federal tax purposes. Once you start from that premise, as IRS explains in a summary of its notice, “[g]eneral tax principles that apply to property transactions apply to transactions using virtual currency.” In other words, when you use property (like virtual currency) rather than old-fashioned US dollars to pay for goods and services you have a separate tax consequence that stems from in effect the tax system treating the use of virtual currency as a deemed sale for its fair market value upon a taxpayer using it to purchase goods or services.

As the IRS in its 2014 summary notes, that has major implications:

  1. Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
  2. Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.  Normally, payers must issue Form 1099.
  3. The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
  4. A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

The TIGTA report flags some of the complications that spin off that IRS starting point:

Notice 2014-21 requires a taxpayer who receives virtual currency as payment for goods or services to compute gross income using the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency is received. However, because bitcoins are divisible to eight decimal places, this means that each bitcoin can be divided up into 100 million pieces. Based on this general guidance, when a portion of a bitcoin is used to make a purchase, taxpayers will have to treat the transaction as property and determine their tax basis for the bitcoin on the day of the purchase. For example, if a taxpayer uses a portion of a bitcoin to buy a cup of coffee each day for one week, he or she will have to determine what portion of the bitcoin was used to make the purchase based on the daily exchange rate, convert it into U.S. dollars, and keep a record of each transaction so that the gain or loss from his or her virtual currency property can be properly reported. Notice 2014-21 does not provide taxpayers with guidance on what records should be kept and how the records should be maintained. Due to the potential complexity of reporting otherwise simple retail purchase transactions related to virtual currencies, further guidance is needed to help taxpayers voluntarily comply with their tax obligations.

While tax compliance does require some effort, to put consumers through the hoops needed to determine consequences on each use of bitcoin is unreasonable. TIGTA compared the Australian treatment with IRS’s treatment. It seems that the Australian Taxation Office also determined that bitcoin use could trigger a taxable event but the ATO “decided that there will be no income tax implications if the person is not in business or carrying on an enterprise and is simply paying for goods or services. Any capital gain or loss realized from the disposal of the virtual currency is to be disregarded provided its cost is $10,000 (Australian dollars) or less.” The de minimis carve out goes a long way in removing complications that spin from using virtual currency from day to day consumption transactions and pegs compliance costs for larger purchases.

TIGTA also notes that while reporting applies to payments made in virtual currency IRS information returns (e.g., 1099 W-2 etc) “do not provide the IRS with any means to identify that the taxable transaction amounts being reported were specifically related to virtual currencies.” Without that ability the reporting of those virtual payments (if in fact payors comply) does not contribute to IRS use of that information to test compliance on the user-level. TIGTA sensibly recommends that IRS “revise third-party information reporting documents to identify the amounts of virtual currency used in taxable transactions.” IRS agreed with that recommendation though it stated that due to competing funding priorities it did not view that as a priority.


The world changes at an increasingly fast pace. The buzzword in industry and academics is disruption. Disruptive changes can have disastrous effects on those who fail to adapt. Tax agencies are not immune to those forces. The growth in the use of virtual currencies over the past five years combined with the growing distrust in institutions as reflected in some of the recent political events in Europe and here suggest that there may be major changes in the way that people interact with each other in the commercial sphere. Consumers who use traditional greenbacks place faith in the United States. Consumers who use virtual currencies place faith in technology and code, which ensures that people are spending a bitcoin or fraction thereof only once.

Bitcoin was born when its creator was disgusted with the financial meltdown in 2008, with its creator thinking that people should and could not trust governments to behave responsibly. If governments move down the path of irresponsibility we may be entering a new phase in the use of virtual currency. In fact today bitcoin values have soared in light of the election (see e.g., The Telegraph’s Bitcoin price jumps as investors flock to safety after Donald Trump election victory . A tax agency that ignores those possible changes does so at its peril.