What if I Don’t Report My Bitcoin Income

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What if you don’t report all of your Bitcoin gains on your US tax return? You must have at least considered it by now. How would the IRS know? I get this question from clients at least as often as I see it in print. It is a tempting proposition: last year, US taxpayers had around a 1 in 100 shot of being selected for an audit by the IRS. This year, with more responsibilities management of compliance with the Affordable Care Act and less funding, the odds of dodging an audit are even better. However, if you decide to underreport your income and get caught, the result could entail severe consequences for you and also damage to Bitcoin’s regulatory future for all.At this point in its development, Bitcoin seems largely to attract three overlapping types of people: early adopters that are intrigued and/or excited by its possibilities I’ll call these “blockchain evangelists”, investors and entrepreneurs that see a way to cut costs or a new way to invest for a return “economic pragmatists”, and those who see Bitcoin as a way to get a little further away from a state-controlled money supply “crypto anarchists” or just “tax protestors”. All three of these groups have something to gain and something to lose by “forgetting” to report Bitcoin gains at tax time, but it is only the latter group that seems determined to dispense and propagate bad tax advice.Let us say, for the sake of illustration, that you booked substantial Bitcoin gains in 2013. Not enough to make you a Bitcoin millionaire, but enough to pay cash for a nice car and also enough that you would genuinely have an incentive to not report it. If you are like most young American Bitcoin users, you likely fall into a cohort that earns a salary between $50,000 and $100,000 per year, so your Bitcoin gains are not insignificant compared to your regular income. You decide not to report your gains, either because you just don’t think they are taxable incorrect or because you think it would be impossible for the IRS to find you out. Now what?

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