Bitcoin value increased 78 percent in one week in December, another indication of a value appreciation trend that seems to have no limit. In the past 365 calendar days, Bitcoin’s value has risen by more than 1,700 percent.
Governments of the world are noticing, including in the United States. They realize people who possess Bitcoin are enjoying capital gains in the thousands of percent, and currently, the only taxes they are collecting is from people who are being good citizens and self-reporting.
Senate Bill 1241, titled the Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017, was introduced on May 25. Its purpose, according to the bill, is to “improve the prohibitions on money laundering, and for other purposes.”
The primary objective of the bill is to reduce the amount of crime that can be financed through the use of funding hidden from traceable channels. This includes cryptocurrencies, which — due to the way they were created — are not easily traced. The Bitcoin Coaches would be naive not to acknowledge the fact that cryptocurrencies are used for this purpose. Many opponents of the growth of Bitcoin and cryptocurrencies like to refer to it as the favorite tool of thieves and scammers, and this perception has spread.
However, we point out that cash is often used to finance and pay for criminal activities, and nobody is suggesting that new restrictions be placed on cash. Bitcoin, the first cryptocurrency, was not created for criminal purposes. Unfortunately, there are brilliant criminal minds on this Earth, the kind of minds that figured out a way to use airplanes as tools of terrorism. Shrewd criminal minds have indeed found ways to use cryptocurrencies to their advantage.
The Senate bill seeking to combat money laundering says:
No person shall knowingly conceal, falsify, or misrepresent, or attempt to conceal, falsify, or misrepresent, from or to a financial institution, a material fact concerning the ownership or control of an account or assets held in an account with a financial institution.
A person convicted of an offense under subsection (a), or a conspiracy to commit such offense, shall be imprisoned for not more than 10 years, fined not more than $1,000,000, or both.
While the text does not say “Bitcoin” or “cryptocurrency,” it applies to those financial instruments. Coinbase, for example, is registered as a financial institution in some form in 47 states. Any cryptocurrency in an account in Coinbase, therefore, will need to be disclosed. The bill does not make it clear under what circumstances the disclosure will need to occur, though. (The New York Times this week posted an interesting article describing how Coinbase, the world’s leading cryptocurrency exchange, is dealing with rapid growth.)
Many Bitcoin holders have considered the coin a tax shelter of sorts. Since it is not officially regulated in the U.S., many argue that the government has no right to know if they possess it and how much they possess. But the U.S. government previous declared Bitcoin and cryptocurrency as a commodity, meaning it can be taxed based on capital gains. While this particular bill does not address taxation, it might as well. The IRS has already received approval from a judge for access to Coinbase accounts which had transactions of $20,000 or more between 2013 and 2015. There can only be one reason for that.
The Senate Judiciary Committee held a hearing on the bill on November 28. In written testimony, ICE Homeland Security Investigations Investigative Programs Assistant Director Matthew Allen said:
“… many of the illicit activities conducted in cyber-enabled crimes are paid for with virtual currency, including both centralized and decentralized convertible virtual currencies. The latter are sometimes referred to as cryptocurrencies. Virtual currencies are not issued or backed by any sovereign nation, and are distinguished from fiat currency or “real currency,” which is the coin and paper money of a country that is issued and guaranteed by the country; designated as its legal tender; and circulates and is customarily used and accepted as a medium of exchange in the issuing country. HSI agents are increasingly encountering virtual currency, including more recent, anonymity enhancing cryptocurrencies (AECs), in the course of their investigations. AECs are designed to better obfuscate transaction information and are increasingly preferred by TCOs (transnational criminal organizations). Some illicit virtual currency exchangers have also begun to cater to TCO actors, including through the use of “mixers” or “tumblers” that anonymize virtual currency addresses and transactions by weaving together inflows and outflows from different users, further increasing the challenge to law enforcement’s ability to tie virtual currency transactions to real-world individuals.”
Members of Congress, who probably know as little about Bitcoin and cryptocurrencies as most people, are the recipients of a forboding verbal picture of Bitcoin painted by law enforcement officials.
At least one source sees the chances of this bill passing as very small. Skopos Labs, based in New York City, says on its website that it “has developed patent-pending deep-learning AI technology and a platform that collects massive amounts of data to provide strategic forecasts.” In essence, the company uses artificial intelligence to project the importance of pending legislation. On December 6, 2017, Skopos Labs said:
There is no further detail explaining the 8 percent prediction, but Bitcoin Coaches’ guess is that the bill simply doesn’t have enough momentum at present. But make no mistake, it is a sign of things to come. The U.S. government is going to want to know who owns Bitcoin and how much they own — for the reasons listed in the legislation, and because they want to collect taxes on capital gains.
Most of us have nothing to fear regarding criminal penalties. But you may want to start to get a feel for how much capital gains tax you will owe on your Bitcoin when you sell it — change it to U.S. dollars. A good place to do that is Bitcoin.tax, which says it offers the following:
- Simply import details of any Bitcoins or alt-coins you have bought or sold from one of our supported trading exchanges, add any spending or donations you might have made from your wallets, any mined coins or income you have received, and we’ll work your tax position for you.
- You can compare using different cost-basis methodologies, including FIFO, LIFO, and average costing, as well as comparing like-kind treatment.
- We’ll show your Capital Gains Report detailing every transaction’s cost basis, sale proceeds and gain.
- An Income Report with all the calculated mined values.
- A Donation Report with cost basis information for gifts and tips.
- And your Closing Report with your net profit and loss and cost basis going forward.
- Your Capital Gains are also ready to import directly into tax software, such as TurboTax® and TaxACT®, attach as a statement to your tax return or even print as a PDF.
It’s worth a look because it’s clear you’re going to need to know this sooner than later.