Cryptocurrencies have often been described as “the new offshore account” because it is too expensive and time consuming to trace. Cryptocurrencies, such as Bitcoin, are anonymous and decentralized, and although they are a popular form of investment, they are also a tool for those attempting to hide assets.
Every time a Bitcoin is exchanged the sender must announce his or her account number, the account number of the receiver, and the amount of Bitcoin being exchanged. Each account is linked with “keys.” One public key and one private key. The public key represents a unique “fingerprint” of the transaction, allowing for a part of the transaction to be tracked. The private key is personal to each account and is similar to a password. The Bitcoin network uses the users’ public key to verify every transaction.
The IRS considers cryptocurrencies as capital assets subject to capital gain or loss on all sales and exchanges. As such, there are generally two recommended approaches for reporting Bitcoin sales and exchanges. One, you can convert the sale to currency using the market price for Bitcoin that day; or two, you can use an average Bitcoin vs. dollar rate for the tax year.
For the most part, cryptocurrency exchanges lack a paper trail. This, of course, leads some people to deception when it comes to disclosing their assets. If you are in a divorce proceeding, or otherwise need to determine someone’s assets, and you suspect they may have purchased cryptocurrency, there are ways to “find” that cryptocurrency. For instance, you can request documentation regarding cryptocurrency as if you would for any other financial account. You can also inspect bank statements or account records for large financial withdrawals or wire transfers.
Nonetheless, cryptocurrency is a relatively new and unknown concept to most people, and yet it is gaining more mainstream attention. When or if you encounter cryptocurrency, whether in your business or personal life, you should seek out the assistance of an attorney.