IRS Warning Letters to Early BTC Buyers Illustrate the Utter Disarray of our Current Laws

The U.S. Internal Revenue Service (IRS) released a statement on Friday that an operation targeting those who traded or bought more than $20,000 worth of Bitcoin between the years of 2013 and 2015. A warning letter have been sent, or will be sent, to each individual that are in this list, strongly advising that those who may not have reported taxes properly or even filed at all to amend their taxes as soon as possible.

According to the bulletin posted by the IRS, three variations of letters which they referred to as "educational letters" are being sent out. The contents of the letters and who gets what variation of the letter is currently unknown, but it is speculated that the three variations are most likely on a scale of "we know you tried, but you should probably amend your filing" to "we know you bought large amounts of Bitcoin which were never reported; amend or feel the wraith of Uncle Sam."

The exact method in which these 10,000 people were picked are unknown as well, but we can safely assume that they were obtained from subpoenas served to a a certain exchange that was practically the only exchange from 2013 that is still standing today -- Coinbase. To be fair, Coinbase has fought for the privacy of their users last year around the same time, and managed to convince the courts that it was unconstitutional to serve a blanket order for all traders and their activities. That's when $20,000 in trading and buying was decided as the threshold in which the IRS had the authority to "request" data on.

It is no secret that the IRS is a severely understaffed and underfunded agency -- so many are wondering how they are going to pull off keeping tabs on 10,000 people, let alone enforce their threats. "Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” IRS Commissioner Chuck Rettig warned in the press release. Mr. Rettig did, however, give a hint on how they plan to pull this off and somewhat effectively force the hodlers that have hid their Bitcoins: chain analysis. Chain analytics is a very real and effective technology which have been around since the days of Silk Road (the original one). Some chain analysis companies claim to be able to track the movement of funds even with coin tumbling and even coin joins. Bitcoin, once thought to be anonymous and private, is far from that... it's a public ledger. There's nothing private about that.

“The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

On the brightside, the IRS did mention earlier this year that they are working on new tax codes for cryptocurrencies. Unfortunately, no progress update has been given. Despite chain analysis and blockchain forensics technologies that are available to assist the IRS, the likelihood of the agency successfully forcing their hands on compliance to 10,000 early adopters of Bitcoin (vastly composed of Libertarians) is highly unlikely. These warning letters are not likely to change the intentions of those who have already made up their minds that they will never pay taxes on their Bitcoin gains. They have had years to cover their tracks and have already converted to Monero and back, and the number of ledgers being "accidentally tossed" into the sea after a boating incident will likely be high.

"Whoops. I guess I can write that off as a total loss."

I do not condone avoiding taxes, and I urge those who can afford to pay the fines to do so -- now is not the time to anger another federal agency. But perhaps its time for us, as a country, to really educate and encourage the federal government to create a new class of assets, because at the moment it's a circus with the SEC, FinCEN, CFTC, FINRA, and even Homeland Security fighting for jurisdiction over cryptocurrency. So what is it? Is it property? Financial instrument? Commodity? Securities? A threat to the global  economy? Maybe we should define what it is first, because at this rate the U.S. for the first time will not be the leaders of the next technological revolution. I've warned about this a year ago, and I still stand by what I said.

Originally published at Lunar Digital Assets. This is an op ed and does not reflect the views or stance of LDA in any manner. Yes, it's a shitshow, but pay your taxes. There's only two things in life you can't avoid...