The Internal Revenue Service (IRS) is particular about paperwork. This holds true when it comes to transactions involving cryptocurrency like Bitcoins.
Why would I need to keep a record of these transactions? The IRS requires that any earnings made on these transactions be included in tax documents. A piece in Forbes discussed the agency’s requirements by delving into the details of a John Doe summons to Coinbase. The summons requested information about Coinbase users for the previous three years.
The piece concluded that this was a warning sign for cryptocurrency users: the IRS is watching.
What types of records are needed? It is wise to keep a record of all transactions within this market. Keep record of the date, the number of bitcoins transferred and the gain or loss.
It is important to note that this is a new area of tax law and retroactive rulings are possible. As such, it is wise to retain records for a couple of years to better ensure preparation in case you need to defend yourself against a notice from the IRS.
What if records are not present? A recent piece in Cointelegraph discussed this issue. It discussed the possibility of invoking the Cohan rule. This rule essentially allows the taxpayer to substantiate the costs related to digital currency in a manner other than written records. In the case of Cohan v. Commissioner, the man accused of fraudulently claiming expenses on his taxes was allowed to use testimony to substantiate his filings. The case was not a slam dunk. Unfortunately, it took many rounds for the plaintiff to beat the accusations of the IRS.