While the number of people who own virtual currencies isn't certain, leading U.S. cryptocurrency exchange Coinbase had an estimated 11.7 million users at the end of October 2017, according to data compiled by Alistair Milne, co-founder and chief investment officer of Altana Digital Currency Fund. (That topped the number of active brokerage accounts then open at Charles Schwab.)
But unlike with traditional investments, in which case you're likely to be issued a 1099 form (which is also sent to the IRS) to keep track of your holdings and tax obligations, that isn't necessarily the case with virtual currency. Coinbase will provide 1099 forms to "certain business customers" and "customers that have received at least $20,000 cash for sales of virtual currency related to at least 200 transactions in a calendar year," according to the company's customer support page.
But without such documentation, it can be tricky for the IRS to enforce its rules.
"[For] now it is difficult for the IRS to really find out on an individual basis whether you reported your virtual currency sales or exchanges," Losi says.
Indeed, it appears barely anyone is paying taxes on their crypto-gains. For example, in 2015, only 802 Coinbase users told the IRS about bitcoin gains, despite the exchange having 2.9 million users in December of that year, according to Milne's data.
Recently however, the IRS has taken steps to identify tax-payers who are profiting, but not reporting.
In 2016, the IRS summoned records from Coinbase, and a court ruled the company had to disclose information on about 14,000 users who have "either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year," CNBC reports.
Even if you aren't a hefty Coinbase user, you're obligated to report, and every U.S. taxpayer can potentially be audited by the IRS. The IRS examined 0.6 percent of the 193 million tax returns filed in fiscal year 2016, or about 1.2 million.