“A lot of people treat bitcoin as cash, or the same as [mobile payment service] Apple Pay,” Morin said. “If they exchange it for another cryptocurrency or use it at, say, Overstock.com, they’d have to compare the fair market value of it that day versus their cost basis. They’re not always tracking that kind of information.”
She said that when those bitcoin holders go to do their tax returns, they have no idea what their gain or loss was, so they either don’t report it or they try to cobble together information that may or may not be 100 percent accurate.
“In my view, the IRS would rather see some compliance made with your best effort instead of just throwing up your hands and saying it’s too hard,” Morin said.
More from FA Playbook:
What to watch out for if you want to jump on the cannabis investing bandwagon
Freezing your credit is now free
Getting a divorce? The new tax bill will complicate splitting up, especially for women
For many investments, individuals generally receive a Form 1099 that shows their taxable gains. The form also is sent to the IRS, which gives the agency a way to identify any differences in what’s reported between brokerages and taxpayers.
Even if you get no official notice of your taxable gains, you’re expected to report them. And the IRS has put the crypto world on notice: Earlier this year, the popular trading platform Coinbase alerted 13,000 customers that it was complying with a court order to provide the IRS with information on accounts worth at least $20,000 during 2013 to 2015.
“I think now is the time to try to get ahead of these issues, although it’s going to be challenging for a lot of folks to go back and figure out what their cost basis was,” Morin said.