What if you don’t report all of your Bitcoin gains on your US tax return? You must have at least considered it by now. How would the IRS know? I get this question from clients at least as often as I see it in print. It is a tempting proposition: last year, US taxpayers had around a 1 in 100 shot of being selected for an audit by the IRS. This year, with more responsibilities (management of compliance with the Affordable Care Act) and less funding, the odds of dodging an audit are even better. However, if you decide to underreport your income and get caught, the result could entail severe consequences for you and also damage to Bitcoin’s regulatory future for all.
At this point in its development, Bitcoin seems largely to attract three overlapping types of people: early adopters that are intrigued and/or excited by its possibilities (I’ll call these “blockchain evangelists”), investors and entrepreneurs that see a way to cut costs or a new way to invest for a return (“economic pragmatists”), and those who see Bitcoin as a way to get a little further away from a state-controlled money supply (“crypto anarchists” or