The Tax Man Wants to Know About Your Crypto Business – ThirtyK

If your business is involved with cryptocurrency in the U.S. in any way, the Internal Revenue Service may be watching you.

The nation’s Tax Man warned last month its Large Business & International division is ready to audit taxpayers that haven’t complied with the rules on virtual currencies.

This new emphasis could mean headaches for the hedge funds and other businesses investing in cryptocurrencies but, as usual when it comes to audits, it’s likely to be a boon for tax attorneys.

Most crypto investors think their trading is completely anonymous. Now the IRS is going after them if they don’t report profits.

Last year, Wall Street law firm Seward & Kissel created a practice focused solely on cryptocurrency to address clients’ growing needs, Brett Cotler, an associate in the firm’s Taxation Group, tells ThirtyK.

“Cryptocurrency as a practice group is a natural extension of what our firm always does,” he says. “We have a couple dozen hedge funds clients predominantly or exclusively trading in crypto as well as many more interested in it.”

More funds may come knocking. Research firm Autonomous Next estimates there are 370 crypto funds with $8 billion to $10 billion in assets under management. And there are plenty of other Wall Street firms that plan to get in on the cryptocurrency action. A Thomson Reuters survey in April found one in five financial firms were looking at cryptocurrency trading, with the majority eyeing an entrance in the next three to six months.  

Upping the Ante

The IRS has suggested in court documents that only small sliver of cryptocurrency owners were reporting gains or losses on their holdings in their annual returns from 2013 through 2015, Fortune reported last year.

“They are doing more criminal investigations of people for cryptocurrency trades that went unreported,” David Klasing, a California tax attorney, tells ThirtyK. “Most crypto investors across the planet believed, in the beginning, there was no paper trail, that it was completely anonymous. In response to that, [the IRS] upped the ante.”

The IRS did not say exactly where it is targeting the audits, but the Large Business & International division serves corporations and partnerships with assets greater than $10 million, suggesting it’s setting its sights on institutional players.