Bittax VP Or Lokay Cohen at the Ethereal conference in Tel Aviv on September 15, 2019 (photo by Molly Jane Zuckerman for Modern Consensus).

How the IRS is cracking down on crypto taxes: A conversation with Bittax’s Or Lokay Cohen

At this weekend’s Ethereal Summit, Modern Consensus delved into the murky waters of cryptocurrency taxation and its various pitfalls

Or Lokay Cohen has been at crypto tax calculation service Bittax since 2016, which means that she may know more about how to file crypto taxes than any person alive. Lokay Cohen told Modern Consensus that she came to the Ethereal conference in Tel Aviv on September 15 to meet like-minded crypto people, as she was toying with the idea of using Ethereum-based smart contracts to pay taxes automatically to the IRS. 

While this is still just an idea, the Bittax platform itself is currently in beta in the U.S., targeting those that were asked for clarification about their crypto holdings earlier this summer. Lokay Cohen described the several types of letters that were sent out, varying by severity, that led to the roughly 1,000 letter-receivers as targets for this beta version—holders either received a firm warning to redo their forms, or a lighter warning asking them to pretty please double check what they reported.

MODERN CONSENSUS: Can you remind me what is now happening with those IRS letters sent to crypto holders this summer? 

OR LOKAY COHEN: There were two separate letters [sent out in varying degrees of seriousness]. Then, after about a month, the IRS started checking all the data coming from Coinbase and other crypto exchanges. Crypto exchanges are [required] to have a report for every client in the United States called a 1099, either K or B. You must receive it from your exchange, and they are simultaneously sending it to the IRS. 

The IRS could just go through the list and say, ‘This one is not appearing in our system,’ and send out a letter. This one says, ‘Check if you have reports, there is or there is not a correlation between your reports and what we have. Please check if you reported everything and pay us.’ They actually said [that], ‘You can send the money to us!’ 

But right now, because the regulation is very developing [for] crypto exchanges, I think only Coinbase is using these 1099s to record data for clients for the IRS. Kraken and some other ones are not sending it at all, so we know [the reporting is] probably from Gemini and from Coinbase.

Wait a minute, I thought Coinbase won the court case from 2016 against the IRS and only has to give out data on “high transacting clients”?

It was two separate events. The first one is the Supreme Court, [where the] IRS said, ‘Give us all your users’ data. We want to tax them.’ They [Coinbase] said no, and they went to court. Then, the court decision was 14,000 users.

They have to give their names, but simultaneously—because the regulation has evolved—Coinbase started to provide this [1099-K report] last year for any user that had more than 200 transactions or $20,000 a year. [Users] needed to get the report from them by law. 

They started to send it to clients. When clients get it, they should know that the IRS is getting it too.Then if you have not reported, they circulate it and they know. 

Bittax is in beta in the United States, targeting those that got these IRS letters, but how will it actually work?

People get in by pulling [in] all of their address [from various places into the Bittax system]. You can log into your wallets or you can copy paste them from every wallet you want to the system. Then, you have to also add the crypto exchanges, either CSV or an API to have all the data from the exchanges. We combine them all together and then you get your tax report. 

What we are doing is actually very unique. We have a specific identification method. We can say exactly which Bitcoin you bought, when you bought it, and when you sold it. Then, you have your exact and accurate tax report. You can pay less taxes most of the time by using our system, as it’s more accurate. We have a patent pending on this method, so hopefully we will be the only one. 

But, the IRS and a lot of other countries are approving a specific identification method as [the] cryptocurrency tax calculation method.

Will you be working with government tax regulators then, or keeping your work separate?

Well, it’s not our plan at the moment. We are working for the customers—for the ones who are trading in the exchanges—saving them money. It’s about the end user and not the government so much. We are definitely not going to be the next Chainalysis of taxes. 

How can you build a tax reporting program if every country has its own way of classifying cryptocurrencies?

There are two separate levels [to Bittax]. The first one—the hardest one—is to collect all of your information. The second one, once you have all the information of the user, then it’s easy to calculate that tax in a different method for every country. We will be able to do it in Europe. It’s not really a problem. 

Would you say the onus is on the user then to provide all their information? How will you deal with crypto tax cheats?

We usually know when the user is not providing us with everything. We have a letter that says “you are missing a transaction here, your deposits are in an exchange and you did not provide us with the exchange.” We have some alerts for the user, but if he or she is not providing everything at that time, it won’t be accurate. 

Maybe some of the users are [hiding crypto], but some of them have operated for a long time in cryptocurrency—maybe since 2015—and they don’t remember. You switch wallets, you switch exchanges, some exchanges were shut down and don’t exist anymore. 

What would a user do if they had all their money on Mt. Gox or another currently defunct exchange?

Hopefully, our user has succeeded in taking their money out in time. But if not, you have to declare it, and this is a loss. You have to get a refund for it because you are probably not going to see the money anytime soon.

So with this in mind, do you think that more people will be reporting their crypto taxes this year?

In the United States, it has been [said] that not many people are reporting [crypto] taxes. I think this is going to be a different situation after the IRS starts to actively pursue them. I think in January, we’re going to get a different picture. 

The IRS has promised clarifications for how to report. It was back in May, and they did not publish it yet. I think we are going to see some enforcement before we are going to see those clarifications, and then we’ll know. The IRS is currently working with Chainalysis and gathering information, and they can track which crypto addresses belong to another one. They are building their cases and they are learning the materials.I think we’ll see an enforcement coming soon. 

Would you say this is the end of the era being able to trade in Bitcoin and hide it from the IRS?

Well, it’s not the end, but it’s coming, because right now there’s only a few exchanges that are reporting and give you the right forms. I believe that we will see more and more exchanges [doing this]. Binance is coming to the U.S., Huobi has a different operation in the U.S. The exchanges that are not used to working through regulation, but now, operating in the United States, they will have to work with regulation—this will probably be the end. 

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Molly Jane Zuckerman is a freelance journalist covering crypto and blockchain news. Disclosures: Zuckerman does not own enough enough bitcoin (BTC) to buy a Birkin bag (<$5,000) and not enough ether (ETH) to buy a quarter of a Birkin bag (<$1,000).