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What's the deal with Bitcoin and why is the IRS watching?

The Internal Revenue Service is coming after digital currency services and its users for information related to Bitcoin holdings. Bitcoin is a decentralized online crypto-currency. Its users are anonymous. This makes transactions tough to track, attracting the attention of government agencies like the IRS. Why? Because Bitcoin has been linked to criminal activity that law enforcement would like to stop.

With a 3D printing shop and one of 27 Bitcoin ATMs in Michigan, Grand Rapids is considered a major crypto-currency hub of the state.

Financial organizations acknowledge that Bitcoin can be used for legitimate financial services, similar to PayPal, the popular online payment system. The difference is that Bitcoin users are anonymous and the currency's value is constantly fluctuating. With PayPal, your identity is known, and payment is processed using standard currencies.

The IRS is worried that Bitcoin could be used to hide wealth. In November, the IRS sought a court order to force the digital currency services site, Coinbase, to turn over its information related to customer transactions. Coinbase allows digital currency users to buy and sell using digital assets such as Bitcoin. The platform also allows holders to transfer and store digital currencies like Bitcoin, among others.

Bitcoin service partner, Coinbase, cooperates with Feds

In 2014, the IRS declared Bitcoin as taxable property and now seeks to enforce that law. Owning Bitcoin is not illegal, but its use in criminal activities (such as Ponzi schemes and drug trafficking) is obviously a major concern. In October 2013, the FBI shut down dark web Silk Road for selling illegal drugs and taking payment via Bitcoin.

This bust prompted authorities to encourage Coinbase to register its business with the state of California. The registration brought Coinbase under state regulations and stands to help federal authorities fight white collar financial crime. The startup's cooperation with authorities again last month is likely another step in ensuring that Bitcoin crypto-currency functions with legitimate business activities.

Could you be John Doe? Know this.

In its interactions with Coinbase, the IRS used a "John Doe summons" to get account information. This legal process allows the IRS to collect tax information from Coinbase users, even if it cannot track their identities. What this means for users is that the IRS is now aware of their basic demographics, and could also reveal how they're using the service to conduct business in their daily lives.

If you use crypto-currencies or are involved in the "mining" process, you may be unknowingly participating in computer crimes such as fraud or drug trafficking. If you are contacted by authorities about your use of Bitcoin, you should not make a statement or answer any questions without an attorney present.

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