James H. Kim v. Comm., TCM 2023-91
This post is part of our series on recent important tax cases that may be of interest to accounting, tax, and finance professionals. For more like this, see our Federal Tax Update and California Federal Tax Update, which offer a comprehensive analysis of the year’s most pivotal tax developments.
IRS Summons Nets More than $4 Million of Unreported Cryptocurrency Gains(James H. Kim v. Comm., TCM 2023-91)
In response to a summons, the IRS received information reports from Coinbase, Inc. a virtual currency exchange, reporting the proceeds of James Kim’s transactions in Bitcoin and Litecoin (during 2013–2016), and Ethereum (during 2017). For 2013–2016, Mr. Kim reported no cryptocurrency gains or losses. For 2017, he received an information return from Coinbase that reported $18,557,230 of proceeds from virtual currency transactions. On the 2017 Schedule D, Mr. Kim reported gross proceeds in that amount but offset against those proceeds a claimed basis of $18,515,161, reporting a short-term capital gain of $42,069.
From Coinbase records, the IRS determined that Mr. Kim failed to report 2013 short term capital gains of $75,400 and failed to report 2017 short term capital gains of $4,066,629 and 2017 long term capital gains of 74,565.
“Clean hands” doctrine doesn’t apply. Mr. Kim did not dispute the amount or character of the net capital gains determined in the notice of deficiency for 2013 and 2017. But he contended that the virtual currency assets that gave rise to these gains “were completely wiped out” in 2020, during the early days of the COVID epidemic. He asserts that the actions (or inaction) of the U.S. Government in response to the COVID epidemic “directly caused [that] harm” and that, “under the Clean Hands doctrine of US law,” the IRS should be estopped from collecting tax on his 2013 and 2017 gains.
The Court found that when relevant, the “unclean hands” defense applies only to conduct immediately related to the cause in controversy. The Government’s actions in response to the COVID epidemic have no relationship whatever to the determination of Mr. Kim’s 2013 and 2017 tax liabilities. A fundamental tenet of the Federal income tax is the “annual accounting principle.” This principle dictates that a taxpayer’s income for a particular year be calculated on the basis of the events occurring during that year. Any capital losses Mr. Kim realized in 2020 are thus irrelevant in determining his tax liabilities for 2013 and 2017.