In your example you gave the name of a church, that is simple to investigate, but if i tell them i sold my coin to an anonymous person over the internet who made a cash deposit and they ask for proof of that, then what do i tell them? I can give them the amount i sold for (hey there it is in my bank account), the amount of coin, the price per coin, the difference in value from when i obtained it, etc.... but i can never give them proof that the coin was in fact mine and that im not just pointing to some arbritrary address on the blockchain. They suspect that i was selling coin for a favorable longterm capital gains rate and not the newer coin i just purchased recently, i can only point to the address i have given them, then what happens?
I think you're overthinking it.
You write on your taxes that you had a deposit into your bank account of $1,216. Your bank statement confirms this number. You pay taxes on the $1,216. The IRS is happy - they don't care WHAT you sold.
If you're paying taxes something else, like $716 when the deposit shows $1,216, then you need to come up with why you are leaving out $500. The IRS then cares a little more. You show a bank statement where you have a withdrawal/check for $500 earlier in the year. The IRS might just say 'ok' right there and go no further.
They could ask what you bought. You say 1 btc. They might be ok right there.
If the IRS is suspicious, they might ask who did you buy it from. If you don't know, but you can show that when you bought the $500 btc earlier in the year, that was the going rate for 1 btc, then later about $1200 was the going rate for 1 btc, they will probably accept that. I doubt they will ever care about a 'blockchain' or anything like that.
Does it sound like a reasonable explanation? That's all they really care about. They don't understand all the details about bitcoins and they really don't care. They'll probably have 1 expert on bitcoins where they'll email your explanation to, and the expert will either say it sounds legit or not. Just like if you sold a painting for $40,000 - not everyone is an expert, so they will have an IRS agent who is, who will know if it's legit or not.
Unless, of course, you're cashing in millions of dollars of btc. At this point, you better have all the documentation they want, or they won't allow you to 'write-off' the initial cost of the btc.
Example: You sell your btc for $10,000,000. You claim you bought them for $2,000,000. You 'write off' the $2,000,000 and don't pay taxes on that.... you only pay taxes on $8,000,000. If the IRS doesn't believe your story and you can't prove you bought $2,000,000 in btc, then you will owe taxes on the whole $10,000,000, not just $8,000,000.
