IRS Demands All Info On All Coinbase Customers

Legal Issues

from the slow-down,-skippy dept

There have always been questions about the tax implications of cryptocurrencies like Bitcoin. A few years ago, the IRS came out with some guidelines, declaring cryptocurrencies to be property, rather than currency, and then taxed more like equity. But late last week, the IRS went to court to basically demand Coinbase turn over all info it has on everyone. Coinbase is one of, if not the, leading online cryptocurrency exchanges and places where many people store their cryptocurrency in an online wallet. It’s a company that has bent over backwards to comply with the laws. But, no matter, the IRS basically thinks everyone who uses it is a tax cheat. Here’s what the IRS demanded:

All records of account/wallet/vault activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, the names or other identifiers of counterparties to the transaction; requests or instructions to send or receive bitcoin; and, where counterparties transact through their own Coinbase accounts/wallets/vaults, all available information identifying the users of such accounts and their contact information.

Uh, yeah, that’s not very limited. It’s not limited at all. The IRS literally wants everything. Why? Because, according to the IRS, it’s investigating one single tax cheat. In a declaration, IRS agent David Utzke, talks about a single tax cheat, and says this gives him a basis for requesting all info.

After using a traditional abusive offshore arrangement for approximately 5 years, Taxpayer 1 became fatigued with the effort required to manage his offshore accounts, attorneys, and applicable regulations, and discovered virtual currency while conducting internet research on the topic. Taxpayer 1 began testing the use of virtual currency and eventually abandoned the use of his offshore structure. Taxpayer 1 was able to use virtual currency to repatriate his assets without governmental detection.

For example, Taxpayer 1 originally worked with a foreign promoter who set up a controlled foreign shell company which diverted his income to a foreign brokerage account, then to a foreign bank account, and lastly back to Taxpayer 1 through the use of an automated teller machine (ATM). Once Taxpayer 1 abandoned the use of his offshore structure in favor of using virtual currency, the steps described above were the same until his income reached his foreign bank account. Once there, instead of repatriating his income from an ATM in the form of cash, Taxpayer 1 diverted his income to a bank which works with a virtual currency exchanger to convert his income to virtual currency. Once converted to virtual currency, Taxpayer 1?s income was placed into a virtual currency account until Taxpayer 1 used it to purchase goods and services. Taxpayer 1 failed to report this income to the IRS.

Utzke also mentions two other taxpayers, which were companies, not individuals, but which used Coinbase. He notes that others are laundering money and thus likely to be using cryptocurrencies. That may be true, but it seems like a pretty big stretch to argue that means Coinbase should cough up all details on all transactions.

In the IRS’s memorandum of support, it insists that it’s just trying to find all the tax cheats, so it should get to look at all the records.

Since 2009, the use of virtual currency has increased exponentially. Some users value the relatively high degree of anonymity associated with virtual currency transactions because only a transaction in virtual currency, such as buying goods or services, is public and not the identities of the parties to the transaction. Because of that, virtual currency transactions are subject to fewer third-party reporting requirements than transactions in conventional forms of payment. However, due to this anonymity and lack of third-party reporting, the IRS is concerned that U.S. taxpayers are underreporting taxable income from transactions in virtual currencies. Further, because the IRS considers virtual currencies to be property, United States taxpayers can realize a taxable gain from buying, selling, or trading in virtual currencies. There is a likelihood that United States taxpayers are failing to properly determine and report any taxable gain from such transactions.

…. The issuance of the summons is warranted here because (i) the summons relates to an ascertainable group or class of persons; (ii) there is a reasonable basis for believing these U.S. taxpayers failed to comply with internal revenue laws; and (iii) information sufficient to establish these U.S. taxpayers? identities is not readily available to the IRS from other sources.

Coinbase posted a short blog post Friday evening expressing concern over this while exploring the issues:

Our customers may be aware that the U.S. government filed a civil petition yesterday in federal court seeking disclosure of all Coinbase U.S. customers’ records over a three year period. The government has not alleged any wrongdoing on the part of Coinbase and its petition is predicated on sweeping statements that taxpayers may use virtual currency to evade taxes.

Although Coinbase’s general practice is to cooperate with properly targeted law enforcement inquiries, we are extremely concerned with the indiscriminate breadth of the government’s request. Our customers? privacy rights are important to us and our legal team is in the process of examining the government’s petition. In its current form, we will oppose the government?s petition in court. We will continue to keep our customers informed on developments in this matter.

What happens here is going to be a big, big deal in the cryptocurrency world. The IRS had to know that this was going to get attention, and perhaps that’s the intent. But this seems like a massive overreach.

Filed Under: bitcoin, cryptocurrency, irs, tax cheats, taxes
Companies: coinbase