Coinbase ordered to turn over customer records to IRS

A federal district court in California this week blew away one of the major factors in the explosive growth and popularity of Bitcoin and its hundreds of cryptocurrency colleagues: the promise of anonymity.

The court ordered Coinbase, a popular cryptocurrency exchange and wallet service, to turn over three years worth of identifying records on more than 14,000 of its customers to the Internal Revenue Service (IRS), concluding a year-long battle over whether the tax agency could pierce the cryptocurrency anonymity veil.

The IRS didn’t get everything it had asked for a year ago, which included detailed information on any US persons who, “at any time during the period January 1 2013, through December 31 2015, conducted transactions in a convertible virtual currency as defined in IRS Notice 2014-21.”

After Coinbase refused to comply, calling the demand “indiscriminate and over broad,” and even some members of Congress complained that the summons could affect as many as 500,000 people, the IRS dramatically scaled back its demand, reducing the scope of the summons to include only users who had made in any one year, “at least the equivalent of $20,000 in any one transaction type (buy, sell, send or receive) …”

That, according to Coinbase, would include 14,355 users.

Additionally, the court didn’t grant all the user data the IRS was seeking. It denied requests for:

… account opening records, copies of passports or driver’s licenses, all wallet addresses, all public keys for all accounts/wallets/vaults, records of Know-Your-Customer diligence, agreements or instructions granting a third-party access, control, or transaction approval authority, and correspondence  between Coinbase and the account holder.

Those requests, the court said, were “broader than necessary.” But it did order Coinbase to turn over:

(1) the taxpayer ID number, (2) name, (3) birth date, (3) address, (4) records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction  balance, and the names of counterparties to the transaction, and (5) all periodic statements of account or invoices (or the equivalent).

Which is likely, sooner than later, to render moot the promo from cryptocurrency vendor Monero that it offers, offers, “secure, private, untraceable currency.”

It is obvious why the IRS is interested – it considers virtual currencies property for federal tax purposes, which means citizens are supposed to pay taxes on any capital gains from cryptocurrency transactions.

And according to the IRS, fewer than 900 people per year reported income on Form 8949, which is used to account for, “a property description likely related to bitcoin.”

That is a miniscule fraction – less than two-hundredths of a percent – of the number of people using Coinbase, “the largest exchanger in the US of bitcoin into US dollars,” according to the government – with 4.8 million users and 10.6 million wallets.

Not to mention the enormous spike in the value of Bitcoin. Its US value was $13 at the start of 2013. It was less than $1,000 at the start of the year and after recently topping $11,000, it was trading at $9,380 at midweek. Those kinds of profits would obviously yield some significant tax liabilities.

According to the IRS petition, most Coinbase users “have not been or may not be complying with US internal revenue laws requiring the reporting of taxable income from virtual-currency transactions.”

Coinbase has so far not commented on the order. But David Farmer, director of communications, wrote on the company blog after a hearing earlier this month that the IRS demand amounts to “government overreach.”

In the future we hope to work with the IRS to establish a reasonable tax reporting method that makes sense for virtual currency service providers and consumers alike.

And Coin Center’s Peter Van Valkenburgh told The Verge,

Without better rationale for why these specific transactions were suspect, a similarly sweeping request could be made for customer data from any financial institution. It sets a bad precedent for financial privacy.

But according to the court, the IRS, “has a legitimate interest in investigating these taxpayers. Coinbase’s arguments to the contrary, it said, “are not persuasive.”