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How Coinbase Traders Are Fighting Back IRS Attempts to Reveal Their Identities

With the IRS attempting to force Coinbase to disclose the identities of its users, several users have identified themselves and attempted to intervene in the litigation. Who will prevail?

Yet another salvo has been fired in the ongoing conflict between bitcoin trading site Coinbase and the Internal Revenue Service. After Jeffrey Berns and other Coinbase users moved to intervene in the IRS's ongoing case to enforce a "John Doe summons" requesting the identities of all users of that service, the IRS responded in late December by filing documents arguing that Berns and his fellow litigants had already identified themselves and thus were unable to claim that their privacy was threatened.

This battle has been looming for some time, given the effectiveness with which the IRS has settled cases with foreign banking institutions and motivated noncompliant taxpayers to voluntarily settle their accounts with the agency. In addition to millions of dollars in settlement money paid by Swiss banks like UBS, the IRS has collected over $10 billion from its Offshore Voluntary Disclosure Program. As Motherboard reported in June, bitcoin and other cryptocurrencies were the likely next target for an agency tasked with collecting, per the terms of the Sixteenth Amendment, "all income from whatever source derived."

"There is so much at stake here for merchants," an online dealer in nootropic and anabolic drugs told Motherboard. This dealer, who conducts his transactions exclusively in bitcoin and asked not to be identified, stressed that the cryptocurrency was essential to his livelihood. "As of right now, when you look at how the bitcoin value has been soaring in the past year, and how it really doesn't make sense to use Moneygram or Western Union for these sales except maybe for convenience of buyers--at least under a certain dollar amount--this is the best and smartest way to run a cash-only, no-tax operation."

To a certain class of libertarian-minded businessperson, bitcoin represents the freest of markets: an opportunity to trade goods and services anonymously, without the burden of reporting income to the IRS. Despite a good deal of magical thinking on the part of these bitcoin users, however, digital currencies are not exempt from taxation. Although the IRS issued a notice in 2014 that bitcoin would be treated like property, not currency, in any case its receipt represents a taxable event.

"Given the coming economic and political insecurity in this country, maybe even rebellion, you can see why people like [alt-right personality] Mike Cernovich are very bullish on cryptocurrencies," explained a computer programmer who supplements his day job by doing computer science projects for college students--a business he conducts entirely via his Coinbase wallet. "I honestly haven't been following this legal story, though, because I think that the IRS as we know it won't be an issue in two or three years."

Tax attorney Aaron Richter, who has written extensively about expanded IRS enforcement efforts in offshore and cryptocurrency areas, disagrees with this assessment. "I think the IRS will eventually prevail in the John Doe summons case, although the scope of the summons might be limited," he told Motherboard. "If you have an unreported account with Coinbase, you should start working to resolve it before you receive a letter from the IRS inquiring about it. If taxpayers report their accounts before they are under investigation, the likelihood that the IRS will recommend criminal charges is reduced. However, once an examination letter is received, the odds of a criminal indictment substantially increase."

When told that he should make plans to pay tax on thousands of dollars in unreported income, the online nootropic dealer stifled a laugh. "I'll just move where they can't get me, you know," he said. "The way I see it, bitcoin is as secure as those gold bars from Looney Tunes cartoons, or money under the mattress."

Meanwhile, in response primarily to the Chinese yuan's rise against the dollar earlier this week, the value of bitcoin dropped 23 percent.