The exchange lost a legal battle and now Bitcoin’s tax problem is coming to a head.
Image: Shutterstock / Composition: Louise Matsakis
On Tuesday, a California federal court ordered the popular cryptocurrency exchange and wallet service Coinbase to turn over records on thousands of customers to the Internal Revenue Service.
The requested records include the name, birthdate, address, and account activity for any user who bought, sold, sent, or received more than $20,000 worth of Bitcoin in their accounts between 2013 and 2015.
The order marks the end of a year-long court battle between the IRS and Coinbase that began last November when the IRS sought user records for all Coinbase customers. After meeting resistance from Coinbase and Coinbase customers, who argued that the order was overly broad, the IRS narrowed the scope of its request to only cover Coinbase customers who had trafficked in more than $20,000 worth of cryptocurrency in the specified time period.
Read the full court order here
According to an internal Coinbase audit from July, of the 14,000 affected users, 6,200 had bought, sold, sent or received less than $60,000 between 2013 and 2015, based on an internal Coinbase audit. This arguably makes them rather small fish.
In January, Coinbase CEO Brian Armstrong wrote in a Medium post, "asking for detailed transaction information on so many people, simply for using digital currency, is a violation of [customers'] privacy, and is not the best way for us to accomplish our mutual objective.”
US citizens are supposed to pay capital gains tax on cryptocurrency transactions and the IRS labels virtual currencies as property for federal tax purposes. As the court order shows, more than 10,000 people bought or sold more than $20,000 worth of cryptocurrency, but only “800 to 900 taxpayers a year have electronically filed returns with a property description related to bitcoin from 2013 through 2015.”
This “suggests that many Coinbase users may not be reporting their bitcoin gains,” the order reads.
In short, the court order is a reaction by the IRS to possible tax avoidance on cryptocurrency gains. Arguably, though, tax law simply hasn’t caught up with cryptocurrency, and the order effectively places over 14,000 Coinbase users under investigation simply for using a new technology. US legislators introduced a bill in September that would exempt any cryptocurrency transaction under $600 from taxation.
Motherboard has reached out to Coinbase for comment on how the company will proceed and will update this post when we hear back.