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The IRS Has Come Knocking at Bitcoin's Door

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At a time when regulations, glitches, price swings, forks, hacks, and fraud can’t seem to keep the cryptocurrency-mania down, there’s a new hurdle for it to overcome: the taxman.

Coinbase is one the largest cryptocurrency exchanges in the world and its backing by high profile investors like Union Square Ventures and Andreessen Horowitz has given it a certain amount of respectability. But it’s also a prime target for the Internal Revenue Service. Last year, the IRS asked a federal judge to order Coinbase to surrender its customer records for the years of 2013-2015 because it suspects many people trading in digital currency aren’t reporting their gains to the government. Coinbase fought the summons, but on Wednesday it lost the battle.


According to Bloomberg:

U.S. Magistrate Judge Jacqueline Scott Corley in San Francisco ruled that the tax agency’s demand for information isn’t overly intrusive. The price of bitcoin has been soaring and crossed $10,000 Tuesday.

With just 800 to 900 taxpayers reporting bitcoin gains from 2013 through 2015 in a period when more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin, “many Coinbase users may not be reporting their bitcoin gains,” she wrote. “The IRS has a legitimate interest in investigating these taxpayers.”


Coinbase framed the decision as a “partial victory” in a statement posted to Medium. A spokesperson outlined the two ways in which it was able to pull back the terms of the IRS’s request:

First, the government vastly narrowed the scope of its summons. The government’s own lawyers noted at the hearing that the IRS is not accustomed to having to fight for records in this context, and most companies just turn records over without going to court. Thanks to Coinbase’s efforts, more than 480,000 customers’ records were preserved from disclosure. This is a 97% reduction in the number of customers impacted by this summons.

Second, the quantity of data we must produce for the approximately 14,000 customers who remain in scope has been significantly reduced. In narrowing the scope of the summons, we are pleased that the Court acknowledged the privacy rights at stake in this matter.

Coinbase won’t have to turn over communications between the company and users, and it won’t have to give up public keys for wallets, accounts, and vaults at this time. But for the one percent of its users who will now be under scrutiny, this will at least be a headache, if not cause for panic. The numbers bluntly indicate that a significant portion of high-transaction users aren’t reporting their gains.

Wednesday wasn’t the greatest day for cryptocurrency. Following a record high of $11,434, Bitcoin saw $2,000 of its value wiped in a matter of hours. But this year has seen huge dives followed by record rallies again and again. Only time will tell if IRS scrutiny scares off the high rollers.


[Bloomberg, The Verge]