Attention Coinbase customers: The IRS may soon know you purchased Bitcoin

This is the information that the IRS is demanding Coinbase to provide:

For each Coinbase user for which your records show any U.S. address, U.S. telephone number, U.S. e-mail domain, or U.S. bank account, produce the following records for the period January 1, 2013 through December 31, 2015 unless otherwise stated:

1. Account/wallet/vault registration records for each account/wallet/vault owned or controlled by the user during the period stated above including, but not limited to, complete user profile, history of changes to user profile from account inception, complete user preferences, complete user security settings and history (including confirmed devices and account activity), complete user payment methods, and any other information related to the funding sources for the account/wallet/vault, regardless of date.

2. Any other records of Know-Your-Customer due diligence performed with respect to the user not included in paragraph 1, above.

3. For any account/wallet/vault with respect to which the registered user gave any third party access, control, or transaction approval authority, all powers of attorney, letters of wishes, corporate minutes, or other agreements or instructions granting the third party such access, control, or approval authority.

4. 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.

5. For each merchant user for which you act as Payment Service Provider, records of all payments processed, including records identifying the user of the wallet charged, if a Coinbase user, or the address of the wallet charged, if not, the date and amount of the transaction, and any other information that will enable the merchant to identify the transaction.

6. All correspondence between Coinbase and the user or any third party with access to the account/wallet/vault pertaining to the account/wallet/vault, including but not limited to letters, memoranda, telegrams, telexes, facsimiles, e-mail, letters of instruction, and memoranda of telephone or oral instructions received.

7. All periodic statements of account or invoices (or the equivalent).

8. All records of payments to or from the user by checks, wire or other electronic transfer, ACH transaction, PayPal transfer, credit or debit card transaction, money order, transfer to or from other digital currency wallet address, or any other method, including records reflecting the form, manner, nature, and purpose of such payment including, but not limited to, ABA routing number and other routing information, payment instructions, and any and all invoices, billing statements, receipts, or other documents memorializing and describing such transaction.

9. All exception reports produced by your AML system, and all records of
investigation of such exceptions. For the purpose of this summons, you are required to produce all documents described in this attachment, whether located in the United States or otherwise, that are in your possession, custody, or control, or otherwise accessible or available to you either directly or through other entities. ​

Source: Ex B

 

What does this mean for you?

Hey Bitcoin Buyers, Don't Panic About the IRS Probe of Coinbase

But what about those who bought a few bitcoins and sold them when the price went up? Or those who used their bitcoins to buy goods and services online? Some of these people may not be aware that because bitcoin is considered property not currency, every bitcoin purchase can amount to a capital gains event.

In theory, the IRS pay soon demand back taxes and penalties from thousands or even millions of Coinbase customers—and then go after other bitcoin sellers like Circle or Xapo next.

It turns out, though, it probably won’t go down like that. According to Marco Santori, a crypto-currency lawyer at Cooley LLP, the scope of the IRS investigation will be much more modest. Speaking at a Coindesk event in New York last week, Santori noted that Coinbase is refusing the initial IRS demand as too broad, and that a judge is unlikely to enforce the request as it stands.

“This is a blanket request—it’s an opening offer [by the IRS]. They have to come in with something crazy, then agree to limit it something reasonable,” he said.

Santori predicted that, after a legal tussle, the IRS will scale back its demand and instead ask Coinbase to turn over just the bigger fish among its clients. He added that everyone must pay their taxes, and that bitcoin owners should consult their accountants if they are worried about gains for previous years.

On Wednesday, a judge granted a request by the IRS for a “John Doe” summons that requires Coinbase to turn over all the accounts. But Coinbase says it will mount a legal challenge to the order — meaning the IRS has cleared an initial hurdle but that Coinbase may still succeed in limiting the scope of the order.

“We are aware of, and expected, the Court’s ex parte order today,” Coinbase said in a statement. “We look forward to opposing the DOJ’s request in court after Coinbase is served with a subpoena. As we previously stated, we remain concerned with our U.S. customers’ legitimate privacy rights in the face of the government’s sweeping request.”​

 

Coinbase Obtains Partial Victory Over IRS – The Coinbase Blog

Coinbase appeared in federal court this month in the continued fight with the IRS over our customers’ privacy. You can read more in this blog.

We are pleased to say Coinbase won a partial victory in court today. Although the Court did not completely quash the government summons compelling disclosure of certain customers’ records from the period 2013–2015 as we requested, we were proud to accomplish two important victories for our customers.

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 started this process more than 12 months ago, and while today’s result is not the complete victory we hoped for, it does represent a substantial and unprecedented victory for the industry and the hundreds of thousands of customers that would have been unfairly targeted if it weren’t for our action. Although we are disappointed not to be able to entirely defeat the summons, we are proud to fight for our customers and in the result we were able to achieve as a small company against a large government agency.

Coinbase is in the process of reviewing the order. As we proceed, we will continue to keep our customers updated. Coinbase has millions of customers and the narrowed summons affects approximately 14,000 of the highest-transacting customers from 2 to 4 years ago. This represents less than 1% of our customer base. In the event that we ultimately produce the documents under this Court order, we intend to notify impacted users in advance of any disclosure​

 

IRS Cops Are Scouring Crypto Accounts to Build Tax Evasion Cases

A new team of 10 investigators is focusing on international crimes. In addition to following undeclared assets that are flowing out of Swiss banks after a crackdown, it will also build cases against tax evaders who use cryptocurrency. The promise of anonymity that has drawn money launderers and drug dealers to virtual coins is also attracting tax cheats, the IRS has said.

The agency hasn’t charged anyone yet, but the cases will come, Don Fort, chief of the IRS Criminal Investigation Division, said in an interview.

“It’s possible to use Bitcoin and other cryptocurrencies in the same fashion as foreign bank accounts to facilitate tax evasion,” Fort said...

IRS criminal agents, who can arrest people and help send them to prison, have benefited from the work of the agency’s revenue agents. They formed a team in 2013 to study the use of virtual currencies to avoid taxes by moving money in and out of offshore accounts.

That team spent two years helping to prepare a legal summons seeking the identities of all customers of Coinbase Inc., one of the largest virtual currency exchanges, from 2013 to 2015. After a legal fight, the IRS narrowed its request but still argued it had a “reasonable basis” to believe many Bitcoin users weren’t paying taxes. They likened Bitcoin exchanges to the “Wild West” days of unregulated barter exchanges in the late 1970s and early 1980s.

“Billions of dollars in Bitcoins are currently being transferred by malware ransomers, online drug dealers, tax evaders and other criminals, all of whom are emboldened by what they perceive to be law enforcement’s inability to pierce Bitcoin’s pseudo-anonymity,” Justice Department Tax Division attorneys argued in a Sept. 1 court filing...

“That more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of Bitcoin in a given year suggests that many Coinbase users may not be reporting their Bitcoin gains,” U.S. Magistrate Judge Jacqueline Scott Corley wrote. “The IRS has a legitimate interest in investigating these taxpayers.”​