Bitcoin exchange processor likely to fight IRS summons -legal analyst 11 Mins AgoReuters Nov 20 (Reuters) - The largest Bitcoin exchange firm in the U.S. is likely to oppose a summons from the Internal Revenue Services (IRS) seeking the records of all customers who bought virtual currency from the company from 2013 to 2015, a lawyer familiar with the case said Sunday. On Friday, Coinbase, the country's largest Bitcoin exchanger, acknowledged it had received a summons sent by the IRS asking for information on its users. Chris Padovano, a lawyer and the founder of Decentralized Legal, said he expects Coinbase to turn back the government's request. "It's very likely, considering their customer base and the philosophical base of most of their users, that Coinbase will challenge this summons," Padovano told Reuters by telephone. "I think that they need to keep their base somewhat appeased." Padovano does not represent Coinbase, but does work with Bitcoin exchange firm Coinfund. In responding to the IRS's summons, which was reported by the New York Times and financial blog ZeroHedge on Friday, Coinbase cited concerns with the wide-ranging nature of the government's request. "We want to work with law enforcement - that's generally our policy," the company's head legal counsel, Juan Suarez, said Friday. "But we can't tolerate sweeping fishing expeditions. We are very concerned about the financial privacy rights of our customers." The summons said that an IRS agent recently found three cases involving Bitcoin users who used the cryptocurrency to evade taxes. Two of those cases, the summons alleges, involved Coinbase customers. Additionally, the I.R.S. stated that it knows that Coinbase users have not complied with federal law in the past. While the case is likely more nuanced, the government may have overreached with its request to gain access to all of Coinbase's users based on the actions of two, Padovano said. Still, he's unsure whether there could be a case for the IRS to demand that Coinbase release at least some of its users' information. "There are two questions here. One is whether or not (the IRS has) reasonably identified a class of individuals and has a reasonable basis for believing that all U.S. customers for Coinbase from 2013-2015 may have failed to comply with laws based on these three users," he said. "Two is whether the information sought by IRS is not available from any other reasonable source than Coinbase."
It's easy to see how someone who bought at Coinbase (or Circle or other US bank-linked exchanges) and then sold at Coinbase for a large profit is at risk of the IRS hammer if they did not report earnings. Someone that cashed out large amounts at a US bank-linked exchange with the origin and cost-basis of the coins unknown is also at risk if those coins were not reported. What I find puzzling is if the IRS wishes to pursue more than the easy cases that I just presented. The guess is they are just trying to scare people to report income. Will they go beyond the easy cases I just presentented? Will they, for instance, go after people that bought $1,000 in bitcoin and used it to buy their morning joe at Starbucks? What about the many people that bought coins, transferred to other wallets and maybe moved them around some more. Sure, blockchain analysis provides a trail. Is this enforceable in a court of law or something that the IRS would pursue? I tend to strongly doubt they have the knowledge, will, legal precedent or resources to take it to that level. Perhaps years from now. I know that I have purchased BTC and cashed them out for merchandise at places like Purse.io without reporting this to the IRS. I am waiting to see how this pans out. We should get some idea in mid February. The idea of spending lots of money and TIME to refile returns of past years is really troubling.
Not to be a complete dick, but these are the kind of details you need to think about before using bitcoin (how it is going to affect your tax reporting). Hopefully, your buys/sells resulted in a trivial profit/loss that would be overlooked by the IRS.
There are 3-5 million Coinbase accounts. The percentage that truly accounted for every satoshi = maybe a few thousand I would guesstimate. Similarly, there are millions of Ebay users. The percentage of people that report the sale of every bauble is certainly very low. There are millions of casino gamblers, office pools and bets between friends. The limit on profits at the casino before reporting taxes is something like $1200. The profits that get reported below the threshold have to be very small. I recently won $1200 on Predictit.com. I had to provide tax info ONLY because it was above the company's arbitrary threshold of $600. It isn't right to be sanctimonious about someone not reporting small amounts of bitcoin transactions. My point is, I don't think the IRS will bother with that. I don't think that they can. It isn't worth the agency's time. Also, frankly, there are fairly easy ways of cashing out larger sums without being traced. This investigation might be the start of their long and fruitless battle against those mechanisms or the currency itself. Unless technological alternatives are enacted, the IRS will only nab the careless. I don't wish to proffer what those technological alternatives are at this point. I'm glad you are concerned with my BTC profit and loss.
The IRS could give two craps about people who are profiting on bitcoin speculation. Bitcoin is an outstanding way to hide income and profits from other activities, that's what the IRS is concerned about. That said this does seem like a total fishing expedition. It seems unlikely that they've got firm legal ground and more likely that they were hoping to force an undercapitalized company to give up and give them the data rather than face the expense of a pyrrhic victory where in the end they don't hand over the data because they're out of business.
That's the best response I have heard. It seems outrageous that they would go after small fry using it to buy Dogecoin or a quarter of weed. The number of provable "winner traders" at Coinbase that only trade there has to be small and confined to mostly 2013. If they get Coinbase records and find someone spent $20k on BTC in September 2013 and then sold at $180k in December 2013, of course, they will pursue that person. It would seem that banking records would have raised a huge red flag to the IRS already. I know I have talked to bank managers over BTC buy transactions. Miners might be a target also- people that acquired a bunch when the difficulty was low and cashed out. I think Coinbase goes out of business regardless. I saw some projections, and they could be losing $3-$5M a year before the legal costs kick in. They raised a bunch, but it would be much harder to raise cash nowadays.
So basically you are rolling the dice and hoping the IRS doesn't inspect your bitcoin or altcoin activities. That is a viable strategy, but it is not how I choose to run my finances. The problem with bitcoin (in terms of taxes), is that it is not easy to keep track of all your transactions properly.