The IRS and Department of Justice are seeking detailed customer records from Coinbase covering three years of transactions. Last week, the DOJ filed court paperwork requesting the names and account in
The IRS and Department of Justice are seeking detailed customer records from Coinbase covering three years of transactions. Last week, the DOJ filed court paperwork requesting the names and account information of all US Coinbase customers who traded virtual currencies between January 2013 and December 2015.
The request takes the form of a John Doe Summons, a legal tool that doesn't target named individuals but rather entire groups defined by their activities. The IRS used the same approach in 2008 to force UBS to disclose about 4,500 Swiss users, breaking open decades of banking secrecy.
Federal investigators want to determine the correct tax obligations for users of bitcoin and other virtual currencies.
"Although Coinbase's general practice is to cooperate with properly targeted law enforcement inquiries, we are concerned with the indiscriminate breadth of the government's request," the company said in a statement. "Our customers' privacy rights are important to us and our legal team is in the process of examining the government's petition. In its current form, we will oppose the government's petition in court."
Coinbase operates the largest bitcoin-to-dollar exchange in the United States and the fourth-largest overall, serving 4.9 million users.
This request raises questions about how tax authorities should handle the emerging cryptocurrency market. The IRS issued guidance in 2014 classifying bitcoin and other virtual currencies as capital assets subject to standard capital gains taxation. But the reporting process remains unclear, in part because reporting software doesn't exist and calculation methods vary.
Perry Woodin, CEO of Node40, a software company focused on cryptocurrency accounting, said the government's broad summons was unnecessary. "Buying bitcoin is certainly not probable cause for assuming an individual is evading taxes. Part of the problem here is that reporting requirements aren't exactly clear and compliance is very complicated. Only the most tech savvy individuals can accurately calculate the values necessary for reporting to the IRS. So we have a requirement to comply without guidance," Woodin told MiningPool in an email.
A Treasury Inspector General for Tax Administration report released last month concluded that the IRS failed to build proper enforcement infrastructure for virtual currency taxation. The agency issued guidance in 2014 and created a Virtual Currency Issue Team, "but there has been little evidence of coordination between the responsible functions to identify and address, on a program level, potential taxpayer noncompliance issues for transactions involving virtual currencies," the report stated. Additionally, "none of the IRS operating divisions have developed any type of compliance initiatives or guidelines for conducting examinations or investigations specific to tax noncompliance related to virtual currencies," it found.
Woodin identified two requirements for improved compliance. The IRS needs updated guidance that clarifies reporting rules. The agency also needs a standardized software tool that would allow cryptocurrency investors to compile annual reports showing their realized and unrealized gains and losses across all virtual currency holdings.
"Tax software will need to be upgraded so that any user or investor of cryptocurrency can compile a report at the end of the fiscal year, showing unrealized and realized gains and losses from their entire virtual currency portfolio," Woodin explained. Such a "national standard" would give accountants clear, consistent data to work with.
Woodin sees tax evasion as secondary to the compliance barrier. "My belief is that people generally want to comply, but the burden is so great that people are either not reporting or are inaccurately reporting. They are not investing in bitcoin as a way to shirk tax obligations as the IRS summons seems to imply," he said.
"If the IRS wants to reduce non-compliance, two things need to happen. First, the IRS needs to update its tax guidelines. The issues around compliance will be remedied, but it is going to require guidance from the regulatory authorities along with a technological solution that removes the barrier of accurate reporting," Woodin continued.
