The IRS Wins Court Battle Against Coinbase

The cryptocurrency boom is at an all-time high, and Bitcoin investors are not the only ones to milk this cash cow.

The Internal Revenue Service (IRS) has also begun to cast its eye on Bitcoin’s financial potential – as of 2014, cryptocurrency is treated like property under US tax laws –  and thousands of customers who did not report profits made from Bitcoin currency exchange are now being targeted for tax collection.

Coinbase, a San Francisco-based exchange, has been ordered by a federal judge to isolate 14,355 accounts with almost 9 million unreported transactions.

Uncle Sam’s Takeover

Coinbase fought a lengthy court battle with the IRS when they ordered the crypto exchange to provide comprehensive personal details of their more than one million customer accounts that made transactions between 2013 and 2015.

Coinbase countered the demand of the IRS as unlawful, but the court disagreed and ruled in favor of the IRS. The IRS finally chose to focus only on selective accounts making Bitcoin transactions worth $20,000 or more, either exchanging the digital currency for dollars or sending and receiving coins from other digital currency users.

Coinbase has said that they are pleased to have significantly reduced, for a small cryptocurrency company, the scope of a large government agency’s early demands. The company has, however, not yet addressed the question about whether or not it will appeal the federal court ruling.

The US District Judge explained in a statement that the court’s constricted summons support the IRS in a legitimate investigation scrutinizing Coinbase account holders, who may have refrained from their federal tax duty on profits made via the virtual currency exchange.

Opening a Can of Worms

When the IRS began combing through its electronic filings for Bitcoin transactions, it discovered that only 802 people had reported their losses or gains made through Bitcoin-related transactions in 2015. This, in turn, led to further, more comprehensive investigation.

During the 3-year period that IRS covered in its demand, the price of Bitcoin surged from a measly $13 to a whopping $1,100. As with anything that becomes so lucrative so quickly, it suddenly became a lot more interesting to the powers that be.

Coinbase explains their reasons for withholding the identity of its patrons. According to the company, their users may have made tax declarations on paper, as opposed to electronic filings as claimed by IRS. They also added that the agency’s assumptions were not adequately supported by a relevant enforcement purpose.

What It Means for Bitcoin Users

When IRS demanded extensive personal details of Coinbase users last year, the company sprang into action to protect its customers’ privacy. Even though the existing summons represents a narrowed version of the agency’s previous demands, it is still capable of having sweeping repercussions on the sanctity of Bitcoin transactions that are known for their privacy.

Director of Research at the Coin Center, Peter Van Valkenburgh, weighed in on the ruling, calling it a poor example for financial discretion. He further explained that without any justification as to why these transactions are suspected, such requests for sensitive customer information could be made from any financial establishment in the future.

The court dispute between Coinbase and IRS may set the tone for regulation of the digital currency by federal agencies who want to tax all Bitcoin investors. While the current ruling may help the agency in exacting taxes from thousands of Bitcoin investors, it is important to note that it is still restricted to Bitcoin and covers only a three year period.

The Unregulated Bitcoin Market

Needless to say, Bitcoin is now a widely used digital currency. However, there is still $200 billion worth of digital currency out there that remains unregulated. Besides, Coinbase is just one of the many exchanges that people are using to trade in Bitcoin and other virtual currencies.

For now, the IRS has not revealed any plans to go after other exchanges. But another round of tax complications could be in the offing once the split-off currency, Bitcoin Cash, is created. Bitcoin Cash is set to be delivered to every Coinbase patron in January.

Coinbase reveled in triumph, however minor, when the judge refused to order the exchange to provide highly sensitive information such as details regarding third-party communications or passport information.

The Watershed Moment

The latest dispute between the IRS and Coinbase could prove to be a breaking point for tax regulators, not just in the US, but all over the world. Roger Ver, Bitcoin investor and purveyor, told Bitcoin Magazine that the IRS has overstepped their boundaries, and he is happy to be a citizen of a country that follows a friendlier tax policy.

In the wake of the current situation with Bitcoin taxation scrutiny, many people now wonder if digital currencies are becoming a preferred method for tax evasion (considering the recent onslaught of enquiries on tax havens and offshore banks). It remains to be seen if the tax authorities will be able to monitor digital currency proliferation and enforce tax regulations, especially when blockchain’s privacy, security, and complexity is increasing by the day.

With cryptocurrency still a widely unlegislated field, it’s understandable that people view it as loophole to get away from the taxman. And, of course, tax evasion is more prominent when people feel they are being overtaxed, as many Americans do. Well, now that the GOP has passed their $1.5 trillion tax cut, lower taxes should be coming soon, in early 2018. American taxpayers looking for some surplus cash can at least be glad to hear that!