IRS Casts Wide Net in Bitcoin Probe, Demands Exchange Provide Info on All US Customers

Chris Gaetano
Published Date:
Nov 21, 2016

The IRS has decided to get around the relatively anonymous environment that characterizes Bitcoin by simply demanding that Coinbase, one of the largest virtual currency exchanges, give them the personal data of all U.S. users that made transactions through the company between 2013 and 2015, according to Fortune

Bitcoin, the first virtual currency to solve the double-counting problem (how do you prevent someone from copying/pasting the currency's computer code over and over again and amassing a fortune?), is generally seen as very difficult to trace. While all transactions are recorded on a public ledger, these transactions are difficult to link to an actual person, making the currency's use mostly anonymous. However when it comes time to convert those bitcoins into sovereign currency, users generally need to use an exchange, such as Coinbase. Because of the difficulty in overseeing the currency itself, these changes have become the focal point for regulators such as FinCEN and the New York State Department of Taxation and Finance, the latter of which recently implemented the first "BitLicense" regulation. 

Under this BitLicense regulation, exchanges must collect and maintain information on each transaction made through them. This includes the amount, date, precise time of the transaction, any payment instructions, the total number of fees and charges received and paid, as well as the name, account number and physical address of any parties to the transaction. Coinbase, as it operates in New York, works under these regulations and so maintains the relevant customer data. 

It is this customer data that the IRS now seeks, naming "JOHN DOES, United States persons who, at any time during the period of Jan. 1 2013 through Dec. 31 2015, conducted transactions in a convertible virtual currency as defined in IRS notice 2014-21" in the court filing. The IRS, in the filing, said that it has launched an investigation to determine the correct federal tax liabilities of U.S. taxpayers who conducted transactions using convertable virtual currency, noting that they may or may not be complying with all the relevant laws regarding reporting taxable income from virtual currency transactions. 

"There is a reasonable basis for believing that such group or class or persons may fail, or may have failed, to comply with one or more provisions of the internal revenue laws," said the IRS in the court filing. 

Under IRS guidance released in 2014, all virtual currencies count not as currency but as property and would be treated as such for federal tax purposes. This is in contrast to the SEC, which 

Coinbase has yet to file a legal response, according to Fortune, but has expressed its concern over what it says is the "indiscriminate breadth of the government's request." 

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