Identities, Transactions of 4.8 Million Bitcoin Users Ordered Released in IRS Tax Probe

In a massive bitcoin tax-evasion probe, Coinbase has been ordered to release the identity and transactions of 4.8 million users between 2013 and 2015.

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The value of the cryptocurrency Bitcoin has skyrocketed from $13.37 at the beginning of 2013 to over $772.49 at the time of this writing.

Well now Uncle Sam wants his cut and the IRS is seeking the identities and transaction histories of all U.S. based users that use Coinbase, the United States’ largest bitcoin exchange.

After petitioning the courts to order Coinbase release all user data between 2013 and 2015 last week a federal judge in California has granted the request.

Coinbase currently has over 4.8 million users, several million of which are U.S. customers and trades over $5 billion in virtual currencies.

The tax-evasion probe comes after the agency discovered 2 Coinbase customers with millions of dollars of annual revenue were found to be using the service for tax evasion.

The request was triggered after the IRS found instances of tax evasion involving Coinbase customers. In his declaration to the court in support of the summons, IRS Senior Revenue Agent David Utzke noted that his investigations included two taxpayers with annual revenues in the millions who “admitted disguising the amount they spent purchasing the bitcoins as deductions for technology expenses on their tax returns.” Those corporate taxpayers had wallet accounts at Coinbase. Unlike other kinds of financial transactions, there is currently no third-party information which requires separate reporting for bitcoin (think of third-party reporting like the forms 1099 issued by your bank). This, says IRS, means that the “likelihood of underreporting is significant.”

The likelihood of underreporting combined with the anonymity of virtual currency means that the IRS needs more data to complete its investigation. It also explains why the “John Doe” summons is so broad.

How big could the request be? Try massive. As part of the request, the feds note that as of December 2015, “Coinbase was the fourth largest exchanger globally of bitcoin into U.S. dollars and the largest exchanger in the U.S. of bitcoin into U.S. dollars.” On its website, Coinbase claims that it has 4.8 million users trading over $5 billion in virtual currencies making it “the world’s most popular way to buy and sell bitcoin and ethereum” (it’s worth noting that Coinbase did not start accepting Ethereal, or ethers, until 2016, so it is not included in the summons).

According to court documents, as of January 2016, more than 100,000 merchants globally accept bitcoin payments including Overstock, Home Depot, Microsoft, Amazon, and Expedia; that number is expected to increase to 150,000 by fall of 2016. Utzke calculated the 2015 annualized transaction value of bitcoin in the U.S. to be $10,116,817,608.

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Those numbers aren’t showing up on tax returns, claims the IRS. That’s why they are asking Coinbase to turn over records for users who show “any U.S. address, U.S. telephone number, U.S. e-mail domain, or U.S. bank account.” Requested records include but are not limited to user profiles, user preferences, user security settings and history, user payment methods, and other information related to the funding sources for the account/wallet/vault. And that’s just for starters. IRS is also seeking all records of account/wallet/vault activity including but not limited to records identifying the date, amount, and type of transaction, names or other identifiers of parties to the transaction; requests or instructions to send or receive bitcoin; and all correspondence.

More from Zero Hedge on the order from the court:

Largest US Bitcoin Exchange Ordered To Disclose Three Years Of User Data To IRS

Last week we reported, that in an unprecedented attempt to breach the personal privacy of users of the largest bitcoin exchange in the US, Coinbase, the IRS filed papers seeking a judicial order to serve a so-called “John Doe” summons on the San Francisco-based Bitcoin platform.

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The government’s request was part of a bitcoin tax-evasion probe, and seeks to identify all Coinbase users in the U.S. who “conducted transactions in a convertible virtual currency” from 2013 to 2015. What makes a “John Doe” unique, is that it represents a special “shotgun” form of summons to look for tax evaders that allows the IRS to obtain information about all taxpayers in a group or class of people, even if the agency doesn’t know their identities. The IRS has deployed the tactic in its recent crackdown on undeclared offshore accounts, with the implication that any such broad sweep may lead to prosecution.

Coinbase executives were “extremely concerned” and vowed to oppose the government’s petition in court.

Our customers may be aware that the U.S. government filed a civil petition yesterday in federal court seeking disclosure of all Coinbase U.S. customers’ records over a three year period. The government has not alleged any wrongdoing on the part of Coinbase and its petition is predicated on sweeping statements that taxpayers may use virtual currency to evade taxes.

Although Coinbase’s general practice is to cooperate with properly targeted law enforcement inquiries, we are extremely concerned with the indiscriminate breadth of the government’s request. 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 head legal counsel, Juan Suarez, said that “we want to work with law enforcement — that’s generally our policy,” . “But we can’t tolerate sweeping fishing expeditions. We are very concerned about the financial privacy rights of our customers.”

We concluded our report by wishing “Good luck to Coinbase fighting the IRS: if America’s tax collector is intent on getting the identities of the biggest traders are in America’s largest bitcoin exchange, it will certainly succeed (especially if they happen to be conservatives).”

Alas, our best wishes were not enough, and yesterday a federal court in the Northern District of California ordered Coinbase to disclose what the IRS has demanded: all American user transactions from 2013 to 2015.

From the authorization:

A federal court in the Northern District of California entered an order today authorizing the Internal Revenue Service (IRS) to serve a John Doe summons on Coinbase Inc., seeking information about U.S. taxpayers who conducted transactions in a convertible virtual currency during the years 2013 to 2015.  The IRS is seeking the records of Americans who engaged in business with or through Coinbase, a virtual currency exchanger headquartered in San Francisco, California.

“As the use of virtual currencies has grown exponentially, some have raised questions about tax compliance,” said Principal Deputy Assistant Attorney General Caroline D. Ciraolo, head of the Justice Department’s Tax Division.  “Tools like the John Doe summons authorized today send the clear message to U.S. taxpayers that whatever form of currency they use – bitcoin or traditional dollars and cents – we will work to ensure that they are fully reporting their income and paying their fair share of taxes.”

Virtual currency, as generally defined, is a digital representation of value that functions in the same manner as a country’s traditional currency.  There are nearly a thousand virtual currencies, but the most widely known and largest is bitcoin.  Because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, taxpayers may be using them to hide taxable income from the IRS.  In the court’s order, U.S. Magistrate Judge Jacqueline Scott Corley found that there is a reasonable basis for believing that virtual currency users may have failed to comply with federal tax laws.

One paragraph that will likely get particular scrutiny now that virtually any Bitcoin transaction in the US is open to IRS scrutiny is the following:

The IRS has issued guidance regarding the tax consequences on the use of virtual currencies in IRS Notice 2014-21, which provides that virtual currencies that can be converted into traditional currency are property for tax purposes, and a taxpayer can have a gain or loss on the sale or exchange of a virtual currency, depending on the taxpayer’s cost to purchase the virtual currency (that is, the taxpayer’s tax basis).
The order concludes by saying that the court’s order “grants the IRS permission to serve what is known as a “John Doe” summons on Coinbase.  There is no allegation in this suit that Coinbase has engaged in any wrongdoing in connection with its virtual currency exchange business.  Rather, the IRS uses John Doe summonses to obtain information about possible violations of internal revenue laws by individuals whose identities are unknown.  This John Doe summons directs Coinbase to produce records identifying U.S. taxpayers who have used its services, along with other documents relating to their virtual currency transactions.”

Despite the order, Coinbase has vowed to continue the fight: “We look forward to opposing the DOJ’s request in court after Coinbase is served with a subpoena,” a spokesman for the San Francisco-based company said in an email to Reuters.

Coinbase remains concerned with its U.S. customers’ privacy rights in the face of the government’s request, he added, although he is likely far less concerned than any people who used Coinbase from 2013 to 2015, and who may soon be getting a visit from the taxman, even if they have done nothing illegal. As for the myth that trading bitcoin by ordinary Americans provides some additional layer of privacy, that is about to be thoroughly debunked.

The executed DOJ order is below (link).

Last year the the Bitcoin was ruled an official currency by EU courts making it not taxable.

In contrast, U.S. agencies have declared the coin is a taxable commodity and U.S. courts have not yet to ruled on the matter.

The ruling from the EU combined with a stream of news surrounding a wide array of Wall Street firms jockeying for position in new block chain related technologies led many people to purchase the coin last year hoping it would get back to all time highs of over $1,000.

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