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No Hiding Behind Virtual Currency, IRS Insists — and Court Agrees

Bitcoins and other virtual currency are on the national radar with articles and commentary offered every day on their increasing use and on the government’s attempts to regulate the cryptocurrency market. No agency is more interested in the rise of the bitcoin than the IRS because of the potential tax avoidance from using an anonymous currency that is difficult to track and not deposited in any bank.

The IRS’s plan of attack is to compel Coinbase, the U.S.’s largest bitcoin exchange headquartered in California, to identify users who conducted annual transactions of more than $20,000 on its platform between 2013 and 2015. A federal district court in California now has issued an order enforcing the IRS summons, telling Coinbase to turn over information on its users, but not all of the information the IRS wanted. The IRS initially requested complete user profiles, documents regarding third-party access, transaction logs, records of payments processed, correspondence between Coinbase and Coinbase users, account or invoice statements and records of payments. The Court only ordered the company to give the IRS taxpayer ID numbers, names, dates of birth, addresses, transaction logs, and account statements. The transaction logs identify the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction.

IRS Points to Low Reporting Numbers

It is estimated that the IRS information request will apply to more than 10,000 Coinbase account holders. The IRS told the Court that it is seeking the information because of a large discrepancy in known user numbers at Coinbase versus the number of taxpayers who filed Form 8949 with the IRS reporting gain on their virtual currency transactions. Form 8949 is used to report sales and other dispositions of capital assets.

In approving the IRS request for information, the Court states, “Moreover, Coinbase itself admits that the Narrowed Summons requests information regarding 8.9 million Coinbase transactions and 14,355 Coinbase account holders. That only 800 to 900 taxpayers reported gains related to bitcoin in each of the relevant years and that more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year suggests that many Coinbase users may not be reporting their bitcoin gains. The IRS has a legitimate interest in investigating these taxpayers.”

Forms 1099-K

Coinbase is trying to head off conflicts with the IRS, noting in public announcements that it sent Form 1099-Ks to its customers in 2017. That form is used to report payment card and third party network transactions involving 200 receipt transactions and $20,000 in cash received.

As the IRS and the courts stake out new ground on treatment of virtual currencies, one thing is becoming clear. The privacy and anonymity of these currencies is short-lived. This case indicates that the IRS is committed to finding investors who do not have pay federal taxes on their virtual currency profits.

As we went to press, the price of a Bitcoin was $10,335.00. Bitcoin’s Twitter account can be found here.

How are bitcoins taxed?

The IRS issued Notice 2014-21 in 2014 explaining that virtual currency is property for tax purposes and will be taxed as capital gains or losses when bought and sold.

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