The court order demands that the name, birthdate, address and account activity be provided for any customer who bought, sold, sent or received more than $20,000 worth of bitcoin between the years 2013 to 2015.
The court battle between Coinbase and the IRS
Originally the court order last November asked that it be provided with user records for all Coinbase customers. Both the company and its customers complained that the order was much too broad.
The IRS agreed to narrow its request so that it applied only to those who had traded more than $20,000 in bitcoin during the time period.
The text of the court order can be found here.
14,000 Coinbase users affected by the Court order
Of these 14,000, 6,200 of them had received less than $60,000 between 2013 to 2015 according to a Coinbase internal audit.
In January, Brian Armstrong CEO of Coinbase complained that asking for detailed transaction information on so many people just for using bitcoin was a violation of its customers rights to privacy. Armstrong argued that it was not the best way to address the objective of the IRS.
Capital gains taxes are to be paid on gains from cryptocurrency transactions
The court order notes that more than 10,000 people bought or sold more than 20,000 worth of cryptocurrency during the period. Cryptocurrency is regarded as property for tax purposes.
Only 800 to 900 taxpayers filed returns with a property description related to bitcoin during the period. This suggests the court order notes that many Coinbase users are not reporting their bitcoin gains.
U.S. citizens are supposed to pay capital gains tax on cryptocurrency transactions as the IRS labels virtual currencies as property for federal tax purposes.
Perhaps the law is behind development of technology
Some think that the problem is that the law has not kept up with new technology. 14,000 users of the new technology are being put under investigation simply because they use the new technology.
In the U.S. Congress a bill was introduced in September that would at least exempt any cryptocurrency transaction under $600 dollars from taxation. As it is now, every single bitcoin transaction no matter how small must be recorded and later reported to government in order to pay a capital gains tax. This tax is normally applied when someone sells property, stocks, or precious metals
The Cryptocurrency Tax Fairness Act of 22017
The bill was introduced by Rep Jared Polis a Democrat and Rep. David Schweikert a Republican. As mentioned, the bill exempts any transaction under $600 from taxation. This would mean that when bitcoin is simply used to pay for items of limited value the person would not have to pay tax on that.
Jerry Brito, executive director of the Coin Center noted:
“Right now, under the law, you have to keep track of every transaction, whether it’s for a coffee here or an MP3 player there. Because the IRS treats Bitcoin as property for tax purposes, you owe capital gains tax whenever you dispose of Bitcoin, whether that’s selling 10,000 bitcoins or buying a coffee.”
Congressman Schweikert said of the bill: “Individuals all over the world are starting to use cryptocurrencies for small every day transactions, yet here in the States we have fallen behind and make cryptocurrency use more of a challenge than it needs to be. With this simple legislative change, anyone can make digital payments to buy a newspaper or a bike without worrying about tax code challenges.”
Another court battle or an alternative system?
Coinbase said that if it ultimately produced the documents ordered, it would notify those users who were impacted in advance of any disclosure. However, CEO of Coinbase Brian Armstrong suggested that the company will go to court with the IRS and said “..it appears we will be forced to contest [the subpoena] in court to protect our customers’ privacy at great expense”
Coinbase suggested an alternative solution to the issue. Coinbase would send a yearly tax form as is commonly done by stock brokers to report gains and losses both to customers and the IRS. It remains to be seen whether this is acceptable to the IRS.
