Bitcoin’s veil of privacy for 3 million Coinbase customers has been threatened. It may be torn down completely as a result of a summons authorized Wednesday by a federal judge. The Internal Revenue Service is seeking customer identity and 2014 to 2015 transaction records from Coinbase, the largest Bitcoin exchange in the U.S. The summons is characterized as “the largest single attempt to identify tax evaders using virtual currency to date,” reports Gizmodo.
The summons, called a “John Doe summons,” does not name specific individuals, but a class of taxpayers. The IRS argued that because of tax evasion cases involving two Coinbase customers and Bitcoin’s “relatively high level of anonymity,” there is a “reasonable basis” for concern that the other Coinbase customers may be evading taxes as well, according to an earlier article in The New York Times.
Coinbase has characterized the IRS inquiries as a “very, very broad fishing expedition,” and said it will fight the summons.
According to the Justice Department, “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.”
Gizmodo noted the IRS declared in 2014 that, as property, virtual currencies such as Bitcoin are subject to taxes on profits from sales as taxable income.
Coinbase had about 3 million customers at the end of 2015. The New York Times article reported the IRS is “interested in going after both large tax evaders as well as small-time Bitcoin users who might not be recording their virtual currency transactions properly for tax purposes.”
The IRS has said that while Coinbase provides customers with gain and loss statements for each transaction, but it has no means of knowing if anonymous customers are filing related tax information in compliance with the law.
The New York Times quoted IRS Agent David Utzke saying, “The risk/reward ratio for a taxpayer in the virtual currency environment is extremely low, and the likelihood of underreporting is significant. The characteristics of virtual currencies could enable them to replace traditional abusive tax arrangements as the preferred method for tax evaders.”
For Coinbase customers, the risk of not reporting Bitcoin trades properly may be about to increase dramatically.