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IRS Files for Coinbase to Reveal List of US Customers

CoinbaseThe IRS has asked a Federal Court for permission to file a summons on the Bitcoin exchange in order to access Coinbase´s database of US customers.

The request to access Coinbase´s database of US customers is part of an ongoing tax evasion investigation by the IRS. The IRS wants to look at all transactions conducted by the site in any virtual currency between 31 December 2013 and 31 December 2015. The proposed summons would require the Bitcoin exchange to reveal personal details about it customers – such as names and bank details.

According to David Utze – a senior revenue agent at the IRS – the request has been filed because the service believes some US taxpayers are taking advantage of the anonymity of Bitcoin and other virtual currencies to avoid paying taxes. The IRS announced in March 2014 that virtual currencies would be treated as property for federal tax purposes, and the service is concerned that not all of the $5 billion transacted each year is being declared.

IRS Looking for “Significant Underreporting”

Should the request be approved – and it won´t be until February 2017 that we find out – the implications for most profitable online gamblers are expected to be pretty minimal. Although the IRS will be interested in anybody who has failed to declare their full taxable income, the service appears to be particularly interested in significant underreporting by corporations with million dollar revenues.

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Utze disclosed to Forbes.com that the IRS has already uncovered two companies that purchased Bitcoin though Coinbase, and disguised the amounts as technology expenses in order to avoid paying tax. It has also been acknowledged that wading through two years of transactions for over 4.8 million users (including Microsoft, Amazon, and Expedia) is going to take some time.

The only issues that should concern customers of Coinbase is if they purchased and sold Bitcoin at a profit on behalf of somebody else, or if they allowed somebody else to trade in Bitcoin via their account. The IRS will not only be looking at customers who have failed to declare a profit on their transactions, but also where the money came from to fund the transactions.

The Relationship between Coinbase and Online Gambling

The relationship between Coinbase and online gambling is pretty weak anyway. Because Coinbase wanted to get a US license to deal “legally” in virtual currency, it stopped processing online gambling transactions almost two years ago. Players wanting to use Bitcoin to deposit at an online casino or poker site may have purchased their Bitcoin via Coinbase, but would have then transferred the funds to a separate Bitcoin wallet in order to make their deposits.

Furthermore, once the Bitcoins had been purchased and transferred, they are likely to have stayed in situ and not been transferred back to Coinbase to convert into US dollars. Online gamblers tend to allow their bankrolls to grow rather than withdraw their funds after a profitable session, so any profits from online gambling are likely to remain under the IRS radar. Only the source of funds used to make the initial purchase of Bitcoin may be investigated by the IRS.

One further consideration is that, due to the rising value of Bitcoin over the past year, anybody cashing out the virtual currency now is taking a risk on losing exchange rate profits in the future. Certainly the news did not cause a major scare in the currency exchange markets. The value of Bitcoin dipped temporarily from $746 to $737 but recovered soon after and experts predict, due to the deflationary nature of the virtual currency, its value will continue to increase in the future.

Coinbase Responds to IRS Petition

When the news broke of the IRS petition for Coinbase to reveal its database of US customers, a spokesman for the Bitcoin exchange – David Farmer – released a statement to the press in which the company raised concerns about the implications for its customers´ privacy rights. He said:

Although Coinbase´s general practice is to cooperate with law enforcement, we are very concerned with the indiscriminate breadth of the government´s request. We take user privacy rights very seriously and our legal team is in the process of carefully examining the government´s petition.

The full details of the IRS petition can be found here, and anybody concerned about the IRS investigation should consult a professional legal practitioner.

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