In November 2016, a federal court in the Northern District of California authorized the Internal Revenue Service (IRS) to serve a John Doe summons on popular Bitcoin exchange Coinbase, which is used by millions of people to store, sell, buy, and send Bitcoin and other cryptocurrencies. However, the company pushed back on the IRS’ demands, which called for transaction data from hundreds of thousands of accounts. This prompted a contentious and highly publicized legal battle, in the midst of which senior IRS official David Utzke released an affidavit containing a brief explanation of why the government is pursuing Coinbase users – along with some surprising statistics about how Bitcoin transactions are (and aren’t) reported by taxpayers. If you sell, buy, mine, or invest in Bitcoin, you should consult with an experienced Bitcoin tax lawyer for assistance complying with the law and reducing potential penalties for nondisclosure.
Bitcoin, which was first used in 2010, has soared in value throughout much of its short history, particularly over the period from 2013 through 2015, during which the cryptocurrency climbed in worth from just $13 to more than $1,100: a staggering increase of more than 8,000%. Though still used by a relatively narrow sliver of the population – Coinbase, which is the United States’ leading Bitcoin exchange, currently hosts about 12 million users – the virtual currency’s explosive growth prompted the American Institute of CPAs (AICPA) to request more detailed information than the IRS had, via Notice 2014-21, previously provided on Bitcoin taxation. This led the Treasury Inspector General for Tax Administration (TIGTA) to recommend, in a report issued September 2016, stricter regulations and more rigorous enforcement of compliance. Spurred by a combination of policy recommendations and an increasing need for careful monitoring of virtual currencies, the IRS sought and obtained a summons targeting Coinbase records.
Citing the previous month’s court ruling, discussed in this DOJ press release, the original summons, dated December 5, 2016, directed Coinbase to provide, with some exceptions, customer records for the years ending December 31, 2013 through December 31, 2015. The summons demanded that Coinbase produce various records “For each Coinbase user for which your records show any U.S. address, U.S. telephone number, U.S. e-mail domain, or U.S. bank account” during the period specified.
Coinbase fought back, countering that the summons illegally violated customers’ rights to privacy. Rather than backing down, the IRS responded with a lawsuit, filed March 2017, to enforce the summons.
Around the same time, IRS Senior Revenue Agent David Utzke filed an affidavit addressing the investigation. The affidavit:
Ultimately, Coinbase proved successful in restricting the scope of the original summons, obtaining in July 2017 a narrowed summons which reduced total customers affected from approximately 500,000 to fewer than 15,000. Nonetheless, that still leaves approximately 14,400 Coinbase accounts to be examined, which could have disastrous implications for hundreds or thousands of taxpayers.
If you used Coinbase to sell Bitcoin, purchase Bitcoin, or otherwise conduct cryptocurrency transactions during tax years 2013 through 2015, or if you are a business owner who currently uses or has previously used Bitcoin to compensate employees and/or independent contractors, you may be at risk for a civil audit or IRS criminal investigation, depending on the nature of the transaction and attending circumstances. If you are an active or former Bitcoin user, investor, or miner, it is in your best interests to carefully review your record of compliance with an experienced tax attorney who understands the unique challenges that arise in these complex and cutting-edge cases.
At the Tax Law Office of David W. Klasing, our California tax lawyers have more than 20 years of experience and are known for providing aggressive, zealous representation, whether we are defending a criminal case in court or negotiating with the IRS. To book a reduced-rate consultation with our experienced cryptocurrency tax attorneys, contact us online, or call our law offices at (800) 681-1295.
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