Coinbase Ordered to Disclose Nearly 9 Million Transactions to IRS, Affecting More Than 14,000 Bitcoin Holders

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The Nothern District Court of California has ordered Coinbase, the biggest bitcoin broker and one of the biggest bitcoin exchange, to disclose “information regarding 8.9 million transactions and 14,355 account holders.”

U.S Magistrates Judge Jacqueline Scott Corley denied in part and granted in part a request by IRS to enforce a summons on Coinbase which requested numerous information on bitcoin account holders.

IRS argued that only 800 to 900 individuals had disclosed bitcoin gains or losses during the period of 2013-2015 despite Coinbase having almost 6 million customers at the time.

Pursuant to a notice IRS issued in 2014, bitcoin is a commodity, rather than a currency, therefore gains are taxable. In light of the discrepancy between bitcoin related tax disclosures and Coinbase account holders, IRS said they needed to investigate the matter.

Judge Corley agreed, stating “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.”

Coinbase argued that bitcoin’s price fell during that period, so there may have not been any gains, but the judge was unpersuaded, stating that was speculation.

The summons, however, has been narrowed considerably following discussions between IRS and Coinbase during summer. The judge says:

“IRS learned that most of Coinbase’s users engage in low volume, low dollar transactions. The IRS also discovered “what information Coinbase collects and does not collect, and the degree of difficulty Coinbase would face in producing certain information and its possible corresponding investigative value.”

[IRS’s] Mr. Utzke clarifies that “[if ] the Coinbase user and account activity level had been what the IRS expected based on Coinbase’s public information gathered prior to the issuance of the summons, the IRS would not have narrowed the requests it is now seeking for enforcement.””

The disclosure order therefore now affects only buys, sells, withdrawals or deposits of sums over $20,000 in any one transaction. Even there, the amount of information requested by IRS has been narrowed.

Judge Croley stated that AML/KYC processes, passports or other identifying documents, correspondences with Coinbase, and other information, were too broad a request considering that thousands are affected.

The judge stated that IRS firstly needed to establish whether there has been any under-reporting of taxable bitcoin gains. For that, it needs only the following information according to the order:

Courts order on the information Coinbase must disclose to IRS for bitcoin taxation purposes.

Coinbase declared a victory of sorts in considerably narrowing the request, but millions of records will now be disclosed, including potentially wallet addresses.

As public blockchains, like bitcoin, are public, linking a name to a bitcoin address can have significant privacy implications as one can see much of the financial activity.

IRS might have the legal right to it, but if that information falls in the wrong hands through hacking or even potentially rogue employees, as has happened with many companies, including regulatory agencies like the SEC which was hacked recently, then there may be considerable implications.

That information could be very valuable to criminals. Which may mean significant monetary incentives for IRS employees to go rogue and then blame it on hacking.

It would have therefore been far better for Coinbase itself, which has never been hacked, to have undertaken the investigation, with data then shared only where there has been under-reporting.

Rather than a blanket sharing of nearly 9 million transactions of presumably wealthy individuals considering the threshold of $20,000.

This decision, however, is at the lowest court level, with appeals on privacy grounds possible because it can be argued IRS does not need such intricate detail but only if taxes have been misreported, by how much, and by who.

But, Coinbase’s declaration of a victory seems to suggest the matter is to be closed here. Something which may have implications regarding what jurisdiction companies and individuals may choose in the future as privacy is of considerably importance where public blockchains are concerned.

 

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