In 2016, the United States IRS demanded that Coinbase provide them with information about all of their U.S. based customers, including their purchase histories. Coinbase refused. This year, the IRS is back on the hunt. This time, they are only going after the top grossing, highest earning customers with individual transactions in excess of $20,000. Read on to find out how this craziness began, and where its headed to next.
The IRS lashes out
According to papers filed at the Northern District Of California court, the IRS issued a summons to Coinbase, a California company, to submit all customer data for every account that was active during 2012 through 2015.
In a new filing put through on the 28th of November, the IRS is submitting a petition to enforce. Coinbase did not comply with the previous summons. So the IRS is attempting to put more pressure on them to get them to comply.
In the recent filing, the IRS makes the claim that they have the “legitamete [sic] purpose of investigating Coinbase account holders who may not have paid federal taxes on their virtual currency profits.”
The backup plan
Since the original summons was too broad to be enforced, the IRS changed their demand. Now, they want the information about accounts “with at least the equivalent of $20,000 in any one transaction type in any one year” during the relevant time period.
This means that if you did a total amount of transactions in excess of $20,000, but not in one single transaction, the IRS does not care about you… yet.
“I believe Coinbase and the IRS fundamentally want the same thing: for all U.S. users of virtual currency to pay their taxes. And I believe our prior actions demonstrate that we are committed to making this happen.” – Brian Armstrong, CEO of Coinbase
On his Medium account, Coinbase CEO Brian Armstrong wrote a blog post about his company's recent contact with the IRS. Armstrong noted several times that to Coinbase, “compliance is key”. It is also, in his opinion, of critical importance to the overall success of digital currencies.
However, customer privacy is also important to the company. Armstrong noted, “Asking for detailed transaction information on so many people, simply for using digital currency, is a violation of their privacy…”
Armstrong also noted that while in most cases the company does not provide IRS 1099's to customers currently, it does for merchant accounts. The company does offer a cost basis report to all of its customers. However, the output can be difficult to understand for non-experts.
1099's for everyone
To resolve this issue and to hopefully increase the ease of tax compliance for U.S. customers, Armstrong claims that Coinbase will begin submitting form 1099-B on behalf of all it's U.S. customers. This is the same form that is traditionally used by brokerage firms.
Brian Armstrong noted that 1099 forms offer a number of advantages for both customers and the IRS. Specifically, he noted that: “1099 forms provide a simple summary of gains or losses on trading activity, instead of full transaction records, transcripts with customer support, IP addresses, etc.”
What happens now?
At this point in time, the only people who should be significantly worried about the IRS is those top customers that have single transactions valued at over $20,000, and within the time frame of 2012-2015. The court papers filed by the IRS suggest that this number is less than 10,000 people.
If you suspect you may be implicated in this and have not already paid taxes on it, it's best that you seek professional help immediately. For the rest of us, make sure to keep track of your cryptocurrency gains and losses. Also take full advantage of any 1099 or similar forms that Coinbase may provide when filing your taxes.
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