The IRS is seeking information on Coinbase users who are American taxpayers and made virtual currency transactions between 1 January 2013 and 31 December 2015.
In the court document, filed on 17 November, the IRS stated: “[We are] responsible for monitoring ways in which United States taxpayers evade their United States tax obligations by concealing or otherwise failing to report their proper amount of taxable income and thus underpay their taxes.
“The ever-changing digital age and innovation pose new risks for the IRS and tax compliance by United States taxpayers.
“One such innovation is the creation of virtual currency which, unlike US dollars or other government-issued currencies, does not have a physical coin or bill associated with their circulation and is not owned by any government.”
As a result, the IRS is “seeking to issue a summons that will allow it to identify US persons who have not properly reported income arising from their use of virtual currency”.
Tax avoidance
A 2013 Government Accountability Office (GAO) report identified several tax compliance risks associated with virtual currencies, including lack of third-part reporting, lack of knowledge among taxpayers, and uncertainty of gains realised from virtual currencies.
The report found that “some taxpayers may use virtual economies and currencies as a way to evade tax. Because transactions can be difficult to trace and many virtual economies and currencies offer some level of anonymity, taxpayers may use them to hide taxable income”.
A 2014 GAO report added that virtual currencies “may be attractive to parties seeking to […] move or conceal money obtained by illegal means”.
Three convictions
As part of its ongoing investigation, a senior IRS agent interviewed three taxpayers found to have used virtual currencies to avoid their tax liability.
One diverted his income to an offshore tax haven and used virtual currency to repatriate his assets without government detection.
Two other two were corporate entities with annual revenues of several million dollars that bought and sold bitcoins.
Coinbase
Headquartered in San Francisco, Coinbase was the fourth largest exchanger of bitcoin in the US as of December 2015.
In response to the court petition, Coinbase posted the following message on its website:
“Our customers may be aware that the US government filed a civil petition yesterday in federal court seeking disclosure of all Coinbase US customers’ records over a three-year period.
“The government has not alleged any wrongdoing on the part of Coinbase and its petition is predicated on sweeping statements that taxpayers may use virtual currency to evade taxes.
“Although Coinbase’s general practice is to cooperate with properly targeted law enforcement inquiries, we are extremely concerned with the indiscriminate breadth of the government’s request.
“Our customers’ privacy rights are important to us and our legal team is in the process of examining the government’s petition. In its current form, we will oppose the government’s petition in court. We will continue to keep our customers informed on developments in this matter.”
