IRS Demands All Info On All Coinbase Customers

from the slow-down,-skippy dept

Mon, Nov 21st 2016 6:25am — Mike Masnick

There have always been questions about the tax implications of cryptocurrencies like Bitcoin. A few years ago, the IRS came out with some guidelines, declaring cryptocurrencies to be property, rather than currency, and then taxed more like equity. But late last week, the IRS went to court to basically demand Coinbase turn over all info it has on everyone. Coinbase is one of, if not the, leading online cryptocurrency exchanges and places where many people store their cryptocurrency in an online wallet. It's a company that has bent over backwards to comply with the laws. But, no matter, the IRS basically thinks everyone who uses it is a tax cheat. Here's what the IRS demanded:

All records of account/wallet/vault activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, the names or other identifiers of counterparties to the transaction; requests or instructions to send or receive bitcoin; and, where counterparties transact through their own Coinbase accounts/wallets/vaults, all available information identifying the users of such accounts and their contact information.

Uh, yeah, that's not very limited. It's not limited at all. The IRS literally wants everything. Why? Because, according to the IRS, it's investigating one single tax cheat. In a declaration, IRS agent David Utzke, talks about a single tax cheat, and says this gives him a basis for requesting all info.

After using a traditional abusive offshore arrangement for approximately 5 years, Taxpayer 1 became fatigued with the effort required to manage his offshore accounts, attorneys, and applicable regulations, and discovered virtual currency while conducting internet research on the topic. Taxpayer 1 began testing the use of virtual currency and eventually abandoned the use of his offshore structure. Taxpayer 1 was able to use virtual currency to repatriate his assets without governmental detection.

For example, Taxpayer 1 originally worked with a foreign promoter who set up a controlled foreign shell company which diverted his income to a foreign brokerage account, then to a foreign bank account, and lastly back to Taxpayer 1 through the use of an automated teller machine (ATM). Once Taxpayer 1 abandoned the use of his offshore structure in favor of using virtual currency, the steps described above were the same until his income reached his foreign bank account. Once there, instead of repatriating his income from an ATM in the form of cash, Taxpayer 1 diverted his income to a bank which works with a virtual currency exchanger to convert his income to virtual currency. Once converted to virtual currency, Taxpayer 1’s income was placed into a virtual currency account until Taxpayer 1 used it to purchase goods and services. Taxpayer 1 failed to report this income to the IRS.

Utzke also mentions two other taxpayers, which were companies, not individuals, but which used Coinbase. He notes that others are laundering money and thus likely to be using cryptocurrencies. That may be true, but it seems like a pretty big stretch to argue that means Coinbase should cough up all details on all transactions.

In the IRS's memorandum of support, it insists that it's just trying to find all the tax cheats, so it should get to look at all the records.

Since 2009, the use of virtual currency has increased exponentially. Some users value the relatively high degree of anonymity associated with virtual currency transactions because only a transaction in virtual currency, such as buying goods or services, is public and not the identities of the parties to the transaction. Because of that, virtual currency transactions are subject to fewer third-party reporting requirements than transactions in conventional forms of payment. However, due to this anonymity and lack of third-party reporting, the IRS is concerned that U.S. taxpayers are underreporting taxable income from transactions in virtual currencies. Further, because the IRS considers virtual currencies to be property, United States taxpayers can realize a taxable gain from buying, selling, or trading in virtual currencies. There is a likelihood that United States taxpayers are failing to properly determine and report any taxable gain from such transactions.

.... The issuance of the summons is warranted here because (i) the summons relates to an ascertainable group or class of persons; (ii) there is a reasonable basis for believing these U.S. taxpayers failed to comply with internal revenue laws; and (iii) information sufficient to establish these U.S. taxpayers’ identities is not readily available to the IRS from other sources.

Coinbase posted a short blog post Friday evening expressing concern over this while exploring the issues:

Our customers may be aware that the U.S. government filed a civil petition yesterday in federal court seeking disclosure of all Coinbase U.S. 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.

What happens here is going to be a big, big deal in the cryptocurrency world. The IRS had to know that this was going to get attention, and perhaps that's the intent. But this seems like a massive overreach.

Petition for Coinbase Trader Identities (PDF)Petition for Coinbase Trader Identities (Text)

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Filed Under: bitcoin, cryptocurrency, irs, tax cheats, taxes
Companies: coinbase

43 Comments

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That One Guy (profile), 21 Nov 2016 @ 4:55am

Deja vu
"A suspected criminal might have used the service for illegal actions, therefore we should be able to search every account to fish for illegal actions."

Where have I heard that logic before...

"Criminals drive cars, therefore we should be able to search every car..."

"Criminals use encryption, therefore encryption in general should be crippled so we can bypass it..."

Let's cut to the chase and boil it down to the bare essence of the argument:

"Criminals use X, therefore X and anyone who uses it is a potential criminal and should be treated as such."
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Anonymous Coward, 21 Nov 2016 @ 6:54am

Re: Deja vu
The state doesn't like citizens to have secrecy in communications or financial transactions.
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Paul Renault (profile), 21 Nov 2016 @ 6:55am

Badly placed efforts, if you ask me.
They'd likely get better results if the IRS put some efforts into shutting down tax havens all over the world. But no, it's better to simply spy on everyone.

Or by lobbying to switch the US system of taxation to Land Value Taxation.
https://en.wikipedia.org/wiki/Land_value_tax

You get to invoke Adam Smith, David Ricardo, and Henry George (double-bonus here: he was an American!).
It has the potential to reduce the cost of living for everyone by two means: i) taxes can actually get collected (or else the owner of the land has to forfeit it, returning it to the Commons); 2) house prices are likely to come down to non-speculation prices.
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That One Guy (profile), 21 Nov 2016 @ 6:59am

Re: Re: Deja vu
The state doesn't like citizens to have secrecy in communications or financial transactions.

Remove the last five words and I'd say it would be more accurate.

The state doesn't like citizens to have secrecy
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Anonymous Coward, 21 Nov 2016 @ 7:03am

Damnit. Now I'm expecting bitcoin values to take a hit. Just when I was starting to get a non-negligible return on investment. Time for my money to be worth less than when I put it in again.
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Anonymous Coward, 21 Nov 2016 @ 7:03am

Re: Badly placed efforts, if you ask me.

They'd likely get better results if the IRS put some efforts into shutting down tax havens all over the world

That involves meddling in the sovereignty of other countries.

Or by lobbying to switch the US system of taxation to Land Value Taxation.

That has the problem that a land owner needs some form of cash income. Here in the UK, death duties on the value of property has destroyed many estates, and forced the transfer of the remnants into the hands of the national trust.
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Anonymous Coward, 21 Nov 2016 @ 7:05am

There's a lot of "mays" and "mights" in that petition, smacking of precrime. One lesson to take from this is to absolutely not use companies based in the U.S. if one wants to keep anything secret. Offshore all critical accounts, encyprt all cloud files using non-U.S. based encryption, and for god's sake try to stay away from anything remotely connected to five or fourteen eyes countries. The whole idea behind bitcoins was to keep goverments away from your transactions. VPNs and Tor, people! Make it your mantra.
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Anonymous Coward, 21 Nov 2016 @ 7:06am

Re: Deja vu
These days you're either a government agent or a criminal.
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Ninja (profile), 21 Nov 2016 @ 7:13am

Hmmm, seems like they are testing waters. Let's ask for everything and see what we can get. If there is a single point of failure it is when those cryptocurrencies need to get offline (ie: be exchanged for old currencies that actually do the job). Let's see how this will play.
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Anonymous Coward, 21 Nov 2016 @ 7:15am

Re: Re: Re: Deja vu
>The state doesn't like citizens to have secrecy

In general yes, but specifically only when it threatens the existence of said state.
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Anonymous Coward, 21 Nov 2016 @ 7:26am

meddling in the sovereignty of other countries

did that become a problem? when did that happen?
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Anonymous Coward, 21 Nov 2016 @ 7:28am

Re: Re: Re: Re: Deja vu
It has been shown through history that every attempt to remove a private citizens secrecy is a surefire way to 'threaten the existence of said state'.

Like a self fulfilling prophecy, all attempts to stifle dissent usually result in making it grow.

And like the IRS in this case, they are ensuring that they will become an even more hated organization increasing the desire of candidates to run on a platform of IRS abolition.
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That One Guy (profile), 21 Nov 2016 @ 7:30am

Re: Re: Re: Re: Deja vu
When you hold to the idea that everyone is at the very least a potential criminal and/or threat to the state, as more than a few in various governments seem to believe, then any secrecy on the part of the non-government is a problem, because anyone might at some point 'threaten the existence of said state', and clearly not having every needle for the haystack is a disaster in waiting, as that one missing piece would have been the important one.
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OldMugwump (profile), 21 Nov 2016 @ 7:44am

Re: Re: Deja vu
These days we're all criminals. Some of us are also government agents, and so except from prosecution.

Up to a point.
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Anonymous Coward, 21 Nov 2016 @ 7:51am

Re:
"smacking of precrime"

The holy grail of Law-enforcement! When you need a 'potential' perp in shackles or just plain dead... just accuse them of being in the process of committing a heinous crime.

It's not like the law would ever abuse it authority and lie to anyone.
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Anonymous Coward, 21 Nov 2016 @ 7:59am

Re: Re: Re: Deja vu
Replace "secrecy" with "privacy" or "rights".
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Anonymous Coward, 21 Nov 2016 @ 8:06am

Re:
That's exactly right: they're testing the waters. This case is not an accident: it's been deliberately chosen to be one that they think they can win and thus establish precedent. It's certain they knew they'd be rebuffed since their request is clearly overbroad: their next move will be to dutifully narrow it as much as court instructs...and as much as they wanted to from the beginning.
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Anonymous Coward, 21 Nov 2016 @ 8:07am

Re: Re: Badly placed efforts, if you ask me.
My heart bleeds for all those aristo estates - remember the families still get free accommodation via National Trust & say in what happens so not exactly chucked on the streets and looking for soup kitchens
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Anonymous Coward, 21 Nov 2016 @ 8:11am

Re: Badly placed efforts, if you ask me.
If you pay tax on a property, then you do not own it!

There is only 1 test for ownership.

Does it remain in your possession if you stop spending any money associated with it.

It funny that those pesky and stupid Americans think they own land or property. In truth, you rent it from the Government. They own your property, go ahead stop paying taxes and find out who owns what?
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orbitalinsertion (profile), 21 Nov 2016 @ 8:30am

Re:
I, for one, honestly don't know. Not that this would even be necessary at all. But meddle they would, anyway, if they felt like it.
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orbitalinsertion (profile), 21 Nov 2016 @ 8:32am

All your Coinbase are belong to IRS?
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Anonymous Coward, 21 Nov 2016 @ 8:40am

Re: Re: Badly placed efforts, if you ask me.

They'd likely get better results if the IRS put some efforts into shutting down tax havens all over the world

That involves meddling in the sovereignty of other countries.

Not necessarily. Nevada is a popular tax haven right now, as are a few other US states.

Besides that, the IRS lets companies get out of US taxes by claiming income and taxes in other countries. The USA could tax US companies based on worldwide income, as they do for individuals (with limited success admittedly, but these laws can be changed without meddling in other countries).
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anonymouse, 21 Nov 2016 @ 8:51am

Deny the request
Actually, Coinbase should deny the request. Not all account holders are US Citizens, thus making the request probably a breach of customers rights within their own country. Given Coinbase probably does NOT have residency information on each of its customers, the IRS MUST specify exactly the accounts they are seeking and must verify with the customer that they are that a citizen of that country. Just because you look for John Smith, the IRS must unique identify that specific person.
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Oninoshiko (profile), 21 Nov 2016 @ 9:52am

Re: Re: Badly placed efforts, if you ask me.
You don't pay a tax on holding it. You do pay a tax when you "sell" it (which is to say, convert it back into recognised currency). You can hold it as long as you want, that's not what incurs a tax burden.
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Oninoshiko (profile), 21 Nov 2016 @ 9:54am

I think my lawerly friends have a word for this
I believe it is referred to as a "fishing expedition." It should be denied.
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Anonymous Coward, 21 Nov 2016 @ 11:16am

Re: Re: Re: Re: Deja vu
But using that paranoid logic of said state, all secrets threaten the existence of said state. They wouldn't be a secret otherwise.
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R.H. (profile), 21 Nov 2016 @ 11:25am

Re: Re: Re: Badly placed efforts, if you ask me.
The AC above you is referring (badly) to property taxes on real estate. Which is the only type of property that his statement actually does apply to. Even then, we the people agree to property tax assessments. At least where I live, I've never seen a property tax applied without the consent of a majority of the voters.

For everything else, your statement certainly applies.
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Anonymous Coward, 21 Nov 2016 @ 12:49pm

I appreciate your clarification of the libertarianesque "property tax is rent" proposition.

Now, a question:

At least where I live, I've never seen a property tax applied without the consent of a majority of the voters.

How many corporate property tax abatements have you seen made subject to such consent?
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Anonymous Coward, 21 Nov 2016 @ 12:54pm

Re:
Dammit. Threading fail.

The comment above was meant as a reply to this comment, from RH:

https://www.techdirt.com/articles/20161118/18090136088/irs-demands-all-info-all-coinbase-customer s.shtml#c323
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Anonymous Coward, 21 Nov 2016 @ 2:25pm

Re: Re: Badly placed efforts, if you ask me.

That involves meddling in the sovereignty of other countries.

Have you not heard of FATCA?
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Anonymous Coward, 21 Nov 2016 @ 2:49pm

Re: Deny the request

Not all account holders are US Citizens, thus making the request probably a breach of customers rights within their own country.

Which is perfectly in standing with FATCA.
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Anonymous Coward, 21 Nov 2016 @ 3:23pm

Re: Re: Deny the request
> Which is perfectly in standing with FATCA.

I was of the understanding that FACTA applied only to U.S. persons.
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Anonymous Coward, 21 Nov 2016 @ 3:25pm

I think the IRS just did a broad shot and is hoping the courts will decided exactly how much the US government has leeway to request these records instead of getting new laws written. The block chain is public so they can prove a transaction was made but now they need to tie that transaction back to an individual or company.
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Anonymous Coward, 21 Nov 2016 @ 3:38pm

FTFY
Since 2009, the use of CASH has increased exponentially. Some users value the relatively high degree of anonymity associated with CASH transactions because only a transaction in CASH, such as buying goods or services, is public and not the identities of the parties to the transaction. Because of that, CASH transactions are subject to fewer third-party reporting requirements than transactions in conventional NON-CASH forms of payment. However, due to this anonymity and lack of third-party reporting, the IRS is concerned that U.S. taxpayers are underreporting taxable income from transactions in CASH.
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CharlieBrown, 21 Nov 2016 @ 3:44pm

Viewing The Data
Maybe they should let the IRS view the data. In a darkened room. With one computer. And only one IRS employee reading it. Who is not allowed to take notes. Or advisors. They must be by the self. With no mobile phone or other devices..
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Anonymous Coward, 21 Nov 2016 @ 3:53pm

Re: Re: Re: Deny the request

I was of the understanding that FACTA applied only to U.S. persons.

Not quite. While I was referring U.S. Persons overseas, many of whom are permanent residents or citizens of the country that they reside in, FATCA also breaches the privacy of any joint account holders which may have no other connection to the U.S., and any companies that they may have signatory authority for any accounts for.

And that assumes that non-U.S. Persons have not been incorrectly identified, possibly for not providing evidence to prove that they are not. The potential penalties for foreign financial institutions provide a rather perverse incentive to identify as a U.S. Person anyone that has raised even a slight suspicion of being one.
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Anonymous Coward, 21 Nov 2016 @ 4:15pm

It is a pretty simple case to make, using this logic:

The IRS knows how many people declared coinbase income on 2015 call that number X.

Coinbase has a number of crypto wallets that had activity on 2015. Call that number Y.

Coinbase has processed a number of transactions for customers. Call that number Z.

Given that the IRS is show9ng s9me cases of tax avoidance and given that crypto currency is a good eay yo move money....

Take Y - X . If that number is still very large, say multiples of X, there is great potential for people not reporting.

You can take Z / Y and figure out the number of transactions per account average, and then figure out an average transaction size to know what was unreported on average.

At that point, the state can show a valid interest in knowing who has not reported Coinbase transactions.

Privacy does not generally extend to illegal acts.
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Anonymous Coward, 21 Nov 2016 @ 4:26pm

Re:

At that point, the state can show a valid interest in knowing who has not reported Coinbase transactions.

Except that it still can't say which it might have some interest in or jurisdiction over. It's still nothing more than a fishing expedition in extra-territorial waters.
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Paul Renault (profile), 22 Nov 2016 @ 4:54am

Re: Re: Badly placed efforts, if you ask me.
By greatly increasing the tax on property (and greatly reducing all other taxes), you'd be essentially renting the land from the Commons, the people.

That land cannot be furtively moved to a lower-tax district by weaselly accounting practices. I'm sure you can find all sorts of instances where companies claim that all of their profits are generated by a post-office box address in Andorra or Bermuda, and so can't be taxed where you live.

In many, many cases, the increase of the value of land is largely due to improvements which have been paid for by other citizens' taxes (roads, sewage, public transit, etc), or are the property of Commons (resources, oil,ore, etc).
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nasch (profile), 22 Nov 2016 @ 7:01am

Re: Re: Re: Badly placed efforts, if you ask me.

The USA could tax US companies based on worldwide income

Wouldn't that just incentivize companies to headquarter elsewhere?
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nasch (profile), 22 Nov 2016 @ 7:11am

Re: FTFY

Since 2009, the use of CASH has increased exponentially.

Got a citation for that?
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intrautarchy, 22 Nov 2016 @ 8:14am

Re: Re: Deja vu
Citizens and their communications, private transactions, or any other inalienable human action are not property of the "state" (feudalist family-controlled corporate government). What The Borg-"state" likes or doesn't like has long impaired humanity. That needs to be corrected.
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Bitcoin, 25 Nov 2016 @ 10:20am

First they ignore you, then they laugh at you, then they fight you, then you win.
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