Taxing Bitcoin

The only thing truly certain about Bitcoin and other cryptocurrencies is that as soon as people start marking money the IRS will get interested. That has happened February 21, 2018 approximately 13,000 Coinbase users received notice that Coinbase is going to release information about their Bitcoin transactions to the IRS.

Coinbase is one of the largest cryptocurrency exchanges. Users of Coinbase, like any other exchange, can exchange cryptocurrencies like Bitcoin and Ehereum, with fiat currencies like US dollars. In December 2016, the IRS issued a summons to Coinbase requesting information about user transactions. Based on its records, the IRS found that only approximately 800 to 900 taxpayers reported gain or loss from cryptocurrencies on their tax returns. For perspective, Coinbase has 5.9 million active users and has buy/sell functionality in 33 countries, and has exchanged over $6 billion in Bitcoin.

After some initial wrangling, the IRS focused its request for information on users who exchanged $20,000 or more in any year from 2013 to 2015. Coinbase refused, and the matter had to be resolved by the United States District Court for the Northern District of California. The Court issued its decision on November 28, 2017, requiring Coinbase to turn over some, but not all, of the information the IRS requested:

(1) the taxpayer ID number,

(2) name,

(3) birth date,

(3) address,

(4) records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and

(5) all periodic statements of account or invoices (or the equivalent).

The IRS will use this information to determine whether Coinbase users have failed to properly report their cryptocurrency transactions on their federal tax returns.

This may not be the end for the IRS and Coinbase either. The Court denied the IRS’s request for additional information such as Coinbase’s due diligence information about customers. That could change, however, if the IRS learns, for example, that any of the users whose information is disclosed were involved in money laundering or other criminal enterprises. Banks and other financial institutions have long been required to engage in so-called “know your customer” due diligence to protect against precisely this kind of illegal conduct. Coinbase could have a larger problem if it turns out that it has been allowing money laundering or other criminal activity.

The Court’s recent decision is a good example of how cutting edge technology like Bitcoin can intersect with long established statutes and government rules. Before governments create new laws for cryptocurrencies, they will undoubtedly evaluate them under existing statutory frameworks. That means people who make money on Bitcoin better make sure they’re talking to qualified counsel and reporting it on their tax returns.  

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed. 

- John Lande