The IRS Moves in on Coinbase Customers

The Bitcoin community is becoming wary of Coinbase. Coinbase has made its name as an easy-to-use crypto wallet that offers mobile and desktop apps, but is quickly gaining a reputation for having horrendous customer support and high fees. Users have reported inexplicably losing access to their accounts for months, among other things.

Knowing this, things seem to worsen when Coinbase originally made a feeble attempt to defend its customers against a recent and controversial inquiry. Rather, a small group of anonymous Coinbase customers stepped up to hire the Berns Weiss law firm, which specializes in issues relating to digital currency, to challenge the probe. That being said, Coinbase did recently announced that it would bring its own challenge to the investigation into court. 

The IRS began its inquiry in November of 2016, when it took Coinbase to court to try to collect general user records from the last several years, but has recently decided to hone in on a smaller set of Coinbase customers–specifically, those who have traded more than $20,000 in Bitcoin assets from 2013-2015.

The IRS originally demanded to see all of Coinbase’s customer records from this time period, during which Bitcoin’s value rocketed from close to $10USD to about $1100USD. Out of the millions of Coinbase customers, only 802 filed Bitcoin-related tax returns in the year 2015.

On July 27, Coinbase lawyers rejected the request with a new filing, saying that the inquiry was not specific enough. If the inquiry was to proceed under the proposed conditions, over 14,000 of Coinbase’s 7.4 million users would be under investigation. Coinbase asserted that such a broad inquiry is a waste of money, a “fishing expedition” that makes the IRS look like it is taking action without actually doing anything effective to change policy surrounding digital assets. Here’s an excerpt:

“…the IRS, under pressure from critics in Congress, the General Accounting Office, and the Treasury Department, all of whom have called on the IRS to develop better policies, rules, data, and procedures with regard to digital currency tax reporting, decided to issue a John Doe summons to Coinbase in an attempt to show the critics that the IRS was taking ‘tough’ action rather than continuing to ignore the issue.”

With this filing, Coinbase asks that the court will dismiss the IRS’s request, and that it will be granted an evidentiary hearing to dispute the IRS’s supposition that Coinbase customers are evading taxes. Some experts claim that the original, sweeping requests were nothing more than a negotiating tactic, and that ultimately, the IRS would scale back the inquiry considerably. Just last week, the agency announced that it would not ask for Coinbase customer passwords or security settings.

The IRS has also garnered criticism from within the government, including from Senator Orrin Hatch, who condemned the probe as “overly broad, extremely burdensome, and highly intrusive to a large portion of individuals.”

As of yet, the agency has not made any public plans to investigate other cryptocurrency trading hubs or wallets. However, as cryptocurrency enters further into the world of mainstream finance, we can be sure that a slew of legislation and further probing will ensue.