Will US Government Continue to Target Bitcoin Users for Taxes?

Coinbase, the world’s largest Bitcoin brokerage and wallet platform, has won a partial but significant victory in its fight against the Internal Revenue Service (IRS), as Cointelegraph previously reported.

Brief history of Coinbase v. IRS

On January 15, Coinbase CEO Brian Armstrong revealed that the IRS sent the company a subpoena to disclose the account details of all US-based users over a three year period for taxation purposes. At the time, Armstrong stated that the subpoena of the IRS is overly broad and “incorrectly implies” that all Bitcoin users have invested in the cryptocurrency to evade taxes.

Armstrong vowed to fight back against the IRS, even though legal costs were expected to be significant. He wrote:

Asking for detailed transaction information on so many people, simply for using digital currency, is a violation of their privacy, and is not the best way for us to accomplish our mutual objective. If the IRS were to approach Citibank, Fidelity, or Paypal and ask them to turn over all customer records, they would rightfully push back.”

In July, six months after the release of Armstrong’s official statement, the IRS narrowed its subpoena to a smaller range of investors. Cointelegraph reported that the reduced subpoena reflected the following changes:

1. Eliminates request for payment information and security settings.

2. Eliminates request for power of attorney letters and corporate minutes tied to third parties

3. Limits request for correspondence between Coinbase and users to portions that cover account opening/closing and transactions.

Last week, Coinbase won another partial victory against the IRS, as the court requested the IRS to reduce the scope of its summons by 97 percent.

Coinbase director of communications David Farmer stated:

Thanks to Coinbase’s efforts, more than 480,000 customers’ records were preserved from disclosure. This is a 97% reduction in the number of customers impacted by this summons. Second, the quantity of data we must produce for the approximately 14,000 customers who remain in scope has been significantly reduced.”

Government will go after Bitcoin investors

Simon Black, a successful investor and the founder of Sovereign Man, believes the US government and IRS will seek out large Bitcoin holders in upcoming years to punish them for “evading” gains taxes. Black said:

They’ll find a prominent Bitcoin person, someone that’s polarizing to the public – like ‘pharma bro’ Martin Shkreli. It will be a very public trial… and they’ll throw his ass in the slammer. Governments always do this because they want to scare people.”

Black explained that to avoid and to prevent potential legal issues in the future, US-based investors should disclose their gains and pay taxes. Some exchanges, like Coinbase, have built-in systems to help with that.

Swiss banks not so private anymore

While one might be tempted to invest in Bitcoin outside of the jurisdiction of the IRS in other major Bitcoin markets like Japan, South Korea and Hong Kong, this might not be the best idea. Nearly 10 years ago, the IRS was able to force Swiss bank UBS to turn over the identities of account holders, even though Switzerland is clearly outside the IRS’ jurisdiction. Expert Robert Wood wrote for Cointelegraph:

The IRS used a John Doe Summons to get the names of Swiss bank account holders from UBS. Offshore banking changed forever, with all other Swiss (and other) banks following suit.”