According to reporter
Nathaniel Popper, the Internal Revenue Service is on the hunt for
people who used Bitcoin to evade taxes.
The tax
agency sent a broad request on Thursday to Coinbase, the largest Bitcoin
exchange in the United States, asking for the records of all customers who
bought virtual currency from the company from 2013 to 2015.
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The
document, a so-called John Doe summons, said that an I.R.S. agent recently
found three cases in which people were using Bitcoin to evade taxes — two of
which involved Coinbase customers.
The I.R.S.
said that those findings — and Bitcoin’s relatively high level of anonymity —
have led the agency to think that many more people are using the virtual
currency for similar purposes.
“The
I.R.S. not only has suspicion that the John Doe class includes U.S. taxpayers
who are not complying with the law — it knows that the class in the past
included such violators, and very likely includes others,” the document says.
The
summons comes shortly after the Treasury Department’s inspector general issued a report chastising the tax agency for
not taking more aggressive action to curb “unlawful activities by those who use
virtual currencies.”
“None of
the I.R.S. operating divisions have developed any type of compliance
initiatives or guidelines for conducting examinations or investigations
specific to tax noncompliance related to virtual currencies,” the report,
delivered in September, said.
The
request this week would require Coinbase, a start-up based in San Francisco
with funding from several leading venture capital firms, to turn over the
identity and full transaction history of millions of customers — it had about
three million customers at the end of 2015. But the company is already gearing
up to fight the request.
“We want
to work with law enforcement — that’s generally our policy,” the company’s head
legal counsel, Juan Suarez, said Friday. “But we can’t tolerate sweeping
fishing expeditions. We are very concerned about the financial privacy rights
of our customers.”
The
existence of the summons was reported earlier on Twitter by the financial
blog Zero Hedge.
The
request from the I.R.S. appears to be the most sweeping single effort to track
down people using virtual currency to break the law.
In the
past, Coinbase has received narrowly tailored requests for information about
customers, and generally complied, Mr. Suarez said, but never something as
broad as the latest summons.
Coinbase
and other companies that buy and sell Bitcoins are required by regulators to
record the identities of people who buy and sell virtual currency on their
platforms.
The
underlying Bitcoin wallets, however, are tracked by a decentralized network of
computers that generally do not record the identities of the people involved in
transactions. A Bitcoin wallet looks like a series of random letters and
numbers, and anyone can open one without providing their identity. The most
famous early use of Bitcoin came on the Silk Road, an online site where users
could pay for drugs with Bitcoin, with the understanding that their identity
would never be recorded.
The
documents filed this week indicated that the tax agency was interested in going
after both large tax evaders as well as small-time Bitcoin users who might not
be recording their virtual currency transactions properly for tax purposes.
The basic
tax rules for Bitcoin users were set down by the I.R.S. in 2014. The agency’s
guidance said that people should treat their virtual currency as property,
rather than currency, for tax purposes. If a person buys a Bitcoin for $200,
for example, then sells it later when its value has risen to $400, the $200 in
gains are supposed to be recorded to the tax authorities.
Omri
Marian, a professor of tax law at the University of California, Irvine, said
that most Bitcoin users were probably not aware that they were supposed to
record their losses and gains as taxable events every time they bought anything
with their Bitcoins.
“It may be
the case that many people were not aware that what they were doing is taxable,”
Mr. Marian said on Friday. “Are those the people the I.R.S. is looking for?”
An I.R.S.
agent, David Utzke, said in a document filed on Thursday, along with the
summons, that he was already pursuing larger offenders. Mr. Utzke said he
identified two companies that were buying Bitcoin and misreporting them with
the I.R.S. as technology expenses. Mr. Utzke said both of the companies were
customers of Coinbase. The companies themselves were not named in the document.
Coinbase
provides its customers with information about the gains or losses they make on
every virtual currency transaction. The tax agency, however, said it was not
getting the information it needed to determine whether Coinbase users were
making the proper tax payments.
“The
risk/reward ratio for a taxpayer in the virtual currency environment is
extremely low, and the likelihood of underreporting is significant,” Mr. Utzke
wrote. “The characteristics of virtual currencies could enable them to replace
traditional abusive tax arrangements as the preferred method for tax evaders.”
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