IRS Gains Access To Data On 14,355 Coinbase Customers

A California federal court ordered Coinbase, one of the largest and most popular cryptocurrency exchanges in the U.S., to release the data on 14,355 clients to the IRS. The IRS initially asked Coinbase to release the data on all of its customers, but Coinbase fought to limit the request.

Centralized Cryptocurrency Exchanges

Because they are peer-to-peer technologies, Bitcoin and most other cryptocurrencies don’t need a centralized exchange service such as Coinbase to enable the transfer of money from one user to another or from one user to a service. In fact, one of the primary reasons why Bitcoin was created was to have a peer-to-peer electronic money system that isn’t controlled by centralized institutions (with all the pros and cons such a system might entail).

However, back in the real world, there’s a small wrinkle in this plan. In order to get Bitcoins or any other cryptocurrency, you first have to exchange it from fiat currency, such as dollars, and the easiest way to get cryptocurrency for dollars is to go through an exchange service.

Exchange services that trade dollars for cryptocurrencies are bound by “Know Your Customer” (KYC) and Anti-Money Laundering (AML) laws, which means their customers must provide real identities when they sign up. This makes it easy for governments to then go to one of these services and ask them for data on their customers whenever they suspect someone is committing tax evasion or some other financial crime.

However, privacy laws typically require the government to have reasonable suspicion that someone is committing said crime, and to also name the suspects. Otherwise, the government could go on a fishing expedition, analyze the data on millions of people’s transactions, and then find the “criminals.” Fishing expeditions are also unconstitutional in the U.S. as per the Fourth Amendment.

Decentralized exchange applications exist, but either they are in an early stage of development or they can’t reach critical mass in users as long as centralized exchanges continue to remain popular. Without that critical mass of users, it’s too difficult to find buyers or sellers for the cryptocurrency you would like to trade (low liquidity).

IRS Coming After Cryptocurrency Profits

Last year, the IRS issued an order to Coinbase to gain access to data regarding all of its almost half a million customers for the period between 2013 and 2015. The data on each person included the following pieces of information:

Account/wallet/vault registration records for each account/wallet/vault owned or controlled by the user during the period stated above including, but not limited to, complete user profile, history of changes to user profile from account inception, complete user preferences, complete user security settings and history (including confirmed devices and account activity), complete user payment methods, and any other information related to the funding sources for the account/wallet/vault, regardless of date.

Any other records of Know-Your-Customer due diligence performed with respect to the user not included in paragraph 1, above.

Coinbase hit back at the time, saying that it’s “extremely concerned with the indiscriminate breadth of the government’s request,” and the exchange promised to oppose the government’s request in court.

Coinbase Scores A Narrow Win

Coinbase was not successful in completely denying IRS’s request to gain access to thousands of users at once. Instead of having to get an order for every person the IRS suspects of tax evasion, the IRS will be able to get the data on anyone who has traded more than $20,000 between 2013 and 2015 in any single transaction. Then the IRS will be able to check to see which of those people didn’t properly file their taxes.

Of the almost 500,000 customers it had until 2015, Coinbase will have to reveal the data of 14,355 customers. Since 2015, Coinbase’s user base has grown more than tenfold (it currently has 6 million customers ), so the next time IRS comes back knocking at Coinbase’s door, Coinbase may have to give up the data of many more users.

Coinbase said it will continue to work with the IRS to create a reasonable tax reporting system that makes sense for both virtual currency service providers and consumers alike.

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  • husker
    I've been saying for years this was coming. And this is only the tip of the iceberg. Banking laws are very complex and not taken lightly. Trying to find a way around financial regulations is challenging the federal government (pick your country) on it's #1 issue.
  • why_wolf
    Should be the same as the laws required for stock/commodities transactions. All of it is reported to the IRS. When you file your tax return the IRS just checks to see if lied against the information they already have.

    Side note but there isn't actually a reason for people to send in tax returns, the IRS already has all of the information you provide on your return. But a certain lobbying group got the rules changed so that a pointless billion dollar industry could have captured customers once a year.
  • bit_user
    290340 said:
    I've been saying for years this was coming. And this is only the tip of the iceberg. Banking laws are very complex and not taken lightly. Trying to find a way around financial regulations is challenging the federal government (pick your country) on it's #1 issue.

    I signed up for a Coinbase account in 2015, after they had signed agreements with many states and promised to be in compliance with US financial regulations. The last thing I need is the IRS or SEC or somebody saying I'm doing something wrong.

    Anyway, I didn't actually know what information the IRS had access to, from financial institutions. I thought it was pretty much carte blanche, for them. As I understand it, 4th amendment protections don't apply to something you disclose to a 3rd party. In this case, I thought that meant financial institutions were fair game for them.

    BTW, I thought it was a minor miracle that the US didn't outright ban cryptocurrencies, back when Bitcoin started to show up on people's radar screens. Controlling the money supply is one of the very few levers the US government has on the economy. But the horse is now out of the barn, and by the time this becomes an issue, there will be such massive amounts of wealth in the form of cryptocurrencies that it will be politically impossible to ban them.