IRS Requests Bitcoin Buyer Records in Broad Tax Evasion Case

http://fortune.com/2016/11/20/irs-bitcoin-tax-evasion-case/

by aaronhoffman • 10 years ago

149 108 10 years ago

fortune.com

overcast• 10 years ago

This should be a good one.

pjc50• 10 years ago

Well, that was kind of inevitable.

chollida12• 10 years ago

I think this is a pretty reasonable request if they only want Americans who traded bitcoin.

The IRS and SEC have the power to compel brokerages to turn over trading records for people who bought/sold stocks on the stock market so the precedent is not only set but well established long, long, long ago.

I mean if you traded bitcoin but didn't claim the income on your taxes, then you just blatantly and almost certainly knowingly/intentionally lied on your taxes.

I'm not certain what there is to argue about or push back on here.

It's not like you can create something new like bitcoin and then with a straight face claim that its not an equity or currency so the law doesn't apply to you.

Capital gains are taxable, full stop, unless there is a specific law to override that, like selling your primary residence.

Can someone make the case that this isn't just a cut and dry issue?

tyingq5• 10 years ago

Conflating coinbase with a brokerage seems a stretch to me.

Many people used it more like Paypal, a conduit to make or receive payments for sales of goods or services. With the conversion of bitcoin to regular currency happening very quickly. No buy/hold/trade activity, etc.

criley22• 10 years ago

If you made money on ebay, deposited to your PayPal, and then spent elsewhere, and did not claim that money on your American taxes, you would be evading taxes by not reporting taxable income.

Same here.

derekp7• 10 years ago

How does it work if you sold a service for bitcoin, and the value of the bitcoin changed befor converting to cash? I would think that regular taxes (income) would be owed on the initial cash value, then capital gains tax would be owed on the float. Same as selling something in a foreign currency?

optimuspaul• 10 years ago

Well it is a currency exchange and does broker currency transactions. Seems like a brokerage to me.

chollida12• 10 years ago

Many people used it more like Paypal, a conduit to make or receive payments for sales of goods or services. With the conversion of bitcoin to regular currency happening very quickly. No buy/hold/trade activity, etc.

I'm glad you brought this up because it just strengthens my point. Paypal reports US account transactions to the IRS once they go over a certain size.

https://www.paypal.com/us/webapps/mpp/irs6050w

mhluongo7• 10 years ago

The IRS isn't supposed to use these powers to go on "fishing expeditions", according to its own manual[1]. Requesting info on millions of users without particular suspicion is more broad than necessary.

[1] http://www.forbes.com/sites/kellyphillipserb/2016/11/21/irs-...

ryanackley4• 10 years ago

This was just a matter of time. Welcome to the reality of being involved in the money business in the USA. Coinbase is concerned with the breadth of the request. That is actually kind of cute considering that your bank has to report any transaction over $10000 to the US Dept of Treasury and people are actively prosecuted on suspicion of making transactions under this threshold to avoid reporting requirements [1].

Whenever I hear someone talk about the dream of anonymous currency. I kind of laugh to myself because I know how far the government currently goes to monitor every little piece of your financial life to make sure you are paying what you owe in taxes.

[1] https://www.washingtonpost.com/news/the-watch/wp/2014/03/24/...

mhluongo7• 10 years ago

Coinbase has to report SARs, as well- they're a fully licensed money transmitter in the US- so maybe tone down the condescension. This is an overreach of a different type and by a different government body, and would be precedent-setting AFAIK.

ryanackley4• 10 years ago

SARs only apply to suspicious activity. CTRs are what your bank has to file for every transaction over $10000.

Also, it's all the Dept. of Treasury. The IRS is essentially the collection agency of the Dept. of Treasury.

It's listed as a bureau on the U.S. Treasury's website. https://www.treasury.gov/about/organizational-structure/bure...

jonaf• 10 years ago

This, absolutely. I'm actually surprised the government showed their hand so soon. There must be a lot of money in Bitcoin already. The government WANTS people to go 100% digital with their capital. It is infinitely easier to track digital money. Bitcoin is something they're against because the anonymity factor. I won't be surprised if we see some legislation to block or inhibit anonymous digital currency.

Let's not forget that the US will really want to "own" or be in control of any significant digital currency. Since the US dollar is the world reserve currency, the US wields unprecedented economic power on a global scale. Any currency that has the potential or shows signs of shaking that up will be on the radar for the US govt and the Fed, as controlling currency is the means by which one can control the economic destiny of any nation(s). As we saw with Egypt, for example, several years ago. A simple change in US monetary policy can result in the overthrowing of foreign governments!

Interesting side anecdote: A person very close to me purchased Bitcoin on the stock market, but Bank of America froze the account on suspicion / risk of money laundering or general FUD. It isn't clear how much of this was due to the bank or the government, as they are in bed together, but it prevented this person from being able to trade Bitcoin in his account anymore. Sadly, had his account not been frozen, he would have doubled his money.

N.B. Citations needed, obviously. Commenting on mobile makes this challenging.

mhluongo7• 10 years ago

Interesting side anecdote: A person very close to me purchased Bitcoin on the stock market, but Bank of America froze the account on suspicion / risk of money laundering or general FUD. It isn't clear how much of this was due to the bank or the government, as they are in bed together, but it prevented this person from being able to trade Bitcoin in his account anymore. Sadly, had his account not been frozen, he would have doubled his money.

I highly doubt your contact bought bitcoin on the stock market, since there hasn't been an ETF launched. They might've bought bitcoin on an bitcoin exchange and had their bank account frozen- it still happens frequently. Banks in the US are still scared to do business with bitcoin folks because they don't want to get undue attention down the line (eg Operation Chokepoint), and banking a potential MSB is more difficult ("know your customer's customers").

cloakandswagger3• 10 years ago

The downvotes on this comment are confusing. Do people dispute that a cashless society would be a dream come true for the US government & Fed? Or that the US will do pretty much anything to protect its currency hegemony?

rms_returns3• 10 years ago

This, absolutely. I'm actually surprised the government showed their hand so soon.

Does this have anything to do with Trump coming into power?

forgetsusername3• 10 years ago

Any currency that has the potential or shows signs of shaking that up will be on the radar for the US govt and the Fed, as controlling currency is the means by which one can control the economic destiny of any nation(s). As we saw with Egypt, for example, several years ago. A simple change in US monetary policy can result in the overthrowing of foreign governments!

You have your causation reversed. The USD is the global reserve currency because of the power and stability of the United States. People choose to use it, they aren't forced to.

tn132• 10 years ago

I'm actually surprised the government showed their hand so soon.

Yes and in a very incompetent way. Coinbase will lose all credibility now if they don't challenge this in court. Coinbase is likely to win in the court increasing costs for IRS to do the same thing in future.

Secondly, despite the immense coercive power of US government this is a fight they are likely to lose badly in my opinion. The rate of innovation in currencies have reached well beyond the rate at which government can make sense and act on these things.

jrcii• 10 years ago

I've said for a long time that the problem digital currency proponents seem to be missing is that there is nothing intrinsic to the technology that prevents it from being regulated. A bill is already up in California that requires businesses to report anyone who uses it. The only reason it hasn't been heavily regulated is because it hasn't become big enough to be on the radar yet. The second it is, it will become like anything else.

wheelerwj3• 10 years ago

Respectfully, you are incorrect or misinformed on many points.

- coinbase is and has been a licensed MSB for several years, this means that it has already had to comply with all of the same BSA rules as every other bank. [1]

- Banks don't have to report ANY transaction over $10,000. They have to report every CASH transaction (or aggregate of transactions) over $10,000 and any Suspicious transaction (or aggregate of transactions) over $2,000 [2]

- coinbase is rightfully concerned about the breadth of the subpoena because it's a giant fishing expedition. In order to request records, the federal government SHOULD have to provide reasonable proof of suspected criminal activity. [3]

- finally, this has absolutely nothing to do with anonymity. This has everything to do with another drastically over-reaching request by the federal government for personal information even when there is no evidence of any specific crime.

[1] https://www.coinbase.com/legal/licenses?locale=en

[2] https://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_015....

[3] See the Constitution.

kchoudhu2• 10 years ago

Coinbase is welcome to fight the breadth of the request, but they will lose -- if not this time, then the next. The government has every interest in regulating BTC out of existence: the ability to transact value with no government intermediation cuts to the core of what it means to be a nation state, and no state is ever going to renounce that monopoly.

tracker12• 10 years ago

I've been postulating that a return to import/export taxes in addition to a small vat and include financial exchanges for import/export could be a better tax system with less bureaucracy than the current IRS.

Not that I like the approach, but feel it would be better overall, have less gov't and be harder to work around.

trhway• 10 years ago

return to import/export taxes in addition to a small vat

thus significantly slowing B2B and B2C markets. Why would we do it? It is like Middle Ages - one can consume only what is produced in the castle's vicinity and from every bucket of grain one has to give share to the lord and share to the church (note - the example is exactly vat, not income tax, as vat is taken as share of the total volume without regard to the production cost while income tax is share of profit (i.e. of difference between total value and cost to produce)) And yes, nor the lord, nor the church were bothered with bureaucracy.

perlpimp• 10 years ago

thats why on some level it is better to run your own wallet.

mhluongo7• 10 years ago

You still have to buy your bitcoin somewhere, unless you earn it or mine. This is about Coinbase's brokerage activities, not its wallet services.

mirimir2• 10 years ago

OK, so you earn Bitcoin online, as an anonymous consultant. Cashing out is a risk. But at least, you can fund your anonymous online activity. Long term, I suppose that you could drop it somewhere as gold or real estate, and then emigrate. But that's also risky.

dewyatt• 10 years ago

You could buy fairly anonymously via certain methods on localbitcoins.com (or in person, etc).

ulkesh• 10 years ago

I made a whole $50 on Coinbase. I expected some tax form to arrive, and it never came. Honestly I completely forgot about it until I saw this.

I wonder if that $50 will end up being hundreds owed in some kind of late fees/etc.

drcode• 10 years ago

I'm pretty sure they'll be overwhelmed by going after larger fish and nothing will ever come of it for such a small amount.

_pdp_• 10 years ago

Well, unless they scale it - like for example going to Coinbase and asking for all accounts created between 2013 and 2015 :)

lettergram• 10 years ago

They will probably not go after anyone who made less than like $500. Remember each time they go after someone it costs them money too.

thfuran• 10 years ago

The IRS is kind of strapped for money. I suspect the threshold is way over $500.

loeg3• 10 years ago

I wonder if that $50 will end up being hundreds owed in some kind of late fees/etc.

No. Penalties are proportionate.

logfromblammo2• 10 years ago

Spoken like someone who has never been penalized by the IRS.

If you get a zealous agent, they will tack on anything even remotely plausible to nail you with. If you get an "it's a job" agent, they will do the minimum amount of work to process your file out of their inbox.

The difference between the two can be thousands of dollars, not just hundreds.

module0000• 10 years ago

It's really tempting to say that the IRS won't be able to do anything - you can't prove I spent/received this for <x> type of activity.... but that's not how the IRS works. Once the IRS decides to audit, you are guilty until proven innocent. They will be elbow-deep into your figurative financial rectum, and you will (almost always) lose.

wbl2• 10 years ago

That's because they are very good at picking who to audit. If you can document all your deductions, and have all your sources of income declared, and stored it all together an audit consists of hitting print, handing the scanned copies to them, and waiting.

cloakandswagger3• 10 years ago

US tax law is so dense and complicated that they can effectively implicate anyone they choose. Having worked with numerous small businesses in the past, do you know how many of them could readily provide carbon copy receipts for every single deduction they claimed in the last X years?

I think there is a valuable discussion to be had about the power of a federal agency that can so easily zero their sights on anyone they choose, especially when that same agency has admitted to targeting for political purposes in the past.

csomar• 10 years ago

Not in the US. Been 7 years into business. It's practically impossible to be 100% clean on deductions, receipts, reporting, etc... That, and I'm very strict by any standards.

brentm• 10 years ago

I would bet that unless you're a person who willfully hid large capital gains in bitcoin or faked some kind of large tax deductible expenses by purchase of Bitcoin you probably will have anything to worry about. If you are among those two group then you've probably been worrying anyway.

cableshaft2• 10 years ago

I buy a small amount (about $20 worth) every paycheck, so I'm really not sure how to even report that reasonably. With such a volatile price, I don't really know how much it's gone up or down without some serious calculations. I'm not really sure what to do about that.

I was just about to sell some of it too, to help cover some recent expenses.

tedd4u• 10 years ago

The note from the IRS about Bitcoin I read on CoinBase's site said it's similar to a security. So until you trade it out (sell it) you don't realize a gain. When you do your gains are considered similar to capital gains / capital losses (if you held for more than 1 year). Otherwise considered income.

cableshaft2• 10 years ago

Well again, I was about to sell some, and figuring out exactly how much I 'gained' from so many tiny buy transactions I imagine would be difficult (but might not be, I'm not sure).

3pt141592• 10 years ago

I had the same problem with the Canadian equiv (CRA).

I just treated it like I bought it all at $0 / BTC. I was selling between $100 and $1000, with an average purchase price between $4 and $10, so the cost was basically minuscule.

smackfu• 10 years ago

I would personally be wary of a $0 purchase price since that seems more like a gift to someone reviewing it.

emddudley2• 10 years ago

I am not an accountant or tax advisor.

Lots of little transactions are a pain, but I do believe you are required to track them in order to report your capital gains correctly. You only have capital gains when you sell, but you need to know your purchase prices and dates in order to compute it.

I used this website to analyze my CoinBase transactions: https://bitcoin.tax/

The site imports the transactions and computes your capital gains automatically. Then I entered my information into the IRS capital gains worksheet and reported the gains on my taxes.

hak8or• 10 years ago

This is fantastic, thank you!

dbl92• 10 years ago

When I visited Istanbul, I passed through a district with an endless number of exchange shops, and it seemed like a place where you could easily wash money without any bank account involved. I believe Turkey isn't alone in having such a culture of buying/selling US dollars by tracking the USD rate.

Do the IRS and say Turkey's tax office tracks these as well? Assuming that you don't try to deposit the exchanged for bills in a bank.

Couldn't someone offer Bitcoin exchange in existing currency shops or the same service via Bitcoin ATMs? How would the IRS and its equivalents track that without requiring identification and registration before use? I suppose a small amount would be allowed for the tourist aspect but then you could use a group of friends or employees to wash small amounts. If you require ID for that, including tourists, then you can track it.

st3v3r2• 10 years ago

It's no different than any other stock or ETF.

Kinnard• 10 years ago

I wonder if this in response to the recent launch of zcash: http://z.cash

ChemicalWarfare• 10 years ago

What's interesting here is that bitcoin is both an "investment" and "currency" (since you can pay for [some] goods and services with btc directly).

From the "currency" point of view - exchange rate (FX) gains/losses technically only apply to officially recognized foreign currencies.

So that is an interesting can of worms. If I buy bitcoin at price point X, it goes up to X+Y, but instead of selling it I use that Y to pay for something - was that Y a taxable gain?

mhluongo7• 10 years ago

The IRS has already released guidance on this [1]. It might be interesting to think about, but right now it's straightforward in practice.

IANAL, etc.

Edit: Well, for some definition of straightforward :)

[1] https://www.irs.gov/uac/newsroom/irs-virtual-currency-guidan...

GrinningFool• 10 years ago

The IRS views crypto currency as property. In that context, they provided this recently:

https://www.irs.gov/uac/newsroom/irs-virtual-currency-guidan...

Which links to: https://www.irs.gov/pub/irs-drop/n-14-21.pdf

TL;DR - it's not currency, it's property, and as taxed as such in all ways (including recognizing gain/loss).

Specifically re: your question:

Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?
A-6: Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain.

VLM• 10 years ago

They can be an income source if you mine, too.

Even more fun, if you mine back in the old days when difficulty was 3-digits, and then sell years later, they can be a long term capital gain.

omouse• 10 years ago

Canadian govt apparently treats bitcoin as an asset. I wonder how that affects your taxes if the price goes lower than you bought it for; do you treat it as a depreciation in assets and are allowed to pay less tax?

thrillgore• 10 years ago

I have always reported my virtual currency earnings by providing my deposits to Coinbase at tax time. Then again, I use Coinbase strictly to buy things with bitcoin, not as an investment tool.

emddudley2• 10 years ago

Purchasing something with bitcoin can trigger capital gains/loss. If you buy 1 BTC at $700, it increases to $800, and you pay 1 BTC for something worth $800, then you have to report and pay taxes on $100 capital gains.

627467• 10 years ago

May be unrelated... but what happens when I purchase goods with a foreign currency which I had bought before (and reported the purchase) and said foreign currency value had increased 15% since the moment I reported its purchase?

mr_spothawk• 10 years ago

remembering that time, we saw BTC spoke to the ~1000$us mark. my thoughts about his at the time was that the price spike was largely driven by Chinese demand for BTC.

Note that the price crashed after Beijing halted BTC exchanges with their state banks.

It could be part of some larger plan to leverage info against the sorts of folks who have enough RMB to help drive the price of BTC to +$1000.

mirimir2• 10 years ago

I've read that Mt Gox, or someone who compromised it, caused the Nov-13 to Dec-14 bubble.

IRS Requests Bitcoin Buyer Records in Broad Tax Evasion Case

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