Coinbase Obtains Partial Victory Over IRS

97% reduction? Not really. Given how the price of BTC/ETH is going up, they will soon have to report pretty much every user that put more than a couple hundred dollars initially.

Sure it was a victory. But that was not the point of the case. IRS had already agreed to the 97% reduction as seen from the previous post. They went to court because they wanted it to reduce even more. That didn't happen here.

If your intent is to hide something from the government, you really need to only do your business on the black market, with people who are already strongly disincentivized to cooperate with the government.

Otherwise, just pay your capital gains tax and feel good about supporting the general welfare, because every last person that depends on being in the good graces of the government in order to earn their living will roll on you in an instant.

All you U.S.-based Bitcoin speculators have been paying your capital gains taxes, right?~

If you don't want to realize a taxable gain, never buy anything from the U.S. with it, especially dollars. If you don't want to realize a taxable gain that the IRS will know about, don't buy anything from anyone with an EIN. If you're going to be a criminal, please at least be an intelligent criminal.

The only justification the IRS has for invading the privacy of thousands of people is because the stupid criminals are embarrassing them. They estimated only 7-9% of Bitcoiners declare and pay tax on capital gains? So if you don't want Coinbase to be forced to turn over your records, your other option is to volunteer to give them to the IRS yourself. Not much of a choice, but the government wants money, and they prefer to take it from the people who obviously have it, because it's easier. So you illegally conceal, or you legally comply. You can't do it half-assed in either direction.

If your intent is the former, you cannot do it through Coinbase, because they must comply to exist.

While I unequivocally despise the usual tactics of the government with respect to taxation, they are at least predictable, so anyone who is relying on Coinbase to protect them is acting foolishly.

It's $20k in any given transaction type.

So if you do a total of $20k in buys, or $20k in sells, or deposits, or withdrawals, you are targeted.

This is particuarly invasive for people running trading bots, which are likely to have very high transaction volumes but very low profit margins.

1) It's only 14k people, for activity between 2013-15. There are likely to be further disclosures for later years, depending on what the IRS finds for the years they are already looking at. They may also request information for more customers in later years if the number of customers that meet their criteria for suspicious activity goes up. Previously the IRS requested info on pretty much anyone, but now after court review the summons has been restricted to the customers with potentially suspicious transactions (see below).

2) According to the court order, the summons requests info for customers “with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013-2015 period.” Buy and sell transactions of BTC meaning a person put dollars in their account to convert to BTC or took BTC out of their BTC wallet for dollars in their Coinbase account. Whether they then withdrew it from Coinbase to their bank account is irrelevant for tax purposes because they either realized a gain or a loss upon the sale so they had to report it as income if there was a gain.

So Coinbase will run a query aggregating the transactions by year, account, customer, and type, then produce all the records for any customer with any item over $20k, except those who had only buy transactions because the summons does not cover people who only bought and held.

For send/receive transactions, the $20k will almost certainly be the FMV at the time of the transaction. That is easy enough to calculate based on transaction time, transaction BTC amount, and price of BTC at that time. The FMV should be recorded as a matter of course in Coinbase's ledgers, though I am not an insider so I do not know for certain. I would be very, very surprised if their accountants did not insist on recording that information on some ledger for book purposes anyway. The buy, sell, and withdrawal transaction amounts very definitely are recorded on their ledgers and that amount will simply be the nominal amount at the time because they are denominated in dollars anyway.

If you did ten sales worth $10k total, no that wouldn't be covered. Twenty sales worth $20k would be, even if you had a corresponding $20k of buys that netted out to zero gains. In that case, Coinbase will give your info to the IRS who will then take no action because there was no income to report and thus no failure to report it.

Which is to say, the IRS can request someone's info, but that does not necessarily mean the IRS will take any action or that the person has done anything wrong. The IRS has simply requested info for people whose activities can be categorized as higher risk for tax evasion. They will then compare the account information with filed tax returns to determine if the person has failed to report any income. Some people will have reported their BTC gains. Others will have no realized gains. Most people will probably fall into those categories.

A very few will have very complicated records with lots of BTC sent and received which may require an audit to sort out. Some of those will be legitimate BTC users, others may be using their BTC transactions to disguise complicated financial transactions from the IRS. We'll have to see, though I am interested to see how it all shakes out.

In which case the court case is just a form of marketing and not intended to stop full and retrospective reporting?

The law is a funny little thing. The thing I take more issue with is the concept of how audits are handled -- "guilty until proven innocent".

I have a friend who runs a seasonal cash-only business who got audited about 5 years ago. If you knew this individual, personally, you wouldn't waste your time auditing him -- he's a super-conservative Christian fellow, who, while not being terribly big fans of The Government -- wouldn't cross even the slightest gray-area as far as ethical, let alone legal, boundaries are concerned. He hired a CPA to do his family's taxes and I guarantee he had receipts accounting for every single penny, but owing to his frugality, he appeared to have a larger lifestyle on the outside than could be accounted for with his earnings[0].

The audit went on for the better part of a year with him having to prove that he wasn't hiding income. In the end, the IRS was satisfied due to his careful record-keeping and he managed to get a few dollars back by revising his return and accounting for some deductions that he decided not to take ... out of fear of being audited[1].

[0] This is a guy who in 2001 showed me a $600 grocery bill that he paid only the sales tax on due to his careful Couponing. He also lived in his own (mortgaged) home when he was 19-years old and was only making $7.50 an hour (which, while I don't live in Silicon Valley, the area he lived in was not "inner city" and there's no way I can do the math to figure out how he pulled it off, let alone found a bank to give him a loan).

[1] And having beat the audit, he never fails to take any deduction that he is eligible for.