Posted on 03/19/2017 5:10:43 PM PDT by nickcarraway
The Internal Revenue Service revealed new details about its investigation into tax evasion related to bitcoin, filing court documents that suggest only a tiny percentage of virtual currency owners are reporting profits or losses in their annual returns.
The new documents, filed Thursday in San Francisco federal court, come in the midst of a closely-watched legal fight between the IRS and Coinbase, a popular service for buying and selling bitcoins that hosts over a million customer accounts.
The dispute began last year when the IRS issued a sweeping summons for Coinbase to turn over a vast amount of customer data, including every customer account as well as detailed transaction records.
Coinbase claimed the IRS demands are illegally broad and refused to comply, which in turn led the IRS to file a federal lawsuit last week to enforce the summons.
While the lawsuit did not come as a surprise, a new affidavit from IRS agent David Utzke reveals additional information about how the agency is conducting the investigation.
Specifically, Utzke explains he ran a computer analysis against the IRS's repository of hundreds of millions of tax records, and found fewer than a thousand people filed a Form 8949 to account for a "property description likely related to bitcoin."
Would-Be Tesla Competitor Selling Silicon Valley Land As Cash Remains Scarce Form 8949 is used to report capital losses and capital gains and, under current IRS rules, would require bitcoin owners to declare their profits. In some cases, the profit could be significant given the virtual currency soared from $13 to over $1,100 during the three year period (2013-2015) for which the agency is seeking information. Here is a paragraph from Utzke's affidavit that states only 802 individuals filed a bitcoin-related Form 8949 in 2015(emphasis mine):
The IRS searched the MTRDB for Form 8949 data for tax years 2013 through 2015. I received the results of those searches. Those results reflect that in 2013, 807 individuals reported a transaction on Form 8949 using a property description likely related to bitcoin; in 2014, 893 individuals reported a transaction on Form 8949 using a property description likely related to bitcoin; and in 2015, 802 individuals reported a transaction on Form 8949 using a property description likely related to bitcoin.
It's impossible to know what percentage of Coinbase customers these numbers represent, but it's likely only a small fraction. Even though some Coinbase accounts belong to non-U.S. citizens, and many others did not have any transactions (and therefore did not trigger any capital gains), it's possible an IRS review of the accounts could identify hundreds of thousands of individuals who should have declared bitcoin income.
In a Friday blog post, Coinbase said it has yet to turn over any information, and that it would push back against the scope of the summons.
"Coinbase remains concerned with the indiscriminate and over broad scope of the government’s summons and we have produced no records under the summons," wrote Coinbase lawyer, Juan Suarez. Get Data Sheet, Fortune’s technology newsletter.
The company has previously described the IRS probe as unreasonable, noting the agency would not approach other financial institutions like JP Morgan or PayPal and demand every single of their customer records.
In January, Coinbase CEO Brian Armstrong complained the legal fight could cost his company up to $1 million, and that he would prefer to spend the money hiring employees. Armstrong at the time also offered an olive branch to the IRS, saying Coinbase is ready to provide customers with 1099-B forms, which are used by brokerages and others to help customers report their taxes.
Other virtual currencies a target?
Following news of the IRS tax probe, one virtual currency lawyer said the agency's demand simply represented an opening gambit for negotiations—and that it that would end with Coinbase providing a far more narrow set of information.
A person close to Coinbase, who was not authorized to speak for attribution, confirmed to Fortune the company and the IRS have been in talks, but also expressed surprise the agency has so far refused to narrow its demands.
A spokesperson for the IRS said the agency cannot comment on specific investigations.
The upshot of all this is that many Coinbase customers are likely to feel uneasy since the investigation could eventually lead them to owe back taxes or penalties, or even see the IRS seize their accounts. up Meanwhile, Coinbase isn't the only one taking issue with the IRS's bitcoin stance. A Los Angeles law firm, Berns Weiss, sued the IRS last year, complaining the agency's summons swept up one of the firm's partners, Jeffrey Berns, who held bitcoin at Coinbase, but had never sold it. The firm had to drop the lawsuit after the IRS told Berns he would not be a target of the investigation—but has since vowed to resume the legal battle.
"We will, however, continue our efforts to protect the rights of Coinbase customers regarding this patently overbroad summons. Thus, we plan to file a motion to intervene in the enforcement proceeding on behalf of other Coinbase customers who have contacted us and expressed their interest in fighting the summons," said the firm in a statement. Finally, it's unclear if the IRS is also targeting other virtual currency operators. While Coinbase is the most popular and mainstream bitcoin platform, there are numerous others. Meanwhile, the growing value of other virtual currencies, including Ethereum, mean firms that offer such currencies could soon find themselves in the cross-hairs of the IRS too.An earlier version of this story incorrectly referred to the IRS form on one occassion as Form 8948 not 8949. It has been updated.
l8r
A later version misspelled occasion.
Why didn’t they setup this Coinbase company offshore?
I reported them. I never thought I would be one of 812 in the country doing anything.
I guess I am the fool.
I’m not sure it would matter. If you exchange dollars to and from another currency in large amounts, the IRS is likely to find out sooner or later.
Why would you report something that does not exist.
You can’t touch it. You can’t put it your safe at home. It’s does not exist
Period
I'm quite certain the great number of miners, traders, and investors simply claimed any profits as regular income or use some other method of calculating capital gains.
There wouldn't have been a problem if the IRS simply declared Bitcoin a commodity, as tax agencies of many other countries have, instead of a "property".
Which begs the question, is the IRS going to fine those who declared profits as simple income, and likely at a higher tax rates, or as capital gains only not reported via this particular form?
The problem is NOT with Bitcoiners, the problem is with the IRS's decision to declare Bitcoin a property. This is an issue in all probably Congress needs to address, or perhaps Trump could issue an EO declaring Bitcoin a commodity.
Did you report them on Form 8948 or 8949?
I’m trying to decide whether to have more contempt for Bitcoiners than I have for the IRS.
Just keep your bitcoins in your own wallet and nobody will have anything to report.
ping
No you’re honest and play by the rules.
The ones that didn’t report are going to owe penalties.
No you’re honest and play by the rules.
The ones that didn’t report are going to owe penalties.
Doesn’t matter if it exists.
If you sell something that doesn’t exist for more than you paid for that thing that doesn’t exist , you owe capital gains taxes.
Foolish me, I thought bitcoin was invented to bypass snooping governments...
You don't need to report anything annually if you buy and hold. Most are holders.
“Why would you report something that does not exist.”
same reason you must report cap gains on trades for other intangible “investments” such as options, futures, futures options for things like electricity and other intangible goods and service, etc. Those things have about the same amount of “existences” as bitcoin.
Bitcoin isn’t really a currency, anymore than is gold or silver is a currency, and trading between dollars and Bitcoins, gold or silver will result in a profit or loss.
And even it if bitcoin WAS a currency, the government would consider trading profits to be the same as if trading in a foreign currency. That is, if one purchases UK pounds with U.S. dollars and then sells the the UK pounds for more dollars than one originally paid, then one has made a capital gain in dollars.
The govt will not be denied- or another way to look at it - the govt hates competition
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