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Are You a Coinbase User? Keep an Eye on This Tax Case

In November 2016, a federal court ordered that a summons from the IRS be served on Coinbase seeking detailed information on potentially one million virtual currency users.

This could include you if you have a Coinbase wallet.

The case is In The Matter of the Tax Liabilities of John Does, United States persons who, at any time during the period January 1, 2013 through December 31, 2015 conducted transactions in a convertible currency as defined in IRS Notice 2014-21.

Not a catchy title… but a potentially significant case since a million people may have all their account information (including wallet keys) provided to the IRS.

One Coinbase user, Jeffrey J. Berns, sought to intervene, seeking to have the federal court quash the IRS’ summons or, alternatively, provide other relief (essentially narrowing the scope of the requested information).

The hearing is scheduled for January 19, 2017.

The IRS will likely file a response in early January 2017.

If successful, Berns’ counsel will undoubtedly seek reasonable attorney’s fees and costs.

And perhaps those fees will be well-earned since the Motion to Quash raises solid-sounding points backed with some detailed research.

You can read the brief, here.

Berns’ argument is that the IRS does not know what it is doing with virtual currency and this broad fishing expedition is an abuse of IRS power.  Specifically, back in 2014, the IRS issued Notice 2014-21 describing how virtual currency is property and how tax laws are applied to such transactions.  Two and a half years later, in September 2016, the Treasury Department issued a 31-page report which criticized the IRS for not having a methodology to gather data on bitcoin transactions and proposed three recommendations.  The IRS agreed but did nothing.  Two month thereafter the government seeks to subpoena Coinbase for its users’ information seeking wallet information, funding sources, transactions, all Know-Your-Customer due diligence, payments, etc.

In a nutshell, here are some of Berns’ arguments to quash the subpoena:

Abuse of Power — he claims there is no legitimate purpose and the information sought is too broad and not relevant

Legit Purpose — if the IRS has not properly advised taxpayers of the tax rules for virtual currency, why is it now seeking to review records for 1 million people for compliance purposes?

Overbroad — the only information the IRS really needs is names and socials.  Handing over all these details only exposes citizens to hacking risks, which has occurred recently at the IRS.

Research Purposes, Not Enforcement — Berns’ counsel challenge that the IRS is undertaking this fishing expedition to gather data in response to the Treasury Report’s criticism.

We’ll continue to keep an eye on this case as it develops.

 

Photo credit: BTC Keychain

Christopher B. Hopkins

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