IRS Going After Bitcoin Users

It is common mythology that Bitcoin users are thieves, hackers and tax cheats.  The IRS doesn’t like tax cheats.

The IRS is asking a court for a “John Doe” summons asking Coinbase, a Bitcoin exchange, to turn over information on any customers that match a certain criteria.

The summons applies as long as the government can’t get the information elsewhere and has “a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of the tax laws.”

The group that the IRS is asking for information on is every customer of Coinbase between 2013 and 2015 in the U.S.  Suffice it to say that this is not a small list.

The reasonable basis?  “a public perception that tax evasion is possible with virtual currency.”  The IRS’s proof for this is limited to a Huffington Post article.

Where did this article appear?  A pretty staid publication called American Banker.  Granted, the banking community has a dog in this fight.  The IRS could ask banks for a list of all of their customers between, say, 2013 and 2015 who deposited or withdrew cash, since cash is used to pay for drugs.  That might upset some customers.

American Banker says that this is a fishing expedition and Coinbase complies with regulations and cooperates with law enforcement on a regular basis, so why attack them.

I think, although my evidence is about as strong as that HuffPo article, that there could be a different reason.

It is liekly that smart crooks are not going to use a U.S. bitcoin exchange.  After all, it seems likely that some government agency might ask questions.  That means that, at best, the IRS will only catch dumb crooks.

Since there are plenty of offshore exchanges in places like Switzerland, Malta, The Netherlands, China, India, Bulgaria, Belize and other places, why not use an offshore exchange?

Of course, you don’t need to use a Bitcoin exchange at all.  In fact, the smart crooks will do transfers that are less demanding of ID such as LocalBitcoins or Bitcoin ATMs.  These methods allow you to use cash and many do not require IDs, since cash, as long as it is not counterfeit, is a pretty safe trade.

The downside of some of these methods is that the buyer and seller have to meet or, in the case of ATMs, you have to visit the ATM.  For many people, one of these methods is perfectly satisfactory.  After all, we visit ATMs to get cash all the time, so why not get Bitcoin instead.

Given that the feds don’t like cash transactions, I can only imagine how they feel about Bitcoin transactions.  Conspiracy theorists might say that the IRS is trying to spook people who are using Bitcoin.  I don’t know, but I certainly would not rule that out.  However, since Bitcoin is basically fancy arithmetic stored in a (digital) ledger, it will be hard to outlaw.  That doesn’t mean that people won’t try.

As of a few hours ago, the court granted the summons.  This is only the first step in a potentially long battle.  Coinbase said they expected this and will begin fighting it when they are served with the order.

The order is asking:

For any customer between 12/31/13 and 12/31/15 with a U.S. address, phone number, email domain or bank account, the following information.

User profiles, preferences, security settings, history, payment methods and funding sources.

Also, all records of activity including date, amount, type of transaction, name, transfer instructions and correspondence.

Given that Bitcoin seems to maintain a lot of documentation, I would think that only stupid people would use it for tax evasion given there are many other much more secretive ways to deal with this, but who knows.

Stay tuned for the cat and dog fight.

Information for this post came from Forbes.

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