July 3, 2017
Coinbase provides IRS with information on 13,000 bitcoin customers
On behalf of Lawrence Brown
The data was submitted to comply with a court-ordered summons.
We recently posted an article about how the IRS views the taxability of transactions using bitcoin and other cryptocurrencies. In that article, we described the IRS position that gain resulting from transactions in cryptocurrencies that are equivalent to real government-issued currency may be taxable events.
The federal court order
On November 28, 2017, a federal court in northern California issued an order that Coinbase, a major cryptocurrency exchange based in San Francisco, must comply with an IRS summons to release information about customers that engaged in bitcoin transactions valued at $20,000 or more from tax years 2013 through 2015.
On March 16, 2018, the company provided information on 13,000 customers to the IRS in compliance with the court-ordered summons. Data transferred on each customer included name, tax identification number, birth date, address and transaction history.
The court said that this specific information is relevant to the IRS’ “legitimate purpose” of investigating the significant disparity between the number of Coinbase bitcoin users engaging in transactions of at least $20,000 and those filing tax returns electronically that reported bitcoin gains on Form 8939. By showing that the large disparity suggests that some of these taxpayers may not be properly reporting taxable gain, the IRS met its burden of showing a “legitimate purpose of investigating these taxpayers,” said the judge.
In late February, Coinbase notified all customers whose information would be provided to the IRS.
Informational Form 1099-K
In a related development, Cryptovest reports that on January 31, Coinbase began sending IRS Form 1099-K to individual, business and GDAX-using customers who met certain criteria in tax year 2017: either $20,000 in cash generated by cryptocurrency sales or more than 200 transactions. The information on 1099-Ks is also reported to the IRS.
In other words, the Coinbase exchange is starting to treat cryptocurrency transactions it facilitates that may generate taxable gain more like similar transactions in regular currency.
Cryptocurrency investors and users are on notice
The IRS has made it position clear on the taxability of certain virtual currency transactions. If you have received notice from Coinbase that your information was sent to the IRS for 2013 through 2015, or if you received a Form 1099-K for cryptocurrency transactions, get legal advice immediately about your tax obligations. Even if you have not received these notices, if you have made money in cryptocurrency, used it to pay employees or received it in exchange for services, you should be proactive and talk to an experienced tax lawyer about what steps are recommended to comply with the tax law.
This area of the law is quickly evolving and the IRS is very interested in related taxable activity. Do not delay in getting legal advice about your responsibilities or in talking to a lawyer if you have already been contacted by the IRS. Failure to comply with the law could result in the assessment of civil penalties and in extreme cases, in criminal charges.