What information will Coinbase have to disclose?

The soaring price of bitcoin has crossed the $10,000 mark. Fail to claim gains on a tax return and it could prove costly as the IRS continues an investigation into virtual currency reporting.

For about a year, the IRS has been seeking user information from Coinbase, one of the largest virtual currency exchanges. The numbers of people using virtual currencies (Coinbase claims a customer base of 6 million) has not lined up with tax return disclosures (fewer than 1,000 taxpayers disclosed gains between 2013 to 2015).

Filing a John Doe summons

In a recent blog post, we discussed the IRS approach to treat bitcoin as property. This has caused some reporting confusion, but now is the time to figure out if you are in compliance.

The IRS can issue what is called a John Doe summons. It does not need to identify a specific taxpayer. Earlier this year, the IRS used this type of summons to seek wide-ranging information about Coinbase users based on the above-mentioned mismatch. The company refused to comply arguing that the summons was too broad.

To obtain a court order that enforces a summons the IRS must establish “good faith” by showing the following:

• Issued for a legitimate purpose
• Requested information is relevant and not already in the agency’s possession
• Various administrative steps have been satisfied

This test is relatively easy for the government to meet. In this case, only legitimate purpose and relevance were at issue. Last week, a federal Magistrate Judge in San Francisco ruled in favor of the IRS finding that Coinbase must turn over certain information on its users. This was after much wrangling between the company and the tax agency.

What will Coinbase disclose?

After fighting to protect user privacy, Coinbase will likely have to turn over some information on its users. The summons is narrower is scope, however, so the company has framed the ruling as a victory of sorts.

The partial enforcement order will require disclosure of certain user information (name, birth date, taxpayer ID number and account activity records) for accounts that had any one transaction (sell, send or buy) equivalent to $20,000 or more. The company will not need to provide the IRS with copies of driver’s licenses, passports or other account opening records. The judge found that this information was not necessary to the IRS in identifying whether an account holder had a taxable gain.

Coinbase is reviewing the order. It has said it will notify a user prior to making a disclosure. Regardless, if you invest in bitcoin or use it for large transactions, it is important to speak with a tax attorney to limit any consequences you might face related to the IRS investigation.