Coinbase Wins Battle to Keep Customers' Records Away From IRS…Kinda
As it reeled from its exchange crashing due to Bitcoin on Wednesday, Coinbase was also digesting news that it would have to turn over the records of thousands of its clients to the IRS.
The exchange is claiming a partial victory in the court case over it having to pony up these records. However, it can’t be ignored that even just having to deliver one record to this taxing authority gives many pause.
Deadbeat taxpayers
Earlier this month, we told you about the IRS setting its sights on Coinbase as part of its hunt for people who were not reporting the gains they’ve made from their crypto investments.
Coinbase, being the largest crypto exchange in the U.S., is one of the first to be embroiled in the agency’s quest. Although Coinbase had fought the request on the grounds that it served no legitimate purpose, the court begged to differ.
The IRS made its case that there was a legitimate purpose to investigate the “reporting gap between the number of virtual currency users Coinbase claims to have had during the summons period and U.S. bitcoin users reporting gains or losses to the IRS.”
The federal judge who made the ruling noted that Coinbase had at least 5.9 million customers who completed six billion transactions. However, only 800 to 900 taxpayers a year had electronically filed returns with a property description related to Bitcoin between 2013 through 2015.
“Moreover, Coinbase itself admits that the Narrowed Summons requests information regarding 8.9 million Coinbase transactions and 14,355 Coinbase account holders. That only 800 to 900 taxpayers reported gains related to bitcoin in each of the relevant years and that more than14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year suggests that many Coinbase users may not be reporting their bitcoin gains. The IRS has a legitimate interest in investigating these taxpayers.”
This discrepancy creates an inference that more Coinbase users are trading Bitcoin than reporting gains on their tax returns, the judge found.
Court limits what IRS can get its hands on
The IRS had requested all kinds of information from Coinbase that flies in the face of the space’s reputation of maintaining anonymity.
The IRS wanted Coinbase to fork over to it a lot of its users’ personal information, and just about everything related to the crypto transactions they carried out.
- Names: (users’ full names)
- Addresses: (users’ addresses)
- Tax ID numbers: (identification numbers)
- Dates of birth: (users’ dates of birth)
- Account opening records: (information related to account creation)
- Copies of passports and driver's licenses: (identification documents)
- All wallet addresses: (addresses of crypto wallets)
- All public keys: for all wallets and accounts
In what Coinbase spokesperson David Farmer called a partial victory, the judge didn’t allow for all these requests. He said:
“Although the Court did not completely quash the government summons compelling disclosure of certain customers’ records from the period 2013–2015 as we requested, we were proud to accomplish two important victories for our customers.”
First, Coinbase boasts staving off the government’s attempts to get a hold of more than 480,000 customers’ records. Farmer says this is a 97% reduction in the number of customers impacted by this summons.
“Second, the quantity of data we must produce for the approximately 14,000 customers who remain in scope has been significantly reduced. In narrowing the scope of the summons, we are pleased that the Court acknowledged the privacy rights at stake in this matter.”
To put the order into perspective, Farmer said that Coinbase has millions of customers and the narrowed summons affects about 14,000 of the highest-transacting customers from two to four years ago.
“This represents less than 1% of our customer base. In the event that we ultimately produce the documents under this Court order, we intend to notify impacted users in advance of any disclosure.”