Coindesk is reporting that Coinbase — the largest U.S.-based Bitcoin exchange and the subject of a recently-concluded “John Doe” summons dispute with the Internal Revenue Service — is reminding its customers of their U.S. tax obligations with a new dashboard banner entitled “Please remember to pay your taxes.” The banner then links to a “Taxes FAQ” page which states, in part, that “[w]e remind all our customers, both U.S. and international, that you have a responsibility to self-report and pay taxes on all taxable gains” and references IRS rules issued in 2014 regarding the tax treatment of digital currency activity.
Coinbase’s move to remind its U.S. customers of their tax obligations comes on the heels of a federal judge’s decision in late November to order Coinbase to comply with a “John Doe” summons issued by the IRS seeking information regarding U.S. taxpayers who conducted transactions in virtual currency during 2013, 2014, and 2015. The IRS had served a “John Doe” summons on Coinbase based upon concerns that individuals may be using virtual currency for tax evasion. Coinbase refused to provide the requested information to the IRS, and after a year of litigation in federal court, the IRS eventually prevailed. As ordered by the court order in late November, Coinbase must now turn over to the IRS records for any account with at least the equivalent of $20,000 in any one transaction (buy/sell/send/receive) in any one year during the 2013 through 2015 time period. According to documents filed in the litigation, the court’s order will require Coinbase to turn over documents regarding 8.9 million transactions and 14,355 customers.
Once it receives the summoned data from Coinbase, the IRS will cross-check tax returns filed by the individuals in question to determine if they properly reported their Bitcoin trading gains and losses. Individuals who have not properly reported their Bitcoin holdings will likely be contacted by the IRS, and the nature of that contact will be dictated by the magnitude of each individual’s tax non-compliance. For Coinbase customers with a relatively small number of unreported transactions, the IRS may simply send a “soft” letter advising them to file amended tax returns. Coinbase users with a greater number of unreported transactions may be selected for audit and face penalties for not properly reporting Bitcoin transactions. The most egregious examples of non-compliance may well face criminal investigation by the IRS, if there is evidence those customers deliberately intended to evade their tax obligations by trading in Bitcoin.
Coinbase has not stated publicly whether it intends to appeal, but in a blog post the company said it was “in the process of reviewing the order” and would “continue to keep our customers updated.” In that same piece, Coinbase noted that the summons affected less than 1 percent of its customer base. Coinbase also said that “[i]n the event that we ultimately produce the documents under this Court order, we intend to notify impacted users in advance of any disclosure.” This advance notice will presumably afford concerned accountholders an opportunity to quickly rectify their tax filings, if they deem it advisable.
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