IRS Demands Private Consumer Data from Bitcoin Exchange

Published January 26, 2017

An online cryptocurrency exchange company is vowing to fight a federal agency’s efforts to compel the release of millions of consumers’ private data and metadata.

In November 2016, lawyers representing the Internal Revenue Service (IRS) filed a motion in federal court asking Judge Jacqueline Scott Corley of the U.S. District Court for the Northern District of California to force Coinbase, a private company allowing consumers to trade bitcoins and other digital cryptocurrencies for physical dollars, to turn over customers’ personal and financial information.

In January 2017, Coinbase Chief Executive Officer Brian Armstrong wrote a weblog post promising “to contest it in court to protect our customers’ privacy, at great expense.”

Bitcoin is a digital cryptocurrency system that enables individual users’ computers to verify the accuracy of other users’ account transaction logs in exchange for a small reward.  

Digital cryptocurrencies can be exchanged for physical and digital goods or other currencies, without the need of government central banks or other government intervention.

Gone Fishin’

Jim Harper, a senior fellow at the Cato Institute, says the government is on a fishing expedition, casting a wide net in hopes of capturing an unknown number of lawbreakers.

“The order is very broad, reaching every Coinbase user, no matter how much they transacted, regardless of whether they sold, and regardless of whether they sold at a gain or loss,” Harper said. “The order is also based on weak allegations of a relationship between cryptocurrency use and tax evasion.”

‘Not Worth Its Time’

Harper says hunting for taxpayers using bitcoins to avoid paying tax obligations is not worth the tax agency’s time.

“If the goal of the IRS is to collect revenue for the United States government, bitcoin is probably not worth its time,” Harper said. “The total amount of bitcoins in existence worldwide is worth some $15 billion. That’s roughly equivalent to the amount of credit card payments that occur every day in the United States.”

Harper says lawmakers should develop a more coherent policy toward alternative currencies.

“Bitcoin has varying uses, so regulators should integrate it into existing law, appropriately for the circumstances,” Harper said. “When it is being treated as an investment, it is property to which capital gains taxes apply. When it is being used as a functional currency, then it should be treated as a currency.”

‘Never Possible Before’

Jerry Brito, executive director of Coin Center, a nonprofit research organization focusing on public policy issues facing cryptocurrency, says Bitcoin allows consumers to trade goods entirely peer-to-peer.

“Bitcoin is cash payment online, which was never possible before,” Brito said. “Before the invention of Bitcoin, for two parties to transact online required a third-party intermediary like PayPal or Visa.”

Brito says the IRS should attempt to convince lawmakers to change monetary policy through laws, instead of using the court system.

“I think what might be missing, from the perspective of the IRS, is third-party reporting,” Brito said. “If they want to require it by law, then they can, and there is a procedure in place to get that. But what they shouldn’t be doing is filing a John Doe summons on three million to four million Americans.”