Judge Orders Bitcoin Exchange Coinbase to Surrender Consumer Data to IRS

Published January 10, 2018

The online cryptocurrency exchange company Coinbase lost a legal battle against Internal Revenue Service (IRS) efforts to gain access to users’ private data and metadata.

U.S. District Court for the Northern District of California Judge Jacqueline Scott Corley granted a motion from IRS lawyers on November 29, 2017 to force Coinbase to identify to the IRS all individuals who used the exchange website to buy, sell, or transfer more than $20,000 in Bitcoins, a digital cryptocurrency, between 2013 and 2015. Digital cryptocurrencies can be exchanged for physical and digital goods or other currencies, bypassing government central banks and other government intervention.

Coinbase, a private company that enables people to trade bitcoins and other digital cryptocurrencies for physical currencies, will be required to turn over selected customers’ account activity logs and statements, usernames, and other personally identifying information.

The Taxman Spyeth

Kenyon College assistant professor of economics William Luther, a policy advisor for The Heartland Institute, which publishes Budget & Tax News, says IRS agents can pry deeply into people’s lives.

“The IRS is not required to have probable cause,” Luther said. “It needs only demonstrate a reasonable basis, and the courts have generally supported IRS efforts to secure records, even going so far as to require individuals to provide potentially self-incriminating records despite Fifth Amendment concerns.”

Changing the Rules

Luther says IRS has treated Coinbase users unfairly.

“You do not have to be a fan of tax evasion to think that the IRS has gone too far in this case,” Luther said. “They offered no guidance on how cryptocurrencies would be treated for tax purposes prior to March 2014. As of late September 2016, the Treasury Inspector General for Tax Administration acknowledged the need to provide further clarification.”

“Now the IRS wants to hold Coinbase users accountable for failing to comply with its guidance, even though that guidance was not articulated in advance?” Luther said. “Such an effort is fundamentally at odds with the rule of law.”

Following the Money

Jim Harper, vice president of the Competitive Enterprise Institute, says IRS’ ability to pry into legal commerce should not be unlimited.

“There should be limits on the amount of surveillance the IRS can do to make sure people pay their taxes,” Harper said. “People whose data may be handed over to the government should get notice of the government’s demands, so they can decide whether they want to contest it. That would seem to be a requirement of due process, but the statute and the court don’t appear to recognize that.”