Does the IRS Think All Bitcoin Users are Tax Cheats?

Libertarian think tank Cato Institute opined in its blog recently that the Internal Revenue Service believes that all Bitcoin users are tax cheats.

It cites the recent IRS “John Doe” summons sent to Bitcoin exchange Coinbase for records from all its users over a two year period.  The demand, which CATO calls “shocking”, includes: “complete user profile, history of changes to user profile from account inception, complete user preferences, complete user security settings and history (including confirmed devices and account activity), complete user payment methods, and any other information related to the funding sources for the account/wallet/vault, regardless of date.”

The summons goes on:

All records of account/wallet/vault activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, the names or other identifiers of counterparties to the transaction; requests or instructions to send or receive bitcoin; and, where counterparties transact through their own Coinbase accounts/wallets/vaults, all available information identifying the users of such accounts and their contact information.

As CATO sums it up: “Everything about everyone.”

The declaration submitted to court includes an IRS agent who learned about tax evasion by one Bitcoin user and two companies. The IRS claim “a reasonable basis for believing” that U.S. Coinbase users “may fail or may have failed to comply” with the internal revenue laws.

“If that evidence is enough to create a reasonable basis to believe that all Bitcoin users evade taxes, the IRS is entitled to access the records of everyone who uses paper money,” writes the CATO institute. The think tank outlines what the IRS needs in order to lay claim to a U.S. citizens personal information.

“There must be some specific information about particular users, or else the IRS is seeking a general warrant, which the Fourth Amendment denies it the power to do,” the think tank, originally called the Charles Koch foundation, writes.  It maintains the IRS summons for Coinbase user information sets a dangerous precedent.

“The IRS’s effort to strip away the privacy of all Coinbase users is more broad than the government’s effort in recent cases dealing with cell site location information,” the institute writes.

The CATO institute concludes: “Coinbase’s privacy policy only permits it to share user information with law enforcement when it is “compelled to do so.” That implies putting up a reasonable fight for the interests of its users. Given the low standard and the vastly overbroad demand, Coinbase seems obligated to put up that fight.”

Coinbase doesn’t seem to disagree with CATO, pledging to fight for its users’ privacy. In a succinct note on the summons, Coinbase pledged to fight in court.

“Our customers may be aware that the U.S. government filed a civil petition yesterday in federal court seeking disclosure of all Coinbase U.S. customers’ records over a three-year period,” the San Francisco Bitcoin exchange wrote. “The government has not alleged any wrongdoing on the part of Coinbase and its petition is predicated on sweeping statements that taxpayers may use virtual currency to evade taxes.” This isn’t Coinbase showcasing cyber-punk proclivities. This is prudent business.

“Although Coinbase’s general practice is to cooperate with properly targeted law enforcement inquiries, we are extremely concerned with the indiscriminate breadth of the government’s request,” the company explained. “Our customers’ privacy rights are important to us and our legal team is in the process of examining the government’s petition. In its current form, we will oppose the government’s petition in court. We will continue to keep our customers informed on developments in this matter.”

This will be a court case worth watching for Bitcoin users.

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