by Joseph Young
Brian Armstrong, CEO of prominent bitcoin exchange and wallet platform Coinbase, firmly believes the Internal Revenue Service (IRS) provided an unfair assumption that the majority of Coinbase users are evading taxes. Armstrong and his team are asking the IRS for a more reasonable agreement and an alternative approach in dealing with the matter.
In late 2016, the IRS sent Coinbase a John Doe summons on all customer accounts over a three-year period. If the IRS successfully obtains permission from the court, Coinbase is forced to deal with a legally binding request to submit sensitive personal and financial information of millions of its users.
For the privacy of its users, the operating team behind Coinbase came to a consensus to reject the request of the IRS, allocating between $100,000 and $1 million in a long-term legal dispute. The compliance team at Coinbase intends to cooperate with the IRS and other industry bodies to ensure that both parties come to an agreement.
“We will likely incur a legal cost of between $100,000 and $1 million in the process of defending our customers from this overly broad subpoena; funds which could be put to better use building innovative products or hiring more employees,” said Armstrong.
Armstrong emphasized that Coinbase and the IRS fundamentally have an identical goal, which is to urge all US-based customers to settle their tax payments. However, he noted that unjustifiably obtaining the records of Coinbase customers is not the appropriate method of dealing with tax-related cases.
Instead, a simple request from the IRS to cooperate with the regulators in helping US-based customers to pay taxes would have been sufficient for Coinbase, especially considering the long-term relationship the digital currency firm has had with the IRS.
Coinbase is one of the very few bitcoin or digital currency companies in the US to actively comply with local regulatory frameworks, even with impractical and strict requirements such as BitLicense. In May 2016, Ripple and Coinbase were two of a limited number of digital currency firms to obtain BitLicense, regardless of the total amount of licensing fees required by the New York State Department of Financial Services at the time.
In consideration of the efforts of Coinbase in securing effective relationships with regulators and the company’s willingness to comply with the country’s regulatory frameworks on financial technologies and digital currencies, Armstrong stated that the IRS is punishing one of the few legitimate digital currency exchanges in the US.
“This heavy-handed approach by the IRS punishes one of the good guys. Other digital currency exchanges operating abroad (while still serving US customers) are unlikely to demonstrate a similar commitment to working with the IRS, yet we were the only company (as far as I know) to receive a subpoena for all customer record,” said Armstrong.
Going forward, Armstrong and his compliance team at Coinbase plan to collaborate with the IRS and come up with a different method of encouraging customers to settle tax payments. Coinbase is willing to implement practical solutions such as the simultaneous issuance of a 1099-B document to all US clients and the IRS, which would effectively allow Coinbase customers to pay taxes without jeopardizing their privacy.
Armstrong also would like to see a change in the viewpoint of the IRS toward bitcoin as property, as it operates strictly as a currency rather than an asset. The current framework and guidance designed by the IRS force users to settle taxes for simple bitcoin payments at say, a coffee shop, as this action constitutes sale of property.
“I think the IRS guidance that treats virtual currency as property (instead of currency) may make this 1099 reporting inefficient (not just for us, but for the IRS and citizens). For tax purposes, gains on the property do not have a de minimis exemption like currency; this would mean that even the sale of a small amount of digital currency (say to purchase a cup of coffee) would generate a 1099 form.”
The recognition of bitcoin as a digital currency as an alternative to an asset or property would decrease the bureaucratic burden the IRS has to endure to accept tax payments from Coinbase customers.