Bitcoin Buyers Beware: Coinbase Ordered to Turn Over Some User Info to IRS

Here's why the cryptocurrency exchange still argues this is a win.

Getty Images / Dan Kitwood

A federal court in California ruled Thursday that the cryptocurrency exchange site Coinbase must hand over to the Internal Revenue Service customer records for nearly 15,000 of its biggest users.

While this decision represents a blow to the anonymity of bitcoin and other blockchain-based cryptocurrencies traded on the exchange — you can’t exactly call something a cryptocurrency if the government knows all about what you do with it — Coinbase itself put as positive a spin as it could on the ruling, and with some justification. The order only affects the 14,355 users who had more than $20,000 pass through their account in a single year between 2013 and 2015, a far smaller group than the U.S. government initially targeted.

“Thanks to Coinbase’s efforts, more than 480,000 customers’ records were preserved from disclosure,” Coinbase communications director David Farmer wrote in a statement. “This is a 97 percent reduction in the number of customers impacted by this summons. Second, the quantity of data we must produce for the approximately 14,000 customers who remain in scope has been significantly reduced. In narrowing the scope of the summons, we are pleased that the Court acknowledged the privacy rights at stake in this matter.”

What Coinbase must turn over remains significant for the nearly 15,000 power users affected. The court ruled the site has to give to the IRS the name, address, date of birth, and full account activity for the relevant users, among other items.

In explaining its decision, the court pointed to the fairly massive gulf between how many people are using cryptocurrencies like bitcoin and the fact that almost nobody is bothering to reporting those earnings on their taxes.

“Coinbase is the largest U.S. exchange of bitcoin into dollars with at least 5.9 customers served and 6 billion in transactions,” the court wrote, “while only 800 to 900 taxpayers a year have electronically filed returns with a property description related to bitcoin from 2013 through 2015.”

As tax lawyer Tyson Cross told Inverse in an August interview, this court case will likely serve as a prelude to the IRS making an example of one or more Coinbase users for not reporting their cryptocurrency income.

“When it comes to the IRS, unreported income is a criminal offense,” Cross told Inverse. “I’m willing to bet the IRS is just itching to make a big case out of somebody just to send a message, and I don’t think anybody wants to be that guy.”

In its statement, Coinbase pointed out that it’s basically unprecedented for a company to expend such resources to protect its customer records, which is a major reason the court only ultimately made this narrower ruling. The company has also promised to notify affected users if and when they do comply with the order and turn over the requested records.

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