In 2016, Bitcoin exchange Coinbase was ordered by a federal court in California to turn over customer information. On November 29th of this year the court ruled that Coinbase must turn over information on 14,355 customers to the Internal Revenue Service (IRS). The records involve customers who either bought, sold, sent, or received more than $20,000 worth of Bitcoin. The IRS had originally sought to obtain all customer information from between the years of 2013 and 2015. Coinbase is calling the court’s new ruling a partial victory. The company is looking on the bright side, as they neglected to mention that ruling is also a partial defeat.
The court’s new order requires Coinbase to hand over to the IRS the names, addresses, birth dates, taxpayer ID numbers, transaction logs, and account statements of customers who were involved with transactions that were worth $20,000 or more. The new court order is narrower in scope from the initial court order, which demanded all customer information including communications between Coinbase and its customers. The IRS does not base its demands for customer information on any reasonable suspicions, much less probable cause, against any particular specific customers of Coinbase. The IRS bases its demands for Coinbase customer information on the fact that just over 800 Americans have reported cryptocurrency holdings on their taxes, or more accurately their capital gains from cryptocurrency.
While Coinbase is touting the new court order as a partial victory, others in the cryptocurrency world are seeing the new court order as a huge blow to financial privacy in America. “We remain deeply unsatisfied with the lack of justification provided by the IRS. Without better rationale for why these specific transactions were suspect, a similarly sweeping request could be made for customer data from any financial institution. It sets a bad precedent for financial privacy,” Peter Van Valkenburgh of Coin Center said to The Verge.
In a blog post made on the Coinbase website, the company pointed out that around 14,000 customers whose information will be turned over to the IRS represents less than 1% of all of Coinbase customers. The IRS’ initial request for records would have affected at least 500,000 Coinbase customers. The company has also vowed to notify all affected customers before they turn over any information to the IRS.
“Coinbase is in the process of reviewing the order. As we proceed, we will continue to keep our customers updated. Coinbase has millions of customers and the narrowed summons affects approximately 14,000 of the highest-transacting customers from 2 to 4 years ago. This represents less than 1% of our customer base. In the event that we ultimately produce the documents under this Court order, we intend to notify impacted users in advance of any disclosure,” the company said on their blog post. While the company argued they were fighting against government overreach, they also stated they were eager to work with the IRS in the future. “We were proud to appear in court today, together with support from industry colleagues, to continue to fight against what we believe to be government overreach. In the future we hope to work with the IRS to establish a reasonable tax reporting method that makes sense for virtual currency service providers and consumers alike,” the company said on another blog post.
Could the United States government’s demands for Coinbase customer information have a positive effect? It could, if the IRS’ demands encourage users to shift away from centralized exchanges like Coinbase and move towards using decentralized exchanges such as Bisq, formerly known as BitSquare, and pseudonymous exchanges which exchange cryptocurrencies with prepaid cards and gift cards. Other more anonymous ways of obtaining cryptocurrency include sites like LocalBitcoins and LocalMonero. Bitcoin ATMs are another private way of exchanging cash for coins.