By Michael Scott / Bitcoin Magazine

The recent Internal Revenue Service request to Coinbase, seeking records of customers who purchased virtual currency from 2013 to 2015, has led to a flurry of media attention both in the U.S. and worldwide. This action affecting America’s largest Bitcoin exchange — arguably the most comprehensive sweep of virtual currency for the purpose of identifying lawbreakers — has massive implications for the future of financial privacy and taxation.  

Documents filed by the IRS signal the agency’s intent to pursue both egregious tax evaders, as well as small, everyday users who use bitcoin and other forms of digital currency as a potential dodge for paying taxes. In the John Doe Summons, the IRS alleges that they have uncovered three instances where people have used bitcoin to evade taxes — two involving Coinbase customers. Based on these findings, the IRS. now surmises that many more people are utilizing digital currency for similar aims. 

The request would require Coinbase to hand over the identity and full transaction records of millions of customers. The company immediately responded with a Protecting Customer Privacy notice on their website:

    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
    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.

    "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. 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.”

By law, Coinbase and other companies that purchase and sell bitcoins are required by regulators to capture identifying information on users who initiate purchase and sell orders on their platforms. Because bitcoin transactions generally do not share the identities of the people involved, tracking the flow of funds has arisen as a concern for the IRS.

While guidelines for bitcoin users were established by the IRS in 2014, the tax agency has long alleged that is not receiving information from exchanges like Coinbase in order to ensure that proper tax payments are being captured.

This escalating development between the IRS and Coinbase could be a watershed moment for the future landscape of tax regulators, both in the U.S. and globally. Bitcoin evangelist and investor, Roger Ver, said to Bitcoin Magazine: “It seems very obvious that they (the IRS) are overstepping their already overly broad reach. It also makes me feel extra happy to not be American any longer, and to be a citizen of a country with a much more sane tax policy.”