Coinbase, which faces an IRS subpoena to disclose records on all of its U.S. customers, wants customers to know that while the company has chosen to fight the IRS on releasing customer information, it remains committed to complying with tax reporting requirements. Brian Armstrong, Coinbase CEO and co-founder, clarified the company’s position in a recent Medium post in which he appealed to the IRS to work with Coinbase and suggested a tax reporting form that Charles Schwab and Fidelity use might be a solution.
On December 1, a federal judge approved an IRS summons and demanded Coinbase reveal user transaction records. A Coinbase customer named Jeffrey K. Berns, who is also a lawyer, filed a motion to block the IRS’ efforts to access Coinbase users’ records, CCN.com reported.
Coinbase views tax law compliance as a key to its success, Armstrong noted in the recent blog. Providing a way for people to exchange local currency for digital currency requires complying with the government. Armstrong said 20% of the company’s 130 employees are involved in compliance in some capacity.
Coinbase has filed 1099 forms for merchant customers and has responded to numerous subpoenas for specific cases, he noted. The company created a cost basis report to assist customers with tax reporting.
The Inspector General for Tax Administration stated in a report that virtual currencies offer benefits over traditional currencies, such as faster fund transfers and lower transaction fees, but there is little evidence of coordination of responsible functions to address possible taxpayer noncompliance involving virtual currencies, Armstrong noted.
“I believe Coinbase and the IRS fundamentally want the same thing: for all U.S. users of virtual currency to pay their taxes,” Armstrong wrote. He further noted the company’s actions indicate a commitment to this wish. The John Doe summons the IRS sent to Coinbase requesting all customer accounts is not the best way to accomplish the objective, he noted.
The company has complied with IRS subpoenas specific to individuals meeting certain standards. But the recent subpoena seeking records on all customers, including IP addresses, transcripts with customer support and transaction history, is overly broad and implies, incorrectly, that virtual currency users are evading taxes.
Seeking transaction information on so many customers only because they use virtual currency is a violation of their privacy and not the best way to accomplish the government’s and the company’s mutual goals.
Should the agency approach PayPal, Fidelity or Citibank with such a request, those companies would rightfully object, he said. Hence, Coinbase is obligated to do likewise.
Armstrong claimed Coinbase is being punished unfairly as it is one of the few virtual currency firms committed to compliance that is located in the U.S. The company will incur a legal cost between $100,000 and $1 million, money which could be put to better use creating new products or adding employees.
Other exchanges operating abroad serving U.S. customers will not be likely to show a similar commitment to cooperating with the IRS, yet no other company was subpoenaed, he said. The situation could have been resolved better with a phone call, he added.
A good option would be to use the same third-party reporting mechanism brokers such as Charles Schwab and Fidelity currently use: the 1099-B form, according to Armstrong. Coinbase would like to see the requirement apply evenly to all industry players. Even if required to go first, he said Coinbase is ready to use the 1099-B form.
Coinbase could issue a 1099-B to all U.S. customers at year end and copy the IRS. Hence, it would be easy for virtual currency users to pay taxes without violating their privacy. Such forms offer a simple summary of gains and losses on trading rather than extensive transaction records.
While the IRS processes 1099 forms routinely, the data will be easier to process versus hundreds of gigabytes of unstructured data provided in a subpoena.
Armstrong noted that the IRS guidance treating virtual currency as property can make the 1099 reporting inefficient, for both the IRS and the citizens.
Gains on property do not carry a de minimis exemption such as currency, he noted. This means even the sale of a small amount of virtual currency would require a 1099 form A de minimis exemption would eliminate the extensive paperwork.
Virtual currency could be treated as actual currency for tax purposes, Armstrong said.
Armstrong said a reasonable path forward exists for both Coinbase and the IRS to accomplish mutual goals. Most people using virtual currency are not trying to evade taxes, he said. Rather, they are investors seeking returns and individuals interested in new technology. Making it easy for them to pay taxes will result in compliance.
Due to the overly broad subpoena, the company will have to contest it in court to protect customer privacy and at great expense. Armstrong reiterated that he hopes the agency will work with the company on a sensible reporting system similar to the 1099 one that brokers use. A long legal battle will be bad for all parties.
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