IRS Probe of Bitcoin Goes Too Far, GOP Warns

May 21, 2017

A closely-watched fight between the Internal Revenue Service and a popular bitcoin exchange took a new twist last week, as senior Republicans in Congress sent a sharply-worded letter that suggests the tax agency is overstepping its powers.

The letter concerns an IRS investigation into possible tax evasion by customers who use Coinbase, a San Francisco-based company that many people use to buy digital currencies. As part of the investigation, which began last year, officials demanded that Coinbase turn over information for every one of its accounts.

Coinbase and its customers are currently in court trying to block the demand, saying it's too broad, and now the letter from the Republicans is likely to give them extra ammunition.

"The summons is estimated to affect 500,000 active Coinbase customers and would result in the production of millions of pages of associated records, many of which contain personally identifiable information ... Based on the information before us, this summons seems overly broad, extremely burdensome, and highly intrusive to a large population of individuals," says the letter, which is signed by Sen. Orrin Hatch (R-Ut), Chairman of the Senate Finance Committee, and by Vern Buchanan and Kevin Brady, who head the House Committee on Ways and Means. (my emphasis)

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The Republicans' concerns echo those of Coinbase and its customers, who argue the IRS does not need every single Coinbase account to carry out its audit, and that the investigation sweeps in people who have clearly done nothing wrong.

The tax agency, for its part, has pointed out that only 802 Coinbase users filed a tax form related to bitcoin in 2015, which suggests large number of people have failed to declare capital gains related to bitcoin.

The IRS investigation also comes at a time when the price of bitcoin has been on an incredible tear, climbing from $13 in 2013 to a new high of over $2,000 last week. Those who profited from the higher prices—either by selling bitcoin for dollars or exchanging it for merchandise—are required to pay taxes on the gain.

Some Coinbase customers, however, have not sold any bitcoin at all while many others hold only a minimal amount, raising questions of why the IRS demanded information about every account.

One theory, according to a lawyer who spoke with Fortune late last year, is that the IRS's sweeping demand is a negotiating tactic to make Coinbase more cooperative, and that the two sides will reach an agreement to allow the agency to inspect some, but not all, of the accounts.

The letter from the Republicans, which asks the IRS to explain its strategy for enforcing tax payments on digital currency by June 7, is likely to put pressure on the agency to come to a deal with Coinbase.

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