The IRS Is Puzzled: Why Out Of 500,000 Coinbase Users, Only 900 Reported Gains Or Losses

Almost exactly one year ago, the IRS realized that it could be leaving billions of dollars on the table in the form of uncollected taxes, and launched a tax-evasion probe on the largest US Bitcoin exchange, Coinbase, seeking to identify all Coinbase users in the U.S. who “conducted transactions in a convertible virtual currency” from 2013 to 2015.

In a vexing paradox for cryptocurrency traders who had hoped they could avoid the IRS indefinitely as someone, somewhere once may have mentioned, the higher the price of bitcoin rose, the more motivated the IRS was to obtain access to user transaction records. Or, as Bloomberg put it, "the exploding value of the cryptocurrency since its first real-world transaction in 2010 is one reason the U.S. Internal Revenue Service is pushing to see records on thousands of users of Coinbase Inc., one of the biggest U.S. online exchanges. The company’s digital currency platform allows gains to be converted into old-fashioned dollars in transactions that the IRS alleges are going unreported."

To be sure, as we have reported over the past year, Coinbase and industry trade groups are fighting back in court, claiming the government’s concerns about tax fraud are unfounded and that its sweeping demand for information is a threat to privacy. That however, did not stop the IRS which claimed in a court filing that "U.S. taxpayers, including Coinbase users, have made use of virtual currencies to avoid the reporting and payment of taxes." The agency said it needs access to customer records to “gain some degree of visibility into a space where it is already necessarily moving about somewhat in the dark."

Meanwhile, both Coinbase and bitcoin have exploded. Whereas Coinbase had under 5 million users last November when the IRS filed its lawuist, as of last week it had 12.2 million users, deploying 41 million virtual currency wallets in 32 countries that have so far exchanged $40 billion in digital currency. The price of bitcoin hit a record high just under $8,000 at the start of November, more than 10x higher than in November 2016.

The biggest problem, however, and the reason why the IRS is unlikely to relent is that as the IRS said, it detected a "reporting gap" between the 500,000 virtual currency users Coinbase reported between 2013 and 2015 and the less than 900 bitcoin users reporting gains or losses for each of those years.

That would imply that less than 0.2% of coinbase users bothered to report anything on their tax forms. One can see why the IRS is angry.

And, worse for those who believe they will be able to get away with their cryptoprofits unscathed by Federal Taxes, following last week's hearing, a federal judge is poised to allow a limited investigation into those gains to proceed over the company’s objection that the agency is on “a massive fishing expedition” meant to make itself look tough in the eyes of its critics in Congress, according to Bloomberg.

"It’s legitimate for them to investigate whether people are making money on their bitcoin purchases" and paying taxes on any gains, U.S. Magistrate Judge Jacqueline Scott Corley in San Francisco told lawyers for Coinbase at a hearing last Thursday. "I have to give tremendous discretion to the agency as to how they investigate," she added later.

Coinbase was not impressed. Mike Lempres, the company's chief legal and risk officer said after the hearing that the company can’t negotiate with the IRS about a "forward-looking, rational reporting system" so long as the agency is suing it. Such discussions aren’t possible "because we’re in this tussle with them where they are improperly searching for private information of our customers with no evidence of wrongdoing," Lempres said. He declined to comment on Corley’s pending ruling before the company has seen a final order in writing.

Last year, the IRS persuaded Corley last year to order Coinbase to approve its summons for customer records from 2013 to 2015 for an investigation into whether taxpayers failed to report income. Coinbase resisted, and negotiations between the company and the agency resulted in a narrowed request for information about 8.9 million transactions and 14,355 account holders. Coinbase argued Thursday the inquiry remains unreasonably broad.

On Thursday, Bloomberg reports, Corley said she would allow the IRS to investigate Coinbase customers who made money on the currency and bar the agency from probing accounts of those who hadn’t. The judge also said she’ll probably give Coinbase time to appeal her decision before it turns over any customer information.

While lots was said of bitcoin's drop over the past 4 days, much of attributed to suspension of the controversial Segwit 2x fork which was originally due in mid-November, some are wondering if a key catalyst for the price drop wasn't the latest court ruling, although it in itself should have little impact on trading decisions: after all, at this point it's a binary outcome: either the IRS will have access to all those who made money trading the crypto... or it won't.

In retrospect, it will be interesting to find out, if only based on the number of IRS submissions, how many of the over 12 million bitcoin accounts have actually made money trading cryptos. We will soon find out.


JimmyJones bamawatson Tue, 11/14/2017 - 10:08 Permalink

If I buy crypto currency, and the value of it increases but I don't sell it and keep it on Coinbase's servers then I haven't actually realized a capital gain.  All I have is crypto.  Now if I bought and sold the cyrpto and made a "real" gain in US currency then I would say I am liable for a capital gains tax.  But even that would only be the case if I transered the US dollars from Coinbases possession on my behalf to my actual bank account.  Until I have Possession have I actually made any gain?  That is why I would think the number is so low.  Your Thoughts?

In reply to by bamawatson

bamawatson JimmyJones Tue, 11/14/2017 - 11:17 Permalink

Mr jones; i do not disagree with anything you wrote. i do not pretend to know. i do know "they" can do any thing to any one, any time. my purpose for repeatedly posting that video is simply to alert crypto world that the IRS does already have a dormant fundamental  foundation in place upon which they can base an assault against crypto users when it suits .gov's purposes.witness Canada --- this is from a zh poster's recent comment "PayPal has received a Federal Court order, which requires us to disclose information to the Canada Revenue Agency (CRA) about PayPal Business account holders that have received or sent a payment through their account between January 1, 2014 and November 10, 2017."one can posit that Canada followed a rope-a-dope policy of lulling paypal users into thinking they could skate; and his now taking action. no reason to think the IRS will not do the same((oh, and give the mrs my best )) 

In reply to by JimmyJones

JRobby JimmyJones Tue, 11/14/2017 - 15:32 Permalink

Sounds like IRS fishing (again)From Coinbase site:"Please note that Coinbase cannot and does not provide tax advice, and we encourage you to consult a tax professional for your tax related questions. The intent of this article is not to provide tax advice, but rather to help our customers understand the 1099-K Form they may have received from us.What are Coinbase's reporting obligations? Coinbase has an obligation to complete 1099-K filings for its customers with business use accounts which have received digital currency into their account in volumes at or above the required reporting threshold (more than 200 receipt transactions which amount to greater than $20,000 during the calendar year). If we are required to complete a 1099-K on your account, you will receive it on or before January 31 for the prior calendar year. Note that we are not required to file the 1099-K with the IRS until later in the spring.What does "Business Use" mean? "Business Use" means accepting digital currency payments into your Coinbase Account in exchange for the provision of goods and/or services to your customers. We used the best data available to us to determine whether your account activity qualifies as Business Use, including but not limited to factors such as completion of a merchant profile or enabling merchant tools. Some of the most common questions we've received are as follows:

  • Is receipt of mining proceeds considered a "Business Use?" No. In general, the receipt of digital currency from mining activity does not meet the definition of Business Use, since it is not a payment you received from a customer for your provision of goods or services.
  • What about digital currency I transfer in from another wallet I control? If you use multiple digital currency wallets and transfer digital currency into your Coinbase Account, that transfer should be excluded from the 1099-K form, since it is not a payment from your customer.

What should I do if I received a 1099-K that seems to include non Business Use transactions?If you believe Coinbase has counted transactions which are not related to the Business Use of your Coinbase Account (as "Business Use" is defined above), or has otherwise counted transactions in error, we ask that you please provide us with information regarding the transactions you believe were counted in error by contacting taxfiles@coinbase.comAs you may know, the nature of digital currency makes it nearly impossible to distinguish whether digital currency you received from third-party sources is a payment for the Business Use of your account, and so we encourage you to contact us if you believe we have included non Business Use transactions in your 1099-K. We will work with you to ensure that both our own records and our IRS filings contain accurate information regarding payments you received via your Coinbase account.Please note again that Coinbase cannot and does not provide tax advice, and we encourage you to consult a tax professional for your unique tax-related questions."  STILL CAN'T FIND WHAT YOU'RE LOOKING FOR?Submit A Request 

In reply to by JimmyJones

Midas tmosley Mon, 11/13/2017 - 23:40 Permalink

The IRS might want to think twice about this.  I am tempted to pay $100 in taxes this year to set a precedent.  If they keep it the trap has been set.  If you have to pay taxes on gains, you can also write off losses.  I learned something from Hillary's cattle futures operations.  It can be pretty sweet to keep the losses on the books, but the winnings seem to get off the books somehow.  Hillary's angle was actually her brokers would eat any bad trades and she would keep all the winners.Here is another angle.  If you are mining these coins and selling for a profit, it appears you have a home business with all sorts of deductions; electricity, internet connection, computer, office equipment and square footage...I am heading on down to H&R to see if they specialize in cryptos...

In reply to by tmosley

Feant tmosley Tue, 11/14/2017 - 00:36 Permalink

Oh people are laughing their asses off at your, the lone BCH holder.

But go ahead, you claim to be the smartest person in the room, switched to BCH. Let us know how that works out for you. K honey?

I have some gumdrops I can send to you to suck on. Special delivery,

In reply to by tmosley

NoDebt IH8OBAMA Mon, 11/13/2017 - 23:16 Permalink

Last time I checked you don't have to pay taxes on unrealized gains.  In other words, if you haven't cashed in and sold your Bitcoins to realize a gain (in USD terms) you don't owe any taxes.  The fact that I could cash them in in CHF or EUR or whatever in a completely different country under a completely different tax jurisdiction is just icing on the cake. 

In reply to by IH8OBAMA

Feant IH8OBAMA Tue, 11/14/2017 - 00:14 Permalink

I am too poor to have an accountant. Maybe next year with that good government contract I will be rolling in dough.

I always pay my taxes. Always. Just saying I am not in the bracket where Ihave to pay $140 in short-term captial gains. I am not alone. Plenty of folks like me, trying to make a living and improve themselves the best they can.

In reply to by IH8OBAMA

Feant IH8OBAMA Mon, 11/13/2017 - 23:20 Permalink

Oh holy fucking Jeezus H. Christ!

I pay a helluva lot in taxes every single day. I made $500 profit in BTC.

Whoopdy-fucking-do. I am not unwilling to pay taxes I owe.

Short-term capital gain rate on commodities is 28%. $500 X 28% = $140.

Whatever. Fuck off IRS. It will cost you $1000s to hunt me down.

I dare you. Go ahead. Hunt me down for $140 fucking dollars.

Assholes. I went Galt years ago and I make sure my tax level is minimal. My tax bracket isn't an accident. It was planned.

In reply to by IH8OBAMA

IH8OBAMA Feant Tue, 11/14/2017 - 00:06 Permalink

Hey, don't blame me.  I'm just trying to give you guys who are making money trading or selling bitcoin a heads up to not be stupid and think the IRS isn't going to discover what you bought and sold and for how much. Just a heads up.  What you do about paying taxes or not is your business.

In reply to by Feant

Skeptophrenic Feant Mon, 11/13/2017 - 23:55 Permalink

Do you honestly think the IRS cares that it’ll cost them ‘thousands’ to hunt you down?

If you have assets tied to a SSN or TID, or have an internet connection or phone, they’ve got you already. To think otherwise is naive.

There is no such thing as anonymity. Even if you lived in a van down by the river...

In reply to by Feant

Antifaschistische IH8OBAMA Mon, 11/13/2017 - 23:25 Permalink

why do they not report?1. Because guys like Max Keiser keep trying to convince the planet that bitcoin is the way around all sovereign issued or CB issued currencies and is the big FU to all .gov's.2. Because 99% of people who collect crypto coins are just that.  collector speculators.  how they will use or sell them is something they will figure out later.  for now...just buy more more more because Max Keiser said so.crypto credibility aside...Keiser is entertaining.  Is he also a amway like scam artist?  do your own research on his get rich quick track record schemes.   Is bitcoin another one?

In reply to by IH8OBAMA

VLM Antifaschistische Tue, 11/14/2017 - 08:57 Permalink

3. There's no way to report. Am I part of the 500 or not, who knows. I do know I paid all taxes owed and have the paperwork to prove it.

There is a spot on the form for "other income sources" which will be taxed as regular salary income but its just a blank space for $$$ value and some free text. I've submitted a couple 1040 over the past few years with a free text variation on "mining and sale of bitcoin" "mining and sale of BTC" "mining of cryptocurrencies" "BTC" "cryptocurrency mining" and so forth. I'm not gullible enough to think the IRS is categorizing my returns properly. Trades of course are taxed separately on a different line, you need to file short or long term capgains as appropriate and again the IRS is mostly on the honor system and mostly free text isn't going to work for nationwide reporting purposes. I know for a fact the IRS cannot provide nationwide stats on freetext forms in a general sense, so being surprised at the lack of BTC data is essentially falsified propaganda.

Given the proven lack of tax form data, then, how, exactly, does the IRS know five hundred BTC users paid up? Because its "secret" that they admit to have so far audited five hundred people and they paid up (or, of course, already paid).

All I know is if there's an audit on me, I can trivially provide annual exchange activity reports and put them side by side with signed 1040 and bank statements and they all match perfectly to the penny. I may have slightly less money because of that, but I sleep VERY well at night thank you.

I actually used to be in much more danger from payment penalties... you can't sell BTC in March and pay the IRS the taxes on the sale perhaps $50K next year without them getting pissed off about underpayment penalties, although I was never formally charged its theoretically possible to get in criminal trouble from lack of payment of estimateds. So now I have the joy of paying quarterly estimates to both feds and state. I was used to this, from my small business taxes where thats "normal", but honestly its still a PITA.

My advice is keep a running total, just a simple spreadsheet or something, and then quarterlies are trivial like 15 minutes work. Printing out the estimated deposit slip is a bigger PITA than actually figuring the number. Also keeping running totals makes annual tax time a breeze.

The purpose of this propaganda piece is to scare people about BTC and to signal that the IRS has successfully audited five hundred or so people over the past decade. But its very easy to avoid legal entanglements if you want to.

In reply to by Antifaschistische

Feant Gaius Frakkin'… Mon, 11/13/2017 - 23:28 Permalink

I was very stressed out, about my father, this weekend and stumbled on to something on the website.

Apparently veterans qualify for special status with regard to government contracts. Woo hoo! I have a closet full of art and I plan on dumping that crap in every VA and government office in the US!

Proles sometimes learn how to work the system. Minority status for a government contract. Who knew? Until Saturday I had no idea.

In reply to by Gaius Frakkin'…