United States: IRS And Cryptocurrencies: Coinbase Is Just The Beginning

Last Updated: February 26 2018
Article by Rahul P. Ranadive and Bill Cheng

Last year was a breakout year for cryptocurrencies. At its height, bitcoin's value increased by more than 20 times from the start of the 2017, and ether and litecoin saw gains of more than 80 times. As prices soared, the number of cryptocurrencies also proliferated as thousands of companies, big and small, lasting and ephemeral, sought to issue their own cryptocurrencies in lieu of traditional financing.

Now that cryptocurrencies (and the blockchain technology underlying them) have expanded beyond dorm rooms, garages and basements, commandeering attention from mainstream investors and Wall Street traders alike, regulators and other governmental authorities are taking note. Given the combination of significant gains in crypto asset values and the heightened potential for their underreporting due to the nature of blockchain technology, it is no surprise that the Internal Revenue Service is among the entities most actively asserting itself.

One of the latest IRS efforts ostensibly targets frequent users of Coinbase, one of the largest retail brokerage platforms for four of the most popular mainstream cryptocurrencies (bitcoin, bitcoin cash, ether, and litecoin). In November 2017, a California federal court ordered Coinbase to provide the IRS with certain records related to all Coin base users who bought, sold, sent or received more than $20,000 worth of cryptocurrencies (in any of these four types of transactions) in a single year between 2013 and 2015. Coinbase estimates that more than 14,000 of its users are subject to such reporting.

Many may remember the IRS's similar John Doe summons efforts against UBS in 2008 and HSBC India in 2011. These precipitated the crackdown on unreported foreign accounts and income that continues today. The Coinbase ruling was ultimately much narrower than the initial IRS request, which essentially required Coinbase to turn over users' identifying information and detailed records of transactions and activities conducted through their accounts. Still, the IRS's initial salvo in the case portends potentially significant further investigative and enforcement efforts. All cryptocurrency exchanges and digital wallet providers should be on high alert, as should taxpayers who have recognized income from cryptocurrency transactions, whether from trading activity or from accepting or making payments for goods or services. Companies providing payroll and 1099 reporting services should probably expect cryptocurrencies to be subject to third-party information reporting in the future.

The initial summons the IRS sought to enforce included a laundry list of information and documents beyond what the ruling ultimately granted (although the court noted that some such information could become relevant as the IRS investigation continues). In addition to users' identifying information and activity records, the IRS originally sought complete user profiles, Coinbase's know-your-customer due diligence, information about third-parties authorized to access users' accounts, correspondence between Coinbase and users, and AML exception records, Further, the initial summons did not include the $20,000 threshold, which was only introduced in a subsequent narrowed summons after eight months of back-and-forth in the case.

The information sought by the IRS in the initial summons suggests its interests exceed the frequent traders that it purports the ruling targets, and its concerns perhaps extend beyond the accurate reporting of capital gains or other income. It is unlikely the IRS's interest will wane or that its focus will narrow as cryptocurrency adoption and transaction volume continue to grow. It also is worthwhile to note the IRS made no specific claim of suspicion or allegation of wrongdoing as to any particular user, but argued (and the court agreed) that its summons was justified given the size discrepancy between Coinbase's user base (roughly 6 million) and the number of U.S. taxpayers who reported cryptocurrency holdings (fewer than 1,000). The IRS points to this discrepancy as evidence of the heightened underreporting risk.

The timing of the IRS's initial summons, filed in November 2016, is also notable, The statute of limitations for the IRS to assess taxes for 2013 (the earliest year covered by the summons) would have run in April 2017 (three years from the due date for 2013 tax returns), except in cases where there is a substantial omission (six-year SOL) or fraud, false return, missing return or willful attempt to evade taxes (no SOL). It appears the timing of the summons was meant to give the IRS enough time to investigate and audit any taxpayer who might have underreported cryptocurrency gains, not only those egregious cases that might have fallen into the six-year SOL or no-SOL categories. Again, this suggests the IRS's gaze is not confined to the most active crypto traders.

Finally, the IRS's decision to take a transactional-volume approach in its summons raises an interesting issue about the future of IRS enforcement in the cryptocurrency space. The IRS simply could have tried asking Coinbase to report users' capital gains and losses, but such a request would not have yielded useful results. Coinbase users are free to transfer their crypto assets onto and off the platform (to/ from both themselves and third parties), and, due to the nature of blockchain technology, such crypto trails could be difficult or even impossible to tie back to an identifiable individual. Practically, this means Coinbase lacks reliable information about its users' basis in crypto assets needed to calculate gain or loss (or, indeed, even to know whether a transaction implicates capital gains or represents some other type of receipt that requires a different type of tax treatment), except maybe in cases where all of a user's activities are confined to the Coinbase platform.

Instead, the IRS resorted to a transactional-volume approach, requiring Coinbase to provide the identities and transactional records of all users who engaged in $20,000 of crypto related activity. The problem with this approach, however, is it is not scalable or sustainable as crypto-trading explodes in volume and mainstream adoption because it still requires the IRS to do significant investigative work after receiving information from Coinbase (or any other cryptocurrency exchange). Instead, the IRS may soon discover a need far a more administrable approach to taxing crypto gains — for example, a withholding tax regime where exchanges like Coinbase are required to withhold taxes on each transaction (after all, the IRS has adopted a similar approach in other situations where tax compliance may be difficult to ensure, such as certain payments to foreign persons). Undoubtedly the crypto community would find such a solution antithetical to its philosophy, but the stakes are rising for the IRS (and other authorities) with every rally and surge in crypto asset values, and with increasing transaction volumes as more businesses accept payment in cryptocurrencies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Rubinstein & Rubinstein LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Rubinstein & Rubinstein LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions