UPDATE: November 30, 2016
On November 30, 2016, U.S. Magistrate Judge Jacqueline Scott Corley granted a petition by the IRS to serve a summons on Coinbase that seeks wide-ranging information concerning Coinbase customers, including their identities. Under the applicable procedure, neither Coinbase nor its customers could challenge the IRS’s petition. However, they can now seek to prevent enforcement of the subpoena.
ETHNews will be actively following this story for potential updates.
Update – November 18, 2016, 4:30pm:
Coinbase has released a blog post in regards to the civil petition the IRS filed. The blog update reads:
Protecting Customer Privacy
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.
IRS has opened a John Doe summons (a summons issued to a person whose name is unknown at the time of service) which seeks information on any “United States persons who, at any time during the period January 1, 2013, through December 31, 2015, conducted transactions in a convertible virtual currency.”
As per financial blog, ZeroHedge,
“IRS is targeting transaction records of Coinbase users: case is 16-cv-06658, U.S. District Court, Northern District of California.”
As a result, Coinbase, the digital currency and wallet platform is being ordered to hand over to the IRS the identities of all customers who have made transactions within this three year period. This is huge, considering that according to Coinbase, they have an estimated 4.8 million users and 10.6 million wallets. Nevertheless, a representative from Coinbase responded on a verified Reddit account:
“Coinbase here. Can confirm a civil petition was filed today in federal court in California. We take user privacy very seriously and will work to protect the privacy of our users in broad information requests. We are taking a very careful look at this petition and the scope of the government's authority as it relates to this request.”
The lack of clear regulation of virtual currency has been a hot topic and has caused many industry heads to question the potential to circumvent the federal taxation system. Zooko Wilcox, the CEO of ZCash, illustrated the idea of cryptocurrency as “selective disclosure” due to the fact that its characteristics enable private transactions to be concealed from competitors, thieves, foreign enemies, and including tax authorities.
Additionally, in a recent tweet, Edward Snowden highlighted that “Coincidentally, new technologies raise the possibility of unstoppable tax protests.”
Nevertheless, amongst all the chaos Ethereum remains invulnerable to the investigation, because Ethereum was not introduced until 2016. However, this does not mean that there won’t be audits in the near future. Due to this massive investigation, it should be expected that proposals for more strict or encompassing regulation of virtual currency taxation will be submitted by regulators. Thus, the question isn’t if further regulation will occur, but when will regulation occur?
As a result, ETHNews will be reaching out to Coinbase and following this story as it unfolds. Please stay tuned for updates.