The IRS Succeeds in Compelling Crypto Exchange to Disclose User Information

JD Supra covers an amicus brief by CEI in Coinbase v. United States.

As the price of bitcoin leaps and lurches toward new highs, it seems fitting that the legal regime surrounding it and other virtual currencies is similarly unpredictable. With bitcoin edging its way into mainstream finance, and Coinbase, one of the world’s largest exchanges of bitcoin and other cryptocurrencies, currently holding the top spot on Apple’s free apps chart, U.S. regulators have begun to grapple with how to bring cryptocurrencies and those who use them into compliance with existing and new laws. Though some agencies, like the Securities and Exchange Commission, have chosen a soft entry into regulation by first issuing proactive guidance, others, including the Internal Revenue Service (IRS), have opted to go directly into enforcement actions. A recent decision by the U.S. District Court for the Northern District of California on these actions has brought issues of cryptocurrency account holders’ privacy, anonymity and tax liability onto center stage.

Forceful amicus briefs, submitted by Coin Center, the Competitive Enterprise Institute (CEI) and the Digital Currency & Ledger Defense Coalition, challenged the summons on the grounds of privacy, bad faith and improper breadth. Coin Center’s filing argued that while the IRS could scrutinize people holding baseball cards, works of art or any other form of valuable property and find tax evasion, the fact that it chose to target the virtual currency market revealed that the IRS either is embarking on an impermissible “fishing expedition” or believes “all or most convertible virtual currency transactions are made to evade taxes.” The brief also chided the IRS for failing to provide more specific tax guidance, implying that the summons was a desperate attempt to make up for IRS’ own lagging regulations. Further, while the order did not address any countervailing privacy arguments, CEI argued that the disclosure of such information could threaten user autonomy, undermine the security of user PII, chill the freedom of users to transact as they wish, and potentially reveal privileged relationships between users and third parties.

Read the full article at JD Supra.