The IRS Violates the Tax Bill of Rights with Coinbase Order

Coinbase lost, at least for now, it's legal battle with the IRS and has been ordered to fork over the private transactions and identities of nearly 15,000 individuals.

On Tuesday, a California federal court ordered the exchange hand over records on thousands of customers to the Internal Revenue Service with detailed information including name, birthday,  address, and activity for any user who transacted over $20,000.

The good news is that the IRS changed their request from everything to those who transacted $20,000 or more.

Whereas there is a federal law that does indeed require companies to disclose this amount regarding certain activity, it certainly doesn't cover "sent" funds and that is what the order demands.

If anyone "sent" any amount of bitcoin over $20,000 from their wallet, the IRS gets this information. 

Let's say one put 100 bitcoin in a Coinbase wallet on January 2013, note the word put  and not purchased or given or anything other than put. Then that user moved those coins to a personal wallet in December of 2013.

That information and everything about that use is no going to the IRS. Why? What right does the IRS have to know this information?

They claim it's because that person might not have reported gains. 

This is Bullshit

The "not reporting gains" claim of the IRS is complete bullshit. Plain and simple. 

Its bullshit because capital gains are reported when they are realized, not at whatever value an asset has whenever the IRS decides to poke around into the private business of Coinbase users.

If the value was in bitcoin, then the IRS has no business touching it, taxing it, asking about it, or anything else.

They cannot claim that user now owes any amount of money in taxes because it's not enough information for one, and even if that user woke up one day and magically had 100 bitcoins in his wallet from out of nowhere subjecting him to the full value of the asset as a capital gain, it's still not a capital gain until it's realized.

Meaning that user has to sell that bitcoin before any amount becomes taxable and even then, if it's a long-term gain the IRS can only touch some of it and not the taxable income bracket of that user.

That same user might have sold that bitcoin a year later in January when the price was at $185.

The IRS sees that transaction and assumes there's some portion of $120,000 they are owed since this user did not report the gain. However, the taxable gain would have to be that in profit from the difference of the users acquisition price and the total amount of $18,500, not $120,000.

Which means that bitcoin doesn't even qualify for what their very own requests sets a basis of in dollar amount, $20,000. It's under that amount when the gain becomes taxable.

What if that user still has that bitcoin? Then there is no gain what-so-ever and quite frankly, it's none of their business.
[info title="Note"]Coinbase did in fact make this very argument which the Judge found "unpersuasive".
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What if that user buys a car, then moves that car from California to Texas. Under the pretense of this ridiculous order, the IRS would have the right to obtain that information as well. That an individual has moved property from one state to another.

Something is seriously disturbing about that.

This is an overstep and potential abuse of power and we can only hope that Coinbase continues fighting this. Not because it's bitcoin and not because of any other reason other than nobody has the right to know what you do or don't do with your own personal property and/or your personal information without your consent to allow them that knowledge. 

IRS Virtual Currency Guidance

The IRS will tell you the exact same damn thing. That bitcoin is property and as property it is subject to capital gains. Plain and simple. Apparently they like to make up the rules as they go, because by their actions they are saying that bitcoin ownership is not property and they want to treat it as money, since only actual paper currency is something the IRS has every right to know about and even tax regardless of it's origin or destination. However, they're not going to do that either.

So if it's not money and it's not property then what are they considering it? If there's no capital gain then what business does the IRS have learning trading strategies or whatever other business an individual may being doing regarding its transactions?

Sure, if they suspect a specific individual is up to no good investigate the hell out of that person and by all means take what you need. That is NOT the case here. There is no proof that 15,000 people broke the law and they have reason to believe that all 15,000 of them were hiding capital gains that they realized as a result of bitcoin stored in a Coinbase wallet. Which notably, in some cases, is not even information that can be definitively obtained from Coinbase data in the first place, thus making less sense and sounding more illegal. 

The Judge in the case stated that Coinbase did not make a valid argument under the narrowed scope and to a point this can be understood. Coinbase may have been better served with an argument against the "transaction types" of  "(buy, sell, send, or receive) stating that only combinations receive + sell and buy + sell or transaction type sell should be valid for the IRS to go through. Those are the only types that would be any type of "gain" in support of the "reason" the IRS has established for the enforcement.

Transaction types receive, receive + send, or buy do not result in capital gains, or losses for that matter, giving them no legitimate purpose for the IRS to be obtaining that particular data.

Law and Regulations

The federal law¹ says:

"...maintain in its records only such information about an individual as is relevant and necessary to accomplish a purpose of the agency required to be accomplished by statute or by executive order of the President;"

Since the IRS doesn't even know who these 15,000 people are, they certainly cannot state any of the above to be true since they cannot say anything in the Coinbase data would be relevant and necessary. In fact even data that would be any sort of indication of any possible taxable value not reported could be completely worthless since there is no possible way to guarantee that any value held at any given point in time that would be taxable as a capital gain was ever realized or even remained with Coinbase until it sold. The user may have sent it elsewhere or to a personal hardware wallet.

The IRS Tax Bill of Rights² states the IRS: 

...may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of such taxpayer without providing reasonable notice in advance to the taxpayer that contacts with persons other than the taxpayer may be made.

Did 15,000 people receive a letter from the IRS stating the fact that they were going to review their records in Coinbase? Did 1500 people receive this? Did even 1?

I'll go out on a limb and guess not 1 single person on that list has received a damn thing. I sure as hell didn't.

The IRS tells you this on their very own website ³:

"the IRS cannot contact third parties, e.g., your employer, neighbors, or bank, to obtain information about adjusting or collecting your tax liability unless it provides you with reasonable notice in advance. Subject to some exceptions, the IRS is required to periodically provide you a list of the third party contacts and upon request."

Any and every Coinbase user should request this information immediately following the disclosure. What the IRS is doing appears to be a clear violation of the Tax Bill of Rights.

Furthermore, It sure seems that the law requires the IRS and any other law enforcement agency in the country to have some shred of probable cause to assert this kind of intrusive authority and force a 3rd party to disclose the private information of citizens of the United States. They have none since they don't even know who these people are and the IRS is doing this "just in case" for "what if" reasons. They are going to investigate 15,000 people's transactions for no damn good reason at all other than "just to see" if there's anything they can make a case out of.

They are basically calling 15,000 Americans guilty until proven innocent. Are things not the other way around in the United States? 

According to the IRS ... apparently that's a no.

[accordion] [item title="Author and Credits"]Article by dinbits
Image Credits:
Banner Image by dinbits.com staff
IRS Logo - The Internal Revenue Service
Apocalyptic City- Shutterstock
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[item title="Footnotes"]1. 5 U.S. Code § 552a - Records maintained on individuals
2. IRC § 7602(c) - Tax Bill of Rights
3. IRS operated website "Taxpayer Advocate": https://taxpayeradvocate.irs.gov/taxpayer-rights [/item]
[item title="References"]• Federal Case file: 17-cv-01431-JSC
• ORDER RE PETITION TO ENFORCE IRS SUMMONS Re: Dkt. Nos. 1, 37, 45 (17-cv-01431-JSC) [/item]
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