Coinbase's fight with the IRS escalates as Bitcoin prices surge

Seven years ago, 10,000 bitcoins were exchanged for two pizza coupons and are now worth more than $74 million.

Because of the craze for Bitcoin in the past few years, the U.S. Internal Revenue Service (IRS) has set its sights on the user transaction records of Coinbase, asserting that some Coinbase users did not declare income tax.

Coinbase and industry trade groups fought back in court, arguing that the government’s concerns about tax fraud were unfounded and that the IRS’s extensive demands for user information were a threat to privacy.

Last year, the IRS convinced a federal judge in San Francisco to order Coinbase to hand over the platform’s customer records from 2013 to 2015. On Thursday, the IRS again challenged Coinbase, asking U.S. District Judge Jacqueline Scott Corley to enforce the subpoena.

“U.S. taxpayers, including Coinbase users, have used virtual currencies to evade reporting and paying taxes,” the IRS said in a court filing.

Founded in 2012, the San Francisco-based company says it has 12.2 million customers in 32 countries, with 41 million virtual currency wallets.

On November 2, after CME Group announced plans to launch Bitcoin futures by the end of this year, the price of Bitcoin soared, which led to a surge in Coinbase users, with more than 100,000 new users in just 24 hours.

Coinbase is currently asking Judge Corley to deny the IRS’s subpoena, or at least to require the IRS to produce evidence of its investigation.

The illusion of ‘toughness’

Coinbase believes that the "tough" posture of the IRS is just a false appearance, aimed at appeasing critics in Congress and elsewhere when tax policy and regulatory laws are not yet perfect.

Even though the IRS agreed in July to narrow the scope of its investigation (it had initially requested to investigate all Coinbase customer transaction records), Coinbase still believed that this was unreasonable.

“The IRS is engaging in a massive sweep in the hopes of finding some evidence of tax avoidance so it can appease its critics in Washington, D.C., and justify this ill-advised venture,” Coinbase said.

Coinbase was supported by the Digital Currency and Ledger Defense Coalition in the case, telling the judge that if he approved the IRS subpoena, it would set a dangerous precedent for the bitcoin industry.

"Granting this subpoena would allow the IRS to thwart technological innovation and deprive consumers of their data privacy rights," the advocacy group said in a filing.

Under a 2014 IRS rule, virtual currencies that are convertible into traditional currencies should be treated as property and taxed accordingly. Taxpayers can claim gains or losses based on cost or basis, according to the agency.

It is reported that at Thursday's hearing, a spokesman for the Department of Justice and a spokesman for Coinbase both declined to comment.