Only 802 People Told the IRS About Bitcoin

The Internal Revenue Service revealed new details about its investigation into tax evasion related to bitcoin, filing court documents that suggest only a tiny percentage of virtual currency owners are reporting profits or losses in their annual returns.

The new documents, filed Thursday in San Francisco federal court, come in the midst of a closely-watched legal fight between the IRS and Coinbase, a popular service for buying and selling bitcoins that hosts over a million customer accounts.

The dispute began last year when the IRS issued a sweeping summons for Coinbase to turn over a vast amount of customer data, including every customer account as well as detailed transaction records.

Coinbase claimed the IRS demands are illegally broad and refused to comply, which in turn led the IRS to file a federal lawsuit last week to enforce the summons.

While the lawsuit did not come as a surprise, a new affidavit from IRS agent David Utzke reveals additional information about how the agency is conducting the investigation. Specifically, Utzke explains he ran a computer analysis against the IRS's repository of hundreds of millions of tax records, and found fewer than a thousand people filed a Form 8949 to account for a "property description likely related to bitcoin."

Form 8949 is used to report capital losses and capital gains and, under current IRS rules, would require bitcoin owners to declare their profits. In some cases, the profit could be significant given the virtual currency soared from $13 to over $1,100 during the three year period (2013-2015) for which the agency is seeking information.

It's impossible to know what percentage of Coinbase customers these numbers represent, but it's likely only a small fraction. Even though some Coinbase accounts belong to non-U.S. citizens, and many others did not have any transactions (and therefore did not trigger any capital gains), it's possible an IRS review of the accounts could identify hundreds of thousands of individuals who should have declared bitcoin income.

The company has previously described the IRS probe as unreasonable, noting the agency would not approach other financial institutions like JP Morgan or PayPal and demand every single of their customer records.

In January, Coinbase CEO Brian Armstrong complained the legal fight could cost his company up to $1 million, and that he would prefer to spend the money hiring employees. Armstrong at the time also offered an olive branch to the IRS, saying Coinbase is ready to provide customers with 1099-B forms, which are used by brokerages and others to help customers report their taxes.

Following news of the IRS tax probe, one virtual currency lawyer said the agency's demand simply represented an opening gambit for negotiations—and that it that would end with Coinbase providing a far more narrow set of information.

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