As Bitcoin surged in value throughout 2017, it was shadowed by an equally volatile regulatory regime covering virtual currencies. Now that Bitcoin has entered the mainstream of finance, and the worldâs biggest cryptocurrency, Coinbase, is the top selling Apple free app, regulators in the US have belatedly been attempting to work out how to ensure that cryptocurrencies and their users can be brought into the existing legal framework.
Though some government departments, such as the Securities and Exchange Commission, have taken a gradual approach to regulation by putting out guidance for cryptocurrency traders, others, such as the Internal Revenue Service (IRS), have taken a different route and have opted to begin enforcement action. Those enforcement measures were recently put in the spotlight by the U.S. District Court for the Northern District of California.
Back in November 2016, the IRS began investigating what it considered could be undisclosed tax liabilities associated with cryptocurrencies. The agency instituted a summons on Coinbase Inc. to turn over all information on US citizens who had conducted virtual currency transactions. Coinbase refused and the IRS initiated court proceedings.
After several months of legal argument, the IRS agreed to restrict its request to users who handled $20,000 worth of cryptocurrency. Coinbase argued that even this went too far but, at the end of November last year, a magistrate judge ordered Coinbase to comply.
Coinbase had argued that the summons suggested that the IRS was conducting a âfishing expeditionâ or asserting that all virtual currency transactions were a form of tax avoidance. They also criticised the IRS for failing to produce specific tax guidance.
It is not yet clear whether the company will appeal the decision, but the eventual outcome of the case could have major ramifications for all cryptocurrency users, particularly if other government agencies follow the IRS approach and take a stricter approach. The IRS v Coinbase fight could be just the beginning of a series of legal wrangles over privacy and regulatory compliance in the cryptocurrency sphere.
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