By Kelly Phillips Erb for Forbes
As the legal maneuverings over the rights of the Internal Revenue Service (IRS) to gain access to Coinbase customer accounts continue to wind through the courts, Brian Armstrong, Co-Founder, and CEO at Coinbase, has taken to the publishing platform, Medium, to explain his side of the story.
But first, a little background. In November of 2016, the Department of Justice (DOJ) filed a formal request on behalf of the IRS to serve a “John Doe” summons on all United States Coinbase customers who transferred convertible virtual currency from 2013 to 2015. A “John Doe” summons is an order that does not specifically identify the person but rather identifies a person or ascertainable group or class by their activities.
Days later, the request was granted by Judge Jacqueline Scott Corley. In response to the ruling, a self-identifying Coinbase customer and managing partner of Berns Weiss, Jeffrey K. Berns, filed a motion to set aside the ruling which would prevent the summons from being issued. He did so as an “intervenor” meaning that he was asking the court to allow him to participate in the legal process even though he had not been specifically named in the original summons. Berns argued, among other things, that the summons was overbroad.
In late December of 2016, the IRS fired back, arguing that since Berns outed himself as a Coinbase user, he’s no longer subject to the summons, meaning that the matter as it affects Berns has been resolved and his motion is now moot. With that, the IRS wanted to proceed with issuing the “John Doe” summons on Coinbase customers. In January of 2017, Berns filed an answer to the IRS response claiming the IRS is attempting to “artificially moot the motion” because it does not want the Court to scrutinize its actions in pursuing a summons he characterizes as “improper.”
Despite the very public back and forth in the courts, Coinbase, the company affected by the subpoena, has been relatively quiet about the subpoena (they did post a statement to their blog in November 2016). This week, however, Armstrong decided to share the company’s side of the story.
Coinbase, Armstrong writes, has “worked to comply with all IRS guidance in our space, beginning with the March 2014 guidance on virtual currency.” Why? Armstrong says that he believes that “Coinbase and the IRS fundamentally want the same thing: for all U.S. users of virtual currency to pay their taxes.” However, he says, “I also feel that the IRS sending us a John Doe summons on all customer accounts is not the best way for us to mutually accomplish this objective.”
It’s not simply about a subpoena, indicates Armstrong, pointing out that Coinbase has previously complied with tailored IRS subpoenas. It’s the scope of the most recent subpoena – asking for detailed transaction information on all United States Coinbase customers over a period of time – that is concerning. Armstrong notes that the language and tenor of the argument in favor of the subpoena also “incorrectly implies that all users of virtual currency are evading taxes.”
Pushing back against the subpoena on behalf of its customers, Coinbase says, is the right thing to do. But’s also costly. “We will likely incur a legal cost of between $100,000 and $1,000,000 in the process of defending our customers from this overly broad subpoena,” Armstrong writes, “funds which could be put to better use building innovative products or hiring more employees.” That approach merely “punishes one of the good guys.”
So what’s the solution? What about better reporting? Armstrong suggests that the goal of tax compliance could be achieved while still protecting privacy by requiring that virtual currency companies issue a form 1099-B, just like brokers do. Currently, there is no third-party information for virtual currency which, IRS had argued in its original filing for the subpoenas means that the “likelihood of underreporting is significant.” Requiring a standardized process for reporting which could be utilized by the entire industry would help resolve some of the reporting concerns, says Coinbase and they’re prepared, they say, to go first.
(You can read more on form 1099-B here.)
New technology isn’t bad, it’s just different. And sometimes different is hard to understand. That’s never more clear when it comes to an already muddled tax system. But, Armstrong argues about taxpayers who embrace new technology, “If we make it easy for them to pay their taxes with clear reporting, they will.”
First appeared at Forbes