IRS Wants to Tax Your Bitcoin Gains: Orders Coinbase to Hand Over User Data

If you made money from bitcoin's skyrocketing prices, you may have to share your profits with Uncle Sam soon. The IRS ordered top cryptocurrency exchange Coinbase to turn over data on 13,000 customers.

Coinbase – the world's most popular bitcoin exchange – alerted users in a sobering note on its website: "On February 23rd, 2018, Coinbase notified a group of approximately 13,000 customers concerning a summons from the IRS regarding their Coinbase accounts."

Pursuant to a November 2017 court order obtained by the IRS, Coinbase will turn over taxpayer IDs, names, birth dates, addresses, and transaction records for customers who conducted transactions worth more than $20,000 on its platform between 2013 and 2015.

The latest IRS notice comes three weeks after Coinbase issued 1099-K tax forms, reminding customers to pay taxes on their crypto gains. (See also: Coinbase Issues 1099s: Reminds Users to Pay Taxes on Bitcoin Gains.) 

Not surprisingly, many Coinbase customers are not pleased. Some feel that the decentralized and unregulated nature of cryptocurrencies make the investments immune to taxation, but alas, this apparently is not the case.

Many users were also furious that Coinbase had not given them more-advanced notice that they would have to file taxes on their crypto investment gains.

Peter Van Valkenburgh, director of research at Coin Center, slammed the court ruling requiring disclosure of investor data, saying it sets a bad precedent for financial privacy and spotlights the need for more clarification.

"We remain deeply unsatisfied with the lack of justification provided by the IRS," Van Valkenburgh said in November 2017. "This is a perfect example of why clarity in the tax treatment of cryptocurrencies is needed."

For its part, the Internal Revenue Service probably stepped up its tax-collecting efforts after learning that most people are not reporting their bitcoin gains on their tax returns.

According to Credit Karma, less than 100 people have reported gains from cryptocurrency investments out of the 250,000 Americans who have already filed their 2017 federal tax returns through Credit Karma. (See more: Few People Have Reported Crypto Gains on Their Taxes So Far.)

Bitcoin's soaring prices during the past few years have enabled many individuals to profit from this once-obscure asset class, so it's no surprise the IRS wants its cut of the pie. As they say, the only thing that's certain in life is death and taxes. (See also: Cryptocurrency Billionaire Rankings: The Richest People In Crypto.)

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns no cryptocurrencies.

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