A federal judge has ordered popular U.S-based cryptocurrency exchange and wallet service, Coinbase, to release user data to the IRS in order to combat tax evasion and money laundering using bitcoin. Coinbase has denounced the IRS' move, calling it a "sweeping request," and plans to challenge it in court. This represents an ongoing saga that surrounds the pseudo-anonymous digital currency as to its legitimacy, legality, and status as money versus something else. (See also: Is Bitcoin Legal in the U.S.?)

The Recent Ruling

The recent ruling comes from a San Francisco based federal judge who approved a disputed ruling to allow the IRS to claim years worth of data for thousands of individual users of Coinbase. Federal investigators claim that they need Coinbase's records in order to identify some individual Bitcoin wallets and check against their tax records to make sure Coinbase's users are paying any and all proper taxes due on their Bitcoin-related income. The IRS had also asked  Coinbase to identify "active" US traders between 2013 and 2015. The IRS has ruled via guidelines that Bitcoin and other digital currencies are to be treated as property and not as currency, making profits subject to taxation. (See also: Florida Court: Bitcoin is Not Money (Yet))

Bitcoin has been attractive to those seeking to circumvent tax laws or to launder money because it is quasi-anonymous, and it is easy to mix transactions to further obscure one's identity from external audit. Coinbase, however, is based in the United States and has pledged to adhere to broader financial regulations such as know your customer (KYC) and anti-money laundering (AML) practices. It has also received a New York state BitLicense which legitimizes the company, but also makes it subject to regulatory scrutiny such as this. (For more, see: The Bitcoin Tax Guide)

Coinbase, still, has promised to fight back. “We are aware of, and expected, the Court’s ex parte order today,” the company said in a statement provided by Farmer on Wednesday afternoon. “We look forward to opposing the DOJ’s request in court after Coinbase is served with a subpoena. As we previously stated, we remain concerned with our US customers’ legitimate privacy rights in the face of the government’s sweeping request.”

The Bottom Line

Perhaps it was only a matter of time until the courts would force U.S.-based Bitcoin exchanges to submit their records to the IRS in order to identify money launderers and tax evaders, and now a federal judge has done just that with popular exchange Coinbase. This sets a strong legal precedent going forward, but the company has vowed to fight the ruling.