The IRS has previously asked Coinbase, the leading wallet for digital currencies like Bitcoin and Ethereum's ether, to provide information about customer data. Advocates of cryptocurrencies largely saw this move as a violation of the supposed freedom and privacy associated with the unregulated currencies, and many customers preferred not to have their account information and transaction history made available to the government. Coinbase itself worked to fight off the IRS request. Now, according to an affidavit filed by the IRS with San Francisco federal court, it appears that a mere 802 people in total have reported Bitcoin holdings for 2015. (See our indispensible Bitcoin IRS Tax Guide for Individual Filers)

Are Bitcoin Users in Violation of the Law?

According to the affidavit by the IRS, the agency "searched the MTRDB for Form 8949 data for tax years 2013 through 2015." This form allows for reporting of property related to Bitcoin. The affidavit continues, "those results reflect that in 2013, 807 individuals reported a transaction" on this form, while in 2014 only 893 reported such transactions, and for 2015 the number dropped to 802 individuals. The IRS seems to believe that the vast majority of Bitcoin holders are not filing the form with their agency, which could be in violation of tax law.

Coinbase, for its part, responded to news of the affidavit by saying that it has not yet handed over customer information. Juan Suarez, a lawyer for Coinbase, said that the digital wallet company "remains concerned with the indiscriminate and over-broad scope of the government's summons and we have produced no records under the summons," according to a report by The wallet company and the IRS are reportedly in discussions about what customer information the exchange would entail. The request for information was approved by the California federal court in November of 2016.

Not the First IRS Concerns

The IRS has previously stated its opinion that Bitcoin users may not have fully complied with the tax laws in question. That is the reason why the agency has requested Coinbase user records as far back as 2013. Bitcoin users have responded by indicating that their requests for guidance by the IRS have gone unheeded, making the reporting process more difficult.

Coinbase CEO and founder Brian Armstrong had harsh words for the IRS' subpoena. "Asking for detailed transaction information on so many people, simply for using digital currency, is a violation of their privacy, and is not the best way for us to accomplish our mutual objective. The IRS incorrectly implies that all users of virtual currency are evading taxes."

The ways that digital currencies like Bitcoin will continue to be integrated into the broader financial and tax worlds are often unclear, and the ending to this particular part of the story certainly remains to be seen.