The IRS found three entities using bitcoin to evade taxes and has now demanded the records of millions of users at Coinbase, the largest U.S. cryptocurrency exchange. An accountant and an attorney specializing in cryptocurrency discuss whether the IRS is overreaching, how this “unprecedented” case differs from previous ones pursued by the IRS, and what they think the ultimate outcome will be.

Show Notes

https://www.forbes.com/sites/laurashin/2017/01/24/is-the-irs-justified-in-demanding-information-on-millions-of-bitcoin-users/#133a67ee52c0

Transcript

Laura Shin:

Hi everyone. Welcome to Unchained, a podcast produced by Fractal Recording and put out by me, your host, Laura Shin, a Forbes contributor covering blockchain, cryptocurrencies and fintech. Thanks for tuning in.

If you’ve been enjoying this podcast, please review, rate and subscribe to Unchained on iTunes or wherever you get your podcasts. It helps get word out about the show. I’d like to extend a thank you to our sponsor, Onramp. Branding isn’t just a logo. Your brand is the essence of who you are and what you offer your customers. Onramp is a full service creative and design agency that provides its clients with concise and exceptionally designed branding, websites and marketing materials that will resonate with your audience, affect their purchase decisions and ultimately grow your business. You can learn more at thinkonramp.com.

The topic of today’s episode is the Coinbase IRS case. In late November the IRS with approval from a federal court requested the identity of all Coinbase users from 2013 to 2015. This is called a John Doe summons which doesn’t target an individual but a group or class of people. In the past the IRS has successful served John Doe summons to UBS to for instance, determine if US taxpayers were using Swiss bank accounts to evade federal income taxes. Here to discuss the topic are Daniel Winters, a tax accountant at Global Tax Advisors focusing on cryptocurrencies, and Jeff Berns, managing partner at multispecialty law firm, Berns Weiss, LLP, and cofounder of its Virtual Currency practice group. Welcome, Daniel and Jeff.

Group answer:

Welcome Laura.

Laura Shin:

Daniel, let’s start with you. What information did the IRS request from Coinbase?

Daniel Winters:

Sure. You know, I won’t lay out every single little bit there but essentially what the IRS requested from Coinbase are all user records for their US users for the period of 2013 to 2015. That means all transactions. It means their AML/KYC information. It means the chat transcripts with support personnel from Coinbase. They want to see everything that Coinbase has on their US users for that three-year period.

Laura Shin:

And why do you think the IRS issued this John Doe summons?

Daniel Winters:

You know, I’ve been thinking this one over and I think that the IRS issued this John Doe summons because they have a fundamental misunderstanding of bitcoin and blockchain technology. I think that the IRS move here shows that although that they issued guidance in March 2014, stating how we need to treat virtual currencies such as bitcoin for tax purposes, I think that they are simply having real trouble excepting this as a legitimate way to transfer value, as a legitimate way to do business. In their actions with this really broad John Doe summons to Coinbase it seems their only focus is that bitcoin can be used for tax evasion and money laundering.

Laura Shin:

It’s because they’re assuming that people are using Coinbase to evade taxes. Is that essentially what this implies?

Daniel Winters:

Yeah, that’s what I’m implying, what I’m saying that the IRS has a fundamental misunderstanding that we’re here in the 21st century and the IRS is just sitting with a 20th century perspective saying this is a new payment system and we think people are using it to hide assets and not declare their income when the reality is nothing but. They don’t get it.

Laura Shin:

Well, I mean so they did have a few cases that they could point to as evidence that people are doing this. Correct?

Daniel Winters:

Right. And I think what you’re referring to is in the documentation that the IRS submitted to get the John Doe summons they referenced three tax payers that they found that had accounts at Coinbase that had committed tax evasion. That’s three tax payers, one individual and two businesses, I believe, and Jeff, maybe you could confirm that. So, they found three users that had committed tax evasion with a Coinbase account. There’s hundreds of thousands of Coinbase users. It’s a ridiculous overreach. They’re painting everyone with a broad stroke. They’re assuming that if you’ve got bitcoin you’re evading taxes, you’re doing things that are illegal. They just don’t get it.

Laura Shin:

Okay. And just to be clear for all the listeners, both Daniel and Jeff probably have similar opinions on the IRS’s action here but of course there is another side of that. For various reasons I wasn’t able to get somebody who would represent that other side but as you can see the IRS does have evidence that people are doing this so it’s not simply that they don’t understand how this works. But I want to also then just ask like why do you think that they picked Coinbase because there are so many people that use bitcoin that are not customers of Coinbase? So why Coinbase?

Daniel Winters:

Sure. I think that they targeted Coinbase because it’s the largest bitcoin and wallet and exchange service in the United States. I work primarily with individuals and companies in the bitcoin and cryptocurrency space and what I have seen in the last two years is that essentially Coinbase is the onramp to the bitcoin and cryptocurrency ecosystem for people who are in the United States. That’s where things start for people in this ecosystem.

Now, the IRS has well run, well designed systems to receive income information from people. We’re all familiar with the W2 for wages or a 1099 for a stock sale for instance but they don’t have a data feed from the bitcoin blockchain. So, since they don’t have a mechanism to receive that information what they’re doing is attempting to force Coinbase, which is the onramp to the bitcoin ecosystem, to provide them with information about their users.

Laura Shin:

Jeff, let’s turn to you now.

Jeff Berns:

Laura would you mind, could I just comment on one addition thing what Daniel said on why the IRS I think targeted Coinbase?

Laura Shin:

Yeah.

Jeff Berns:

During that period of time Coinbase was I would say probably the most safe and legit exchange for US citizens to use and very likely, I mean you look at who is behind Coinbase, these are not fly-by-night people. These are legit businessmen who have histories in successful businesses. Their compliance was probably very good from the very beginning of opening their doors. So, they are where you would want to go for information because some of these other exchanges probably don’t do KYC. They don’t track everything. They don’t record everything. Coinbase is a legit company. They’re going to have that information and I think that’s why the IRS went after them first.

Laura Shin:

Yeah. I wrote a feature story on Coinbase for the magazine and the lead to my story actually is about how compliance was a big priority at the company from the start and actually very early on like literally in the beginning of 2013 they had gotten some advice to ignore some guidance that came out from FinCEN from one of their lawyers because this is before they had raised money and he just said like it’s going to be expensive for you to do this. You’re a start-up. Nobody is going to care if you ignore it, and they ended up deciding, no, actually we are going to try to comply with this and they then hired another lawyer. So, that was the lead into my story. So you are right that compliance has been a big theme at the company and it’s something I even saw like during their staff meetings and stuff.

But while we’re talking about Coinbase, I actually wanted to state their position on the subject, which the CEO Brian Armstrong had articulated in a medium blog post recently, and he basically said, and I’m just quoting here, that ‘The John Doe summons is overly broad and implies all users of virtual currencies are evading taxes. 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 and that mutual objective being that Coinbase wants all their users to also pay their taxes.’

And then he went on to say that the summons unfairly punishes Coinbase and he projects that it will cost the company 100,000 dollars to one million dollars to contest the subpoena, and his proposed solution is that the company begin sending out 1099 B’s, which is a report that other brokerage firms send out at the end of the year. So, Jeff, I actually wanted now that we’ve established what Coinbase’s position is I want to talk about your role in this. You are not only a lawyer but also a Coinbase customer and now you’ve gotten involved in the case yourself. What steps have you taken and why?

Jeff Berns:

Right. So Coinbase, the IRS filed what’s called what you said at the beginning, a John Doe summons, and the purpose of a John Doe summons it’s Congress told the IRS you can use this in limited circumstances. It’s supposed to be used to get information when you have a reasonable belief that tax evasion is taking place. So, I filed a motion to intervene in the summons procedure because it was granted. So once that summons is granted Coinbase is free to just agree to provide all of the documentation to the IRS. They don’t have to ask their customers’ permission or anything like that. So I filed a motion to intervene asking the court to stop this procedure, to say, wait a minute. This is unprecedented. I’ve never seen a fishing expedition like this come from the IRS in any case I’ve ever seen and we need the court to look at this, and somebody has to raise the issue of, wait a minute. This is not about tax evasion.

I mean let’s face it, the IRS had all of this time and they came up with three examples, two of which were companies. They weren’t even individuals. They’re asking for information that is more like a criminal proceeding. They want every scrap of email, every scrap of transaction history. They want to know the devices that accessed your account and how. They want to know your passwords to access your account and as I read it potentially they want access to the virtual currency, and I don’t know how many people understand that once you have private keys it’s the password that controls your virtual currency, it could be sent out anywhere and can never be recovered again. So, there’s a danger.

Laura Shin:

I hadn’t been aware that that’s interesting. I actually just want to backtrack for a second. You used this word fishing expedition and you often hear that John Doe summonses are not supposed to be fishing expeditions, so what does that mean?

Jeff Berns:

Right. It’s when you basically you throw out a net to catch fish, right. So, if you’re using a net to catch fish it’s not really fishing, right. You’re putting a net out there, you’re going to catch everything and hopefully you’ll catch some fish, too. So, fishermen you have that expression. It basically means you ask for everything and eventually you’ll find something. That’s the theory, right. If they get records on a million or two million Americans they’re going to find a couple of people, a couple of companies that did use it to evade taxes but to get that information they’ve received information on a million people who are law abiding citizens and the IRS is not entitled to that information.

This is bigger than just, oh, they’re trying to look at virtual currency. If they’re allowed to do this where does it stop? Right now law enforcement knows that people are using prepaid credit cards to evade taxes and to launder money. They can go in and they can buy these cards for cash anywhere. There’s no record. They can then use it to buy products or sell them for a discount on the Internet. Can you imagine if the IRS served the credit card company with a request to produce every piece of every transaction history on every prepaid credit card that was ever issued during a three-year period? This is just a ridiculous over grab.

Laura Shin:

So, then let’s differentiate what they’re doing now with successful John Doe summonses in the past. There are a couple of cases that people point to, one is the one I mentioned earlier that involves UBS. Can one of you describe what was going on then, you know, what they were looking for, why that ended up being successful and then also talk about how it differentiates from the current Coinbase case?

Jeff Berns:

Daniel, do you want to go first?

Daniel Winters:

Yeah. Thanks so much, Jeff. Here’s what happened with the UBS case. UBS Bank, unfortunately for them and their clients was actively assisting US citizens to take their  money and move it over to Switzerland, hide it, not declare it, violate a great deal of laws and violate a great deal of tax laws in the process. So, the eventual outcome of that case is that the US Treasury Department pressed the Swiss government to crack Swiss banking secrecy and the Treasury Department said, ‘We want names. We want a list of names. We want to know who was hiding their money in UBS Bank,’ and it became a top-level diplomatic dispute between the US and Swiss government, and guess what, Swiss banking secrecy cracked. UBS Bank turned over a list to the Treasury Department. The IRS then began prosecuting these people for the fact that they had hid hundreds of millions of dollars and not filed foreign bank account reports and all sorts of other things.

Now, what was the biggest outcome of this is FinCEN has a report out there called a Foreign Bank Account Report and that report is required when a US person has at least 10,000 dollars in all non-US foreign financial accounts, but the law was an old law but there was no enforcement mechanism for this. That’s why the UBS customers were able to get away with violating the law. So, in response Congress enacted the Foreign Account Tax Compliance Act, FATCA, to create a worldwide enforcement mechanism to ensure that all US persons with significant funds in a non-US financial institution were accurately reporting, meeting their FATCA or their FBAR requirements and then they introduced a whole set of new ones.

Laura Shin:

So, this is a case where the John Doe summons was seemingly justified. Is that correct?

Daniel Winters:

In that, yeah, in that case, yes because they had information that they were US persons and employees of UBS Bank who were clearly violating US law.

Laura Shin:

And so how is the Coinbase case different?

Daniel Winters:

The Coinbase case is completely different because in Coinbase we have three users who are implicated but that’s all the IRS knows. So, it’s a huge difference of degree from evidence of criminal activity on a broad scale, which incidentally turned out to be completely correct, to we found three users that broke the law and therefore we are now going to treat the other 99.99 percent of users as potential criminals. It’s an absolute difference of degree.

Laura Shin:

Okay.

Jeff Berns:

I think if I can add also, that’s a perfect example of legitimate IRS investigation, right. If everybody knows or that used to be the running joke, you know, I’m going to open a Swiss bank account to avoid taxes. They had testimony from a UBS employee that they put in their declaration to do the John Doe summons. Here they have examples of three people unrelated necessarily to Coinbase. They haven’t even tied them to it being involved with Coinbase.

And the other case that people like to talk about and say it might justify this is the PayPal case, but again, that’s a perfect example of why this is different. In PayPal they requested information on all US citizens but they limited it. Like there was a five-year period but then they said who had a bank account or a credit card drawn by a financial institution in one of these countries, Barbados, Antigua, countries that were known to be havens for tax avoidance. That’s again, a legitimate IRS investigation but here three examples unrelated to Coinbase and they’re going to ask for documents on every American citizen, this is not about avoiding taxes. This is the IRS trying to cover itself because of it’s a bad decision initially and because of that they’re going down this rabbit hole and they’re not going to be able to come out of it. Even if they got this information it wouldn’t help them.

Laura Shin:

What do you mean there when you talk about this bad decision initially?

Jeff Berns:

Right. You cannot treat virtual currency as property. It has to be treated as a currency and here’s the idiocy of the decisions that are being made. If you were to buy the virtual currency Ether or bitcoin and you went to Starbucks and they accepted it, let’s just say, but when you bought the virtual currency it was one value and let’s say over the course of the week it goes up five percent. So you’ve made five dollars and now you go and you spend it on a Starbucks coffee, you technically have a taxable event.

I mean Daniel will be able to comment and tell me if I’m right but you cannot keep records when you’re making these de minimis property trades, where if it was a currency and it went up slightly in value, like if a dollar can buy you a little bit more this year than it could last year and vice versa, you don’t have to pay attention to that but if you’re trading currencies then those are taxable events. That’s how this should have been treated and then it would be much easier to have exchanges issue 1099 B’s like the stock exchange is doing everything else, we wouldn’t have to have this huge invasion of privacy.

Laura Shin:

Okay.

Daniel Winters:

If I could jump in, yeah, I would agree with Jeff that the treatment of bitcoin and other virtual currencies like Ethereum or Monero, Zcash, Litecoin, it’s awkward because there’s no de minimis exception, and technically if someone buys 10 dollars of bitcoin today and three days from now they exchange it, the fair market value has risen to 12 and they use that to buy a mouse on the Internet, they have a two-dollar gain. The reality is no one is reporting small transactions and I spend the majority of my time working with people in the bitcoin cryptocurrency space, people don’t come to me for stuff like that.

So, a de minimis acceptation wouldn’t be too bad necessarily because the people who are really running a bitcoin ATM company or they’re a full-time trader or they’re selling bitcoins day-to-day on local bitcoins or they’re getting paid in bitcoin, all of those activities we can already sort out what the income is. There’s tools, we just apply what the rules are and those are not folks who just bought 25 bucks of bitcoin. So, a de minimis acceptation would definitely relieve a reporting burden because it’s really complicated to do all this stuff.

Laura Shin:

And so for a de minimis acceptation I’m assuming that, that means that there is not a taxable event under a certain threshold. Is there an established threshold

at which they always have this or is this something that if they went that route that would need to be worked out?

Daniel Winters:

Believe it or not I’ll actually kick that back to Jeff because I’m so focused on virtual currency and I actually don’t really deal with foreign currency in terms of the de minimis acceptation. As I understand it big picture that’s designed for somebody takes a trip to France, they buy some euros while they’re there, they come home, they still have a hundred euros left and they go and exchange it for dollars and there’s a slight difference so there’s nothing that they need to do, and that’s what it’s designed for, for small scale transactions but that’s really my only comment.

Jeff Berns:

That’s correct and that’s one thing the IRS, they could set up procedures like that. I feel bad because the people at the IRS, they’re good people. They’re trying to do their job. They don’t have the resources to do it but this is just not the way to go about things. You don’t just take away the privacy of millions of Americans because you need to learn something. I mean this is a data dump. They’re going to take this data, they’re going to use it to look into everybody and potential set up procedures going forward but there are other ways of doing that, that make more sense and that are within the bounds of the law.

Laura Shin:

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I am speaking with Daniel Winters of Global Tax Advisors and Jeff Berns of Berns Weiss, LLP. So, to continue this conversation about the way that the IRS went about this John Doe summons is perhaps not justified in your opinion. What do you think would be a more reasonable request?

Jeff Berns:

Right. So, Coinbase filed last week, in the middle of the week Coinbase filed a motion to intervene and to my motion to intervene. So, and Coinbase’s position is that the substantive issues need to be resolved together and they need to be heard as well. The reason why that was really important is twofold. One, think about this, the IRS requested all of this information then I filed the motion to intervene and what did the IRS do, it told Coinbase we don’t need any more information on Mr. Berns. Now, I have bought millions of dollars in virtual currency so I should be somebody who legitimately has to report taxes if I have taxable events. This isn’t a de minimis thing is what I’m trying to say.

The IRS says, ‘Okay. Well we don’t want that information on Mr. Berns so he no longer has standing to try to intervene. We’re not trying to get his information,’ and they thought, I think they thought oh, that’ll appease me and I’ll be done but we received so many calls from other Coinbase users who were saying, ‘Can you please help us? Can you please represent us?’ It strikes me as fantastical. I have to use that word, that they could think that just knowing my name would be sufficient but yet want all of the other information they do on everybody else.

Laura Shin:

Yeah. And I don’t understand how knowing your name would be sufficient because does that then somehow give them some insight into how much you’ve purchased and when you’ve sold and all your taxable events in virtual currency?

Jeff Berns:

No. I don’t think so. You know, the funny thing is they picked a time period to investigate when Bitcoin which was the biggest cryptocurrency and still is, there are other ones that are rising fast, but they picked a time when bitcoin was depressed. It had been at its all-time high and so the chances are there’s not going to be much in the way of taxable events for anybody during that period of time including me. So, knowing my name didn’t give the IRS any additional information but what it made me think is well then maybe all they need to know is the names of American citizens who are Coinbase customers. I mean if it was good enough for me why isn’t good enough for everyone else, for all the other Coinbase customers. Go ahead, Dan. I’m sorry.

Daniel Winters:

Oh, if I can jump in there. I just want to say I do have a disagreement with you about did people really have materials, substantial taxable transactions during those years. From my personal experience there are definitely people in 2015 who have material income from bitcoin and cryptocurrency. These are often people who I would say who made some very wisey canny investment decisions, who saw an opportunity perhaps long before 2015, it really depends, or they’re just people who are frankly really, really bright all the way out there, outlier on the bell curve and my client base are generally people who have found a creative way, okay, to generate income using bitcoin and cryptocurrency. They build platforms. They trade. They build blockchain apps. So, there are people who definitely had the need to go and report all their income from at least ’14, ’15.

Laura Shin:

So, when you do their taxes, you know, we were talking about these examples of like buying coffee and the de minimis exemption, are you finding that their taxable events tend to be trading events or are some of them like in this example with the coffee are they like, oh, they bought something on Overstock or they bought a plane ticket on Expedia, or whatever?

Daniel Winters:

Yeah. I mean I’m trying to think how much I really want to say in detail but what I have to say is things that bitcoin transactions and virtual currency transactions encompass a broad variety of activity. For some people they’re just treating it as digital gold, as a new investment class which is what it is, and their goal is to stock up, buy bitcoin on a consistent basis every couple of weeks, okay, and just hold it. For other people they have a much more short-term horizon. They buy bitcoins on Tuesday, they turn around and flip it and make a percentage, okay, and that’s what they do. For yet other people they work for a bitcoin or blockchain company and they are paid in bitcoin which complicates their tax situation because it’s like if you got paid in stock.

So, if someone sends me a thousand dollars in bitcoin because I provided services I immediately have a thousand dollars in bitcoin but if I don’t exchange that for dollars or goods or services immediately I’m going to have a gain or loss when I do the exchange. So, if I get a thousand dollars of bitcoin today and then I wait five days to cash it out I have to report a gain or loss.

Laura Shin:

And to go back also to the digital gold example, if someone is just buying and not selling, they’re holding for the long term, then there is no taxable event, correct.

Jeff Berns:

Correct.

Daniel Winters:

Yeah. That’s absolutely correct. If all you do is buy bitcoin or Ethereum, any other cryptocurrency, there’s nothing to do, no different than if you buy shares of IBM, however, as soon as you take your bitcoin and exchange it for goods, for services or another type of property such as a different cryptocurrency like Ethereum, like Monero, like Zcash, like Litecoin, you have a taxable event.

Laura Shin:

And vice versa, correct. Like if you have Ethereum…

Daniel Winters:

And vice versa. If you’re an all coin miner and you have specialty computers so that you can mine a cryptocurrency such as Ethereum or Ethereum classic, you have a dollar value when that’s received. Like say today I mined Ethereum Classic. I have 500 dollars of Ether Classic tokens. I have income today of that 500 dollars. I then hold on to them for two weeks because I’m bullish and I hope the price would go up, and then I sell those same _____ 30:45 for 600, there’s a gain right there. So it’s a two-step calculation and that’s why it’s complicated.

Laura Shin:

Okay. So, we’ve been alluding to the specific cases at the IRS referred to but we haven’t described any of them in detail. Can you guys tell us what was going on in those cases and how that ended up triggering the summons?

Jeff Berns:

You mean the UBS and PayPal cases?

Laura Shin:

No. The cases of tax evasion using bitcoin that the IRS cited when requesting the summons.

Jeff Berns:

Well, I think from what I remember and it was one individual who I don’t know the specifics on it, I can’t remember, but there were two entities who declared business expenses and they were personal expenses, which you can do by buying something on Amazon, right. If I buy something for my office or I buy something for my house and say it’s my office, that’s exactly what these two companies apparently were doing from what I remember, but it wasn’t enough to…you’re talking about millions of people just at Coinbase that are US citizens. So, you found three examples, two of which don’t even apply to virtual currency.

So, I think they thought that they would get away with it. I think they thought that nobody would say anything and Coinbase will negotiate with them which is the real reason I’m still involved in fighting so hard is that at this point even though Coinbase has indicated that it is going to fight compliance with this request they could change their mind or they could reach a deal tomorrow and provide certain information to the IRS, and I just think Coinbase customers have to have someone there to argue and to say, no, this isn’t okay. You need to prove your case.

Laura Shin:

So, Jeff, what is your ultimate goal then and what next steps are you going to take?

Jeff Berns:

Right. So, we had our hearing moved. The court moved our hearing that was scheduled for this week to February and the same day that Coinbase’s motion intervene was being heard. So, I think probably at that point we’re going to say to the judge…actually we’re going to file something today but I’ll give you the…we’re going to file something today that basically says we have no problem with giving Coinbase time to respond and giving the court more time as long as we’re notified in advance if any deal is being cut so we have a right to go in there and seek a class wide injunction if we have to. So, that’s what we’re filing today.

When we go to the court I’m hoping that this judge will take a look at it and say, you know what, yes I approved the summons because I approved it. It looked legit but now this is brought to light, there’s a lot of information now being brought to the court that maybe I have to rethink this or at the very least we need to severely limit it to tax issues. I mean if you’re looking for tax avoiders then figure out the most likely tax avoider conduct and ask for information related to that, not every email.

Laura Shin:

And is there something that you would propose in that direction? Like if you were to come up with some solution that would help the IRS identify tax evaders how would you structure it?

Jeff Berns:

Yeah. I think, at first I would try to get Congress to change the fact that virtual currency should not be treated as a property. It should be treated as a currency because it will streamline a lot of bookkeeping and make compliance much easier and make enforcement much easier, and the second thing is I would require exchanges to file the 1009, I think they’re 1099 B’s, and that should solve the problem. And then if you see legitimate, if you see information on somebody like any other way the IRS has to investigate without going in and subpoenaing blanket records.

If I all of a sudden go out and buy an island maybe that’s something that should be looked at. I don’t know. But the IRS already has mechanisms in place. They shouldn’t be creating this image that blockchain technology, virtual currency is a bad thing. It is going to revolutionize every aspect of how we deal with each other the next 30 years and I don’t want to see that technology stymied because people don’t know what they’re doing.

Laura Shin:

So, something else I wanted to talk about is why this summons was issued now. There has been a little bit of speculation about other things that are happening more broadly at the IRS. Could one of you describe that?

Jeff Berns:

Yeah. In September they were chastised by the Department of Treasury because they still really don’t have any policies that make sense that people can rely upon to understand how you report, how you treat virtual currency. It’s like this amorphus thing they’ve said and they haven’t really put the meat on the bones. So, at least I believe what happened was they got chastised by the Treasury Department and they reacted as most governmental agencies do, they overshot, and so they thought, hey, let’s go get records on a million or two million Americans and we’ll figure things out. At least we can say, hey, we are looking into it. We’re trying to figure it out. We’ve got all of these records and we’re looking for a tax avoidance. That’s my opinion of timing and why this happened now.

Laura Shin:

All right. And I also want to talk about the implications for cryptocurrency users. Is this something that all holders of bitcoin, Ether, Moneros, Zcash, et cetera, should be nervous about or is it just customers of Coinbase? Who should be paying attention to this?

Daniel Winters:

Well, here’s the big picture is that bitcoin income, virtual currency income is taxable income. The IRS has issued fairly clear rules on how to treat certain transactions whether you are providing services, whether you are trading, whether you are mining, and they have also stated that if you’re paid bitcoin and that’s part of your wages your employer should issue a W2. If you’re a contractor you should get a 1099 and if you sell this capital asset that it gets reported on your taxes. So, there are some pretty clear things that the IRS has stated on what to do concerning bitcoin income.

The big question is are people actually complying with those rules? So, here’s sort of what I’d say is for someone who has an account with Coinbase if they properly reported all of their income at their Coinbase account and every other wallet exchange or service that they have, they’re fine, but if you did not _____ 37:54 report your income or didn’t report it at all you might have a serious problem.

Laura Shin:

And how easy is it for people to do that?

Daniel Winters:

It’s not the simplest thing in the world. There are a couple of software tools out there that I use. I could tell you the site. I don’t know if you want me to…

Laura Shin:

Is it Leaper Tax?

Daniel Winters:

No. The site that I work with that I find to be the best and most powerful tool is called bitcoin.tax and I have used that successfully for six-figure income situations. So that’s a tool I use. If you’re activity is light and you just have a Coinbase account then you probably could figure it out yourself. If however if you just use Coinbase to be your entry point to the cryptocurrency ecosystem and then you move your money and cycle it through different wallets, different exchanges, go in and out of alt coins, if you have anything more complicated than just one account or two then I would suggest you contact a professional for this.

But my main thing here is to going back to what does this mean for Coinbase users and people being nervous, as long as you reported all your income accurately in the first place you’re fine. If you didn’t that really might be a serious problem, and I think that when the case is eventually settled if you are on the short list of people whose information is sent over to the IRS you’re not going to find out until you get a very unhappy letter in the mail and they’re not going to tell us what their requirements were to be on that list.

Jeff Berns:

Can I comment in response to your question, too, Laura?

Laura Shin:

Yeah.

Jeff Berns:

So, for me this is a much bigger question. I’m not concerned about bitcoin. I’m more concerned about what this means going forward. We’ve allowed digital virtual currency to have some kind of a negative connotation because of things that have happened with Mt. Gox and all of this stuff, you know, Silk Road and we all know all those stories with bitcoin, and it’s made people who don’t really understand the ecosystem have a negative impression about it, but what’s really going on here is this is a governmental agency who’s basically subpoenaing private records of American citizens without justification and information having nothing to do with that agency’s purpose. So, if it is allowed it isn’t just about Coinbase. Where does it stop? Do they then say, two examples of people using Amazon for tax evasion now can they request every record for every transaction you’ve ever made with Amazon? Where does it stop? So, for me, that’s one issue.

The second issue is we have developed and have spent a lot of time developing in the ecosystem, in the blockchain ecosystem, I really believe this is going to change the future. I believe the Ethereum blockchain is going to change the future so I don’t want anything that’s going to put a damper on that. I don’t want the government blindly doing stupid things that are going to interfere with that development and this is one of the things that might do that. It could cause people to say, hey, the IRS is looking into it. I don’t want anything to do with this, and that’s not right.

Laura Shin:

Okay. So there are a couple of things that I’ve been hearing in terms of your criticisms and one is about how the IRS treats virtual currency as property, another one is about how onerous it is it to keep track of what you would need to keep track of to report everything correctly. So, in an ideal world obviously there are a few problems we’ve identified and how cryptocurrencies will be treated for tax purposes, out of this case what would you see as the ideal outcomes?

Jeff Berns:

I would like to see the IRS meet and discuss what they really need and why and have the ability to maybe educate them, and they should convene. I mean there are people like Daniel, there are people in DC, they should convene a meeting and try to figure this out. There are ways of accomplishing the necessary tasks that the IRS has. I am not in support of tax evaders at all, nor do I think most people use or will use virtual currency for tax evasion. So, let’s look at what the IRS really needs and let’s figure out a way of giving that to them without giving them more than they really need because whenever the government gets more than it should have it ends up doing something it shouldn’t do with it.

Laura Shin:

But you were the one I believe who made the point earlier about how calling it property was a fundamental mistake.

Jeff Berns:

Correct.

Laura Shin:

Yeah. What would you suggest otherwise?

Jeff Berns:

I think we have to change the definition and it should be a currency. So when you buy it and you spend it on products you’re not going to have taxable events where…

Laura Shin:

Right. But I mean a lot of people do buy it as an investment and just hold it for years, so in that case would they also be taxed as if it’s a currency?

Jeff Berns:

Right. So if they bought it and held it as an investment, Daniel can jump in, my understanding of taxation is when they sold it they would have a capital gain. Much like anybody who holds assets, if the currency goes up in value and you held it as an investment you have capital gains on it. I want it to be treated the way currencies are treated.

Laura Shin:

Oh, okay.

Jeff Berns:

If you’re using a currency to make money or as a business you’re going to have taxable events but if you’re using it because you’re going to spend it when you go to France you shouldn’t have a taxable event.

Laura Shin:

Oh, I see.

Daniel Winters:

If I could jump in, Jeff and I, I think we disagree on that. I’m actually okay with the IRS treatment of bitcoin as a type of property and a virtual currency for the simple reason that bitcoin doesn’t really fit the definition of currency in that it’s not issued by a sovereign government. It’s not legal tender for a particular country. So, that’s how we get to the definition of virtual currency and FinCEN is the agency that issued that guidance several years back.

So, I’m okay with bitcoin being treated as a type of property. I just think that it would be nice if there was an exception so that people who are doing small scale transactions didn’t have to do any reporting because they’re not doing it anyway. So, that’s sort of my position on that and my thinking there kind of goes to like different states have money transmission laws and what’s the definition of a currency for that, and that’s all legal so I won’t go too far there, but I’m okay with bitcoin being a type of property.

And the big picture issue we have here is that this is a revolutionary, innovative technology that emerged and regulators around the world are playing catchup to understand what do we do here.

Laura Shin:

So then since everything is sort of up in the air let’s do a little prognosticating. I’d like for each of you to finish this sentence. If I had to bet money I’d bet that the outcome of this case is…

Jeff Berns:

Right. I think that the courts will reevaluate…well, it’s hard to know. Either the court will boot me out on procedural grounds because the IRS negated my standing and we’ll have to try again with one of the hundreds of people who’ve called our office to show the court that we’re not going to give up, or this judge will say, you know what, I’m taking a step back and I want you all to meet, mediate the issue. See if you can come up with something that makes sense that all three interests can agree upon. I think that that’s the most likely outcome. I don’t think Coinbase will give into the government’s request. I’m hopeful of that and so I’m hoping that we’ll get to the table and be able to figure out how to navigate this.

Laura Shin:

And when you say all three interests you mean Coinbase, the IRS and you.

Jeff Berns:

Well, it doesn’t have to be me but somebody should represent Coinbase’s customers because realize Coinbase is a company that has to deal with regulators. They need to keep a good relationship with regulators. They stand in a different spot. They don’t have the same interests. It’s not really their information that’s being sought. Yes, it’s not going to be good for them from a business perspective but there’s a different interest and that’s the actual persons whose information is being sought. That’s the third interest that I’m saying needs to be represent, whether it be me or the court can pick anybody. I just want somebody at the table.

Laura Shin:

Okay. And Daniel, finish this sentence. If I had to bet money I’d bet that the outcome of this case is…

Daniel Winters:

Coinbase will be forced to provide information on some of their users. It’s part of a negotiation. Exactly what the parameters for that but I think Coinbase…I’m not as optimistic as Jeff and particularly like using the UBS case as an analogy. So, I think that Coinbase ultimately will need to provide much more information than they’re comfortable doing.

Laura Shin:

But you don’t think it’s all the information that’s currently being requested it sounds like. It sounds like you think it’s only going to be a portion.

Daniel Winters:

Probably not maybe but I’m really not so sure. I mean I’m not…

Laura Shin:

Wait, probably not the full amount.

Daniel Winters:

I would hope that Coinbase does not need to provide the full amount of information the IRS has requested and I don’t think that they will but I think the outcome of the case will be that Coinbase will have to provide information to the IRS on certain other users within some parameters. The thing being there that the exact parameters of the class of people that are being provided and the scale of the transactions will not be public information, so we won’t know. I also like what Brian Armstrong said in his piece, which was essentially, hey, we’ll just _____ 48:24 1099 forms. That’s a great idea. The Bitcoin Exchange already does that. So that’s basically my thinking. I don’t feel as optimistic as Jeff.

Laura Shin:

All right. Well, this has been a fabulous discussion. Thank you both so much for joining. Where can people learn more about your work and get in touch with you? Jeff, do you want to start?

Jeff Berns:

Sure. You can go to law111.com and that’s our firm and you can go to ethnews.com, they’re reporting on things that we’re doing as well. My email is [email protected] if somebody has a question.

Laura Shin:

And Daniel.

Daniel Winters:

My website is globaltaxaccountants.com. There’s a contact form on the site. I’d love to speak to anyone that has a question about this stuff. My email is kind of long, it’s [email protected]. Just go on my website and we can get in touch that way.

Laura Shin:

Great. Well, thanks for joining us today.

Jeff Berns:

Thank you, Laura.

Laura Shin:

If you’re interested in learning more about Jeff and Daniel check out the show notes which are available on my Forbes page, Forbes.com/sites/laurashin. Thanks so much for tuning into episode two of season two and check back in two weeks for the next episode. If you’ve been enjoying the podcast please remember to review, rate and subscribe to it in iTunes or your preferred platform. Thanks again for listening.