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The Tax Man Cometh For Bitcoin
NC Privacy Blog Talks To Digital Assets Tax Policy Coalition Counsel Cameron Arterton

3.27.2017

A federal judge recently ruled that America’s largest Bitcoin service was obligated to provide the Internal Revenue Service with extensive transactional records concerning the financial transactions of its members. The federal government emphasized that Coinbase was not accused of any wrongdoing. Instead, the IRS was seeking the records to identify potential tax issues.

Coinbase is contesting the summons on behalf of its members. NC Privacy Blog spoke to Steptoe & Johnson LLP’s Cameron Arterton, who is advising a coalition on related tax policy issues.

Q: Are these summonses common?

A: The IRS does use these “John Doe” summons. The government says “We need to take a look at these documents, because there aren’t easily accessible records, we are not entirely sure of what’s going on.” And where they find a situation where they’re concerned that a mechanism is being used to evade a taxpayer’s obligations to tax authorities, they will use the John Doe summons.

Q: Then it’s not because bitcoin carries the taint of say, the Dark Web?

A: Well, there may be some wariness. But it seems like the IRS may be thinking of bitcoin like it did off-shore accounts. They think there is something going on—some tax avoidance purpose, but it doesn’t have the information it needs to know for sure.

Q: And what’s the concern on the part of the fintech industry?

A: Well, for one, the compliance costs could be huge. Remember, there are no specific allegations of wrongdoing. So if the government makes sweeping requests encompassing years of transactions, it is a significant burden on American companies in this sphere, who have to produce or recreate a considerable volume of fairly intricate records. And that doesn’t even factor in the burden on their members who then have their own record keeping burdens.

Q: So the issue here is the compliance burden?

Well it is one significant issue. There is the potential that such sweeping requests create an incentive that pushes users into the shadows. It could make companies with less stringent compliance programs in place more attractive, simply because users are understandably wary of being swept up in a large scale investigation simply because of which bitcoin exchange they use.

But there is a larger picture here. There are many reasons to use Bitcoin, but if the IRS approaches the technology with the implicit presumption that this a framework that is used to being evade tax obligations, they are going to be approaching it from an enforcement perspective--that the secrecy and anonymity of blockchain are attractive to people because it is easier to fly under IRS radar.

The industry is trying to change this assumption. It is really not an accurate assessment of the way fintech operates or who its users are. And that’s why the Digital Chamber and other industry players are concerned: not only are we talking about sweeping requests, but there’s underlying government concerns that we think are not warranted.

Q: what is the industry’s preferred approach?

A: We would like to work with the IRS to help provide the information they need to ensure compliance without imposing too much burden on industry or taxpayers. Look, the tax system in general is built on voluntary compliance. And it works. Now, there are a lot of backstops built into the tax system. Third party reporting and so on.

There’s many mechanisms to ensure tax compliance. And the industry wants to leverage those to get the government what it wants rather than expensive ad hoc compliance arrangements where there’s no evidence of wrongdoing.

Q: So what’s the solution?

A: The IRS will have to issue further guidance in this area. Right now, we have the 2014 guidance clarifying that virtual currencies are property, and subject to corresponding tax laws. But that is basically all the guidance in this area.

The industry would welcome further guidance. The IRS has two general functions: the guidance function and the enforcement function. Both have their place. So far the IRS is approaching this from the enforcement angle.

But we do not agree that this issue is one that is appropriately dealt with from the enforcement side yet. Industry wants to cooperate. It needs guidance to do that. Guidance would help both tax collection and compliance.

The alternative we have right now is the John Doe summons process, which is really expensive ad hoc adjudication. It doesn’t serve the IRS mission, and it causes confusion in fintech development.

Q: Thank you for your time.

Saad Gul and Mike Slipsky, editors of NC Privacy Law Blog, are partners with Poyner Spruill LLP. They advise clients on a wide range of privacy, data security, and cyber liability issues, including risk management plans, regulatory compliance, cloud computing implications, and breach obligations. Saad (@NC_Cyberlaw) may be reached at 919.783.1170 or sgul@poynerspruill.com. Mike may be reached at 919.783.2851 or mslipsky@poynerspruill.com.

Physical Address: 301 Fayetteville Street, Suite 1900, Raleigh, NC 27601

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