Two of my clients received an email from Coinbase:
Dear Mr. Smith,
In December 2016, the Internal Revenue Service issued a summons demanding that Coinbase produce a wide range of records relating to approximately 500,000 Coinbase customers. Coinbase fought this summons in court in an effort to protect its customers, and the industry as a whole, from unwarranted intrusions from the government. After a long process, the court issued an order that represents a partial, but still significant, victory for Coinbase and its customers: the order requires Coinbase to produce only certain limited categories of information from the accounts of approximately 13,000 customers. We are writing to let you know that the above-described court order requires us to produce information specific to your account. If you have concerns about this, we encourage you to seek legal advice from an attorney promptly. Coinbase expects to produce the information covered by the court’s order within 21 days. For your reference, the court’s judgment can be found here. The case was filed in the United States District Court for the Northern District of California, Case No. 17-cv-01431-JSC. In addition, we also want you to know that because Coinbase received a summons on December 8, 2016, and more than six months passed before our challenges to the summons were resolved by the court, the period of limitations under sections 6501 and 6531 of the Internal Revenue Code (title 26 of the U.S. Code) were suspended beginning as of June 8, 2017 and continuing through the final resolution of Coinbase’s response to the summons. This may be relevant to the tax returns that you have filed for the 2013, 2014, and 2015 calendar years. If you have questions about your tax liability for those years, we strongly encourage you to consult with your tax advisor.
Regards, The Coinbase Team
Let me clear up a few points made by Coinbase:
1. This is not a significant victory for Coinbase. As most tax professionals thought, Coinbase must comply with US law and comply with most of the IRS summons.
2. The statute of limitations for impacted taxpayers was extended for about nine months by the battle over the summons. Coinbase is absolutely correct about this. Where this gets important for individuals who may not have included all of their Coinbase transactions on their returns is if they substantially underreported their income. Timely filed 2013 tax returns are “beyond the statute date,” even including the extra nine months. (They were due in April 2014, so adding an extra nine months takes to the normal three year statute of limitations takes us to January 2018.) However, timely filed 2014 returns impacted by this will have an extra nine months added to the statute date (until January 2019).
Additionally, anyone who substantially understated their income (20% or more) has a six-year statute length rather than three years. Timely filed 2013 returns are well within the extended statute length.
3. Coinbase’s suggestion of consulting with your tax advisor is an excellent one. If you file an amended return before the IRS comes after you or has knowledge of your error, you generally are looking at just paying tax and interest. Coinbase has told those impacted by this that you have less than 21 days to correct your mistakes; take advantage of that now!
If you included your cryptocurrency transactions on your tax returns, you’re likely not going to be a target. But if you didn’t, you have been given a short period of time to file amended tax returns.
Finally, this is not the end of this issue; expect the IRS to send summonses to all the other US-based Exchanges. I would not be surprised if the IRS targets foreign Exchanges that service Americans. This is a black and white issue under US tax law: Any accession to wealth not exempted from taxation under the law results in taxable income. Cryptocurrency gains are not exempt from taxation under US law.
