Blockchain News: Bitcoin Threatened by IRS Investigation

Blockchain News
Photo: Ethan Miller / Staff / Getty Images

IRS Targets Bitcoin Exchange

Discretion is one of the core appeals of Bitcoin and other blockchain currencies, but that freedom is coming under attack by government forces such as the Internal Revenue Service (IRS).

For instance, IRS officials recently demanded that Coinbase (a major Bitcoin exchange) hand over its customers’ personal data. The agency says it is looking for examples of tax fraud, which helps explain why the legal filings target an unspecified number of “John Does.”

As a result, any bitcoin transaction between 2013 and 2015 would fall within their scope of inquiry. Coinbase responded by saying it is “very concerned with the indiscriminate breadth of the government’s request,” especially since it is the oldest and biggest U.S. Bitcoin exchange.

The entire case rests on how bitcoin is classified by the IRS. (Source: “IRS Requests Bitcoin Buyer Records in Broad Tax Evasion Case,” Fortune, November 20, 2016.)

Two years ago, there was a fight over whether Bitcoin was currency or property. If it were currency, as supporters claimed, there would be no tax obligation. You could hold bitcoin the same way you hold U.S. dollars. But, if the IRS designated it as property, it would be closer to a stock.

You would either have to pay tax on capital gains or else on the bitcoin itself. The legal and regulatory environment around blockchain currencies was murky at the time, so Bitcoin enthusiasts were anxious for a little clarity.

Unfortunately and unsurprisingly, they did not like what happened next.  

The IRS went ahead and designated blockchain currencies as property, meaning that bitcoin was now a taxable asset. This move struck a discordant note with Bitcoin’s true believers, many of whom think that blockchain currencies will one day unseat the traditional monetary system.

A lot of them probably refused to declare their bitcoin assets on principle, which is why the IRS wants to see Coinbase’s records. It is increasingly clear that the government intends to drag blockchain currencies into the U.S. tax system, kicking and screaming if need be.

This conundrum is not unique to the United States. Halfway around the world, China is facing its own issues with Bitcoin, namely that people are using the blockchain currency to ship money overseas.

China has tight capital controls to limit the amount of money which leaves the country. However, many people in China are looking to move their cash abroad and, since Bitcoin operates on a peer-to-peer network, it does not pass through the Chinese banking system.

In other words, Chinese citizens used bitcoin as a loophole to get their money out of the country.

This is why bitcoin prices in China trade at a significant premium to U.S. dollar bitcoin, and it is also why 90% of bitcoin trading volume comes from China. That being said, Chinese regulators are considering how to bring blockchain currencies under their control, much like the IRS just did.