IRS Wins Court Battle Over Access to Coinbase User Data

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In a land­mark rul­ing that could rip­ple through the cryp­to mar­ket, the judi­cia­ry has backed the Inter­nal Rev­enue Service’s (IRS) pow­er to pro­cure per­son­al data from Coin­base. This deci­sion spot­light­ed the strin­gent author­i­ty the IRS com­mands in its pur­suit of tax compliance. 

It is a strik­ing tale of the pow­er­play with the IRS emerg­ing vic­to­ri­ous against a cryp­to user’s pri­va­cy infringe­ment claims.

IRS’s Powers Affirmed in Coinbase User Data Controversy

In a court ses­sion, Dis­trict Court Judge Joseph N. Laplante dis­missed the objec­tions pre­sent­ed by James Harp­er, who argued against the IRS’s seizure of his per­son­al data. 

Laplante upheld that the IRS’s meth­ods, includ­ing obtain­ing per­son­al data through a sum­mons, did not encroach on Harper’s rights to a fair hear­ing or pro­tec­tion from unrea­son­able search­es and seizures. This reaf­firmed the broad man­date that the IRS holds, allow­ing it to release sum­mons­es in a wide range of circumstances.

An inter­est­ing aspect of the case was Harper’s argu­ment. He affirmed that his pri­va­cy rights were vio­lat­ed, which found lit­tle sup­port in inter­pret­ing the Fourth Amendment. 

Judge Laplante not­ed that Harp­er had will­ing­ly dis­closed his infor­ma­tion to Coin­base. More­over, the firm’s pri­va­cy pol­i­cy warned of poten­tial gov­ern­ment req­ui­si­tions. This con­sid­er­ably under­mined Harper’s posi­tion, as dis­clos­ing infor­ma­tion to Coin­base was voluntary. 

Fur­ther­more, Laplante dis­missed Harper’s asser­tion of vio­lat­ing his Fifth Amend­ment rights, indi­cat­ing suf­fi­cient oppor­tu­ni­ties to con­test or restrict the summons.

Harper’s decade-long rela­tion­ship with Coin­base start­ed in 2013, with his deposit­ing Bit­coin earn­ings from con­sul­ta­tion services. 

In 2016, the IRS, eager to main­tain trans­paren­cy and adher­ence to guide­lines in the cryp­to mar­ket, sought infor­ma­tion from Coin­base through a John Doe sum­mons, tar­get­ing unknown tax­pay­ers.

Coin­base ini­tial­ly resist­ed this sum­mons, result­ing in a sec­ond legal pur­suit by the IRS to ensure com­pli­ance. This ini­ti­at­ed a pro­longed legal skir­mish, even­tu­al­ly lead­ing to Coin­base sur­ren­der­ing the nec­es­sary doc­u­ments to the IRS. 

does coinbase report to irs: verified users
Coin­base Ver­i­fied Users. Source: Statista

Harp­er retal­i­at­ed in 2018 with his law­suit, rais­ing numer­ous con­sti­tu­tion­al issues and call­ing for the IRS to destroy his records. The First Cir­cuit sup­port­ed Harper’s argu­ment on the grounds of the Anti-Injunc­tion Act, despite the ini­tial dis­missal of his case.

Despite this, Harper’s most recent effort to chal­lenge the dis­missal of his case in Feb­ru­ary fell short. He main­tained that the IRS vio­lat­ed his con­sti­tu­tion­al rights to due process and the Fourth Amendment’s pro­tec­tions. Espe­cial­ly against unrea­son­able search­es and seizures were disregarded. 

Harp­er argued that he was not allowed to dis­pute the acqui­si­tion of his records and that the IRS’s record pro­cure­ment was unreasonable.

Judge’s Verdict: No Infringement on Harper’s Constitutional Rights

How­ev­er, in his most recent judg­ment, Laplante sided with the IRS. He stat­ed that Harp­er had no stand­ing to claim an inter­est in the records under the Fourth or Fifth Amendments. 

Harper’s claim of a pri­va­cy vio­la­tion was fur­ther weak­ened by the judge’s asser­tion that Coin­base was the right­ful cus­to­di­an of Harper’s account documents.

In addi­tion, the judge dis­missed Harper’s claim of a vio­la­tion of due process and stat­ed that Harp­er did not have any prop­er­ty rights over the records. Even if he had such rights, the sum­mons­es were under sig­nif­i­cant con­straints, requir­ing court approval. 

There were addi­tion­al oppor­tu­ni­ties for Harp­er to chal­lenge the sum­mons­es, even after their issuance, includ­ing dur­ing the court pro­ceed­ings fol­low­ing Coinbase’s refusal to com­ply.

This land­mark rul­ing may leave a ques­tion behind: Does Coin­base report to IRS? The answer is yes, Coin­base sends Forms 1099-MISC to the IRS for US traders who made more than $600 in cryp­to rewards or stak­ing. The $600 thresh­old is the Coin­base IRS report­ing thresh­old for tax year 2022.

Coin­base may issue Form 1099-MISC to the account own­er and the IRS if cer­tain qual­i­fy­ing fac­tors are met. These forms detail tax­able income from cryp­tocur­ren­cy trans­ac­tions but do not report cap­i­tal gains or losses.

Disclaimer

Fol­low­ing the Trust Project guide­lines, this fea­ture arti­cle presents opin­ions and per­spec­tives from indus­try experts or indi­vid­u­als. BeIn­Cryp­to is ded­i­cat­ed to trans­par­ent report­ing, but the views expressed in this arti­cle do not nec­es­sar­i­ly reflect those of BeIn­Cryp­to or its staff. Read­ers should ver­i­fy infor­ma­tion inde­pen­dent­ly and con­sult with a pro­fes­sion­al before mak­ing deci­sions based on this content.

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