Jeffrey K Berns is a bitcoin user, Coinbase customer and a managing partner at multi-specialty law firm Berns Weiss LLP.
In this CoinDesk opinion piece, Berns explains why he chose to seek to intervene in the IRS's attempt to obtain from Coinbase the identities of, and information concerning, millions of US cryptocurrency users.
On 30th November, 2016, a federal court issued an order allowing the IRS to serve an unprecedented summons on Coinbase, Inc, a cryptocurrency exchange, seeking the identities of each of the company's millions of US customers and essentially every piece of information in the company's possession concerning those customers.
As a consumer protection and class action attorney (as well as a cryptocurrency and blockchain entrepreneur), I am deeply concerned about the potential impact that Coinbase's disclosure of this information could have on the burgeoning industry.
I am also troubled by the IRS's motives in issuing this summons.
While I don't want to bore you with the legal procedure that led to the issuance of the summons, the bottom line is that courts grant the IRS substantial leeway to issue a "John Doe" summons to a third-party to require it to identify its customers whom the IRS suspects of tax evasion.
Typically, this has occurred when the IRS identifies a practice that has no legitimate purpose, such as improper tax shelters or offshore bank accounts.
In those cases, the IRS has the power to issue summonses to tax shelter promoters and financial institutions to identify likely tax evaders, as there is no other way for the IRS to obtain that information.
In contrast to those circumstances, cryptocurrencies (such as bitcoin and ether) have clearly legitimate uses, such that there is no reason to suspect that an individual is engaging in tax avoidance behavior merely because they have chosen to buy or use cryptocurrency.
Indeed, many major online retailers already accept bitcoin, such as Overstock.com, Dell and others.
So, how did I get here?
The IRS's characterization of all cryptocurrency users as potential tax evaders concerned me immediately when I first learned of the summons.
As I have been involved in the cryptocurrency and blockchain community since 2012, I knew that there was no reason to suspect that any meaningful portion of Coinbase's customers were transacting in cryptocurrency to avoid tax obligations.
As I investigated the matter further, I learned that not only was I correct, but that the IRS's actions were even more outrageous than I had originally thought.
Incredibly, the IRS's petition to serve the summons seeking information for millions of Coinbase customers was based primarily on three instances of supposed tax evasion involving bitcoin.
I was so appalled by the flimsy justification for the summons that I determined to investigate the matter further and, as a Coinbase customer, fight the IRS if and when the court granted its petition to serve the summons on Coinbase.
My interests in pursuing this action are twofold.
First, I am concerned about the privacy rights of all Coinbase customers, as the IRS is seeking an extraordinary amount of information. This unprecedented demand raises massive security issues concerning the cryptocurrency owned by the customers in view of the government's difficulty in protecting itself from hackers.
Second, I am very worried about the effect this summons could have on the continued expansion and development of blockchain technology in the US.
Google co-founder Larry Page has said, "Lots of companies don’t succeed over time. What do they fundamentally do wrong? They usually miss the future."
To the extent that it is taking steps to actively discourage the use of cryptocurrency by US citizens, I strongly believe that the US government is jeopardizing the country’s role in the global economy going forward.
Cryptocurrency, and the blockchain technology that underlie it, have virtually unlimited potential to change the way that individuals and businesses transact with each other. I believe that this will happen in a way that will greatly benefit consumers through better privacy, reduced transaction costs, enhanced security and faster processing times.
In this way, my stance is about how the government should be fostering this technology, rather than fighting it.
While the IRS is mounting a procedural challenge to prevent the court from considering the issues that I have raised, I pledge to do whatever is necessary to insure that the IRS must explain how it could possibly be entitled to the information that it seeks.
The federal government must not be allowed to trample on the rights of individuals and to stifle innovation due to an undisclosed political agenda.
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