Cryptocurrency is a relatively new form of currency that allows for online exchange. Unlike other forms of currency, cryptocurrency only exists online. Because it removes financial and banking institutions, some may believe that cryptocurrency is private. Although arguably more private than a traditional bank account, it is important for users to know that cryptocurrency is not completely private.
The Internal Revenue Service (IRS) has made it clear that it expects taxpayers to pay taxes on qualifying cryptocurrency transactions. The agency has gathered information from Coinbase about its customers, launched a compliance campaign and sent letters to taxpayers that have accounts with information about compliance requirements. These records are not out of reach of the IRS. A recent case provides an example.
The arguments for and against privacy protections for cryptocurrency
In this case, the courts were asked whether or not cryptocurrency information held by a third party, like Bitcoin or Coinbase, was protected by the Fourth Amendment. When making its decision, the court considered two previous cases. In the first, from over 80 years ago, the Supreme Court of the United States stated bank records do not receive the protections granted under the Fourth Amendment because these documents were not confidential. Once exposed to bank associates, the third-party disclosure doctrine is triggered. This negates an individual’s expectation of privacy.
In the second, the courts decided the Fourth Amendment provided protection for cellphone location data. The taxpayer argued that cryptocurrency data was more like cellphone data than traditional bank records.
Holding, and what it means for taxpayers
Ultimately, the courts decided that the nature of the cryptocurrency data was more akin to bank accounts and Fourth Amendment protections did not extend to cryptocurrency data. As such, taxpayers are wise to proactively review their cryptocurrency data and make sure they follow applicable tax laws. The attorneys with Goldburd McCone are familiar with these issues and can help protect the rights of taxpayers who are attempting to navigate these issues.