Did Any American Really Believe Crypto Income Could Be Hidden from the Government?

Plus, that app on your phone is not a bank.

Number of the Week: $472 billion (explanation below)

Did Any American Really Believe Crypto Income Could Be Hidden from the Government?

A much-watched judicial decision came down this week: a federal judge ruled that the Internal Revenue Service (IRS) has the right to access the crypto trading account of a Coinbase customer. It’s a fascinating, if no-duh, case, less because of the obvious legal principle on which it’s based, and more because it provides a lens onto the ideological and psychological profile of the earliest generation of crypto investors.

Here is the history of the case: In 2013, not long after Coinbase began operating, a New Hampshire resident named James Harper opened an account. Harper appears to have transferred some Bitcoin into that account, obtained from consulting work. He did some buying and selling with his wife for a few years, all the while declaring the income on his tax returns and paying capital gains tax when appropriate. By 2016, Harper no longer had any Bitcoin in his Coinbase account. He also at times held Bitcoin accounts at two other exchanges, Abra and Uphold.

In 2016, the IRS filed a “John Doe” summons on Coinbase, a fairly common technique designed to identify Americans who may have underpaid taxes on crypto transactions, but whose identities are unknown. As far back as 2014, the IRS issued a statement that designated cryptocurrency as property, not currency: “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.” The reality is that very few people who were buying and selling Bitcoin and other crypto in the middle of the last decade were filing the correct capital gains forms even if, like Harper, they intended to pay tax on any profits they made. The IRS justified its actions by talking about money laundering and drug deals, but turning up tax evasion was nearly guaranteed.