The bitcoin price is hanging on above the $10,000 mark for another day, even as cryptocurrency exchange Coinbase revealed that it has decided to tell the Internal Revenue Service who raked in a fortune trading it. It’s another wake-up call for those who think bitcoin transactions are anonymous. If the government can pursue you for taxes on the bitcoin you traded, then obviously, it knows who you are.
Coinbase told customers on Friday that it will report to the IRS the identities of 13,000 users who made the most money trading bitcoin between 2013 and 2015. The tax agency wants to pursue those who dodged the taxes they should have paid on their cryptocurrency. Coinbase originally tried to get out of providing the IRS its user information by going to court, but it didn’t work out.
The cryptocurrency exchange said it will hand over the affected users’ names, taxpayer IDs, transaction records and addresses. This applies to anyone who made over $20,000 worth of transactions via Coinbase, although legally, all cryptocurrency is supposed to be subjected to a capital gains tax, according to tax experts.
The fact that the IRS was able to force Coinbase to hand over user information should serve as a reminder that bitcoin isn’t totally anonymous, even though crypto expert and institutional investor Ari Paul classifies it as a “defensive” technology. Bernstein analyst Gautam Chhugani highlighted some comments Paul tweeted this week.
In his commentary, Paul drew comparisons between cryptocurrencies and the development of offensive and defensive weaponry. He argued that certain weapons lean more toward the offensive end of the spectrum, while others are more defensive in nature. Because wealthy governments can afford aircraft carriers, he classifies them as offensive, but because sniper rifles are easier to afford and work best in defense of one’s home turf, he sees them as defensive.
According to Paul, cryptocurrency and also crypto technology are “naturally defensive in the extreme” because only $25 worth of computer hardware enables him to encrypt a message that no intelligence agencies in the world can decrypt and “transfer value in a way that they can’t censor or seize.”
He also went on to explain how Rome was able to assemble its massive empire simply because it built roads to ease the travel of its armies, which at the time was an innovation. Chhugani added to what Paul wrote by saying that it’s too early for critics to just bitcoin or any other cryptocurrency. He also notes that bitcoin and other “crypto protocols” were originally designed as decentralized payment systems to be “censorship-resistant to prevent a single point of system shutdown.”
Chhugani also argued that bitcoin and cryptocurrencies shouldn’t be seen any differently than “an early stage tech. ecosystem with its adoption linked to new application development on top of these secured base financial protocols.”
Essentially, the Bernstein analyst seems to be saying that bitcoin and crypto technology are like the roads of ancient Rome. He sees them as an early innovation that will eventually serve to enable future development. Indeed, some of the newer cryptocurrencies behave even more like roads that create a path for payments to travel on. XRP, in particular, works like this, although it is also arguably one of the more centralized cryptocurrencies because of Ripple’s control over it. A key question now is whether cryptocurrencies can really survive in their current decentralized form, or whether they will all have to go the path of Ripple by being subjected to regulation in some form or other.
