US Judge Denies Customer's Plea to Quash IRS Bitstamp Inquiry

A Washington Western District Court judge has rejected petitioner William Zietzke’s appeal to stop the U.S. Internal Revenue Service (IRS) from accessing his Bitstamp trade data. An IRS summons invoked Zietzke to file a petition to quash the tax agency’s investigation into his private accounts. Even though the presiding Judge John Coughenour believes the IRS summons is “overbroad,” he still denied Zietzke’s petition.

Also read: IRS Dispels Crypto Tax Confusion

Washington Judge Will Allow IRS to Summons Bitstamp Over a Customer’s Transactions in 2016

William Zietzke filed a motion to quash an IRS summons on June 27, 2019, and the Washington case was then in limbo up until November 25. Court filings detail that in 2016, Zietzke used the platform Turbo Tax and said he thought he made two major transactions by filing a capital gain for more than $100K. After the tax filing, he realized he made a mistake and amended the return. Only this time Zietzke claimed a $410 capital gain and the IRS countered the changes by initiating an audit into his financial affairs.

Zietzke explained that the transactions did not occur in 2016 and he only realized his mistake after his accountant started helping him prepare for retirement. According to the filing on November 25, Zietzke claimed to have only used crypto services like Armory Wallet for his personal holdings and companies like Purse.io and Coinbase. Despite the admission, during the audit, the IRS discovered Zietzke also used the exchange Bitstamp.

“The IRS learned that petitioner used Bitstamp to conduct at least one Bitcoin transaction in 2016. Upon learning of this transaction, the IRS issued a summons to Bitstamp,” the document details.

Zietzke believes that the Bitstamp summons infringes on his Fourth Amendment rights and that he gave the IRS all that it needs for the investigation. However, even though Judge John Coughenour noted that the audit was “overbroad,” he decided he would deny Zietzke’s petition to quash.

“Having considered the parties’ briefing and the relevant record, the court finds oral arguments unnecessary and denies the petitioner’s petition,” Coughenour said. “However, because the court finds the summons overbroad, the court orders the government to file a proposed amended summons that complies with this order. Until the court approves an amended summons, the court postpones ruling on the government’s motion to enforce,” the judge added.

Judge Coughenour Rules Cryptocurrencies Have Tax Consequences and Exchange Records Are Not Immune From Inspection

In addition to the denial, Coughenour remarked that “as with many things in life, cryptocurrency transactions have tax consequences.” Coughenour underlined that in 2014 the tax agency in the U.S. set forth its position on those consequences using IRS Notice 2014-21, 2014-16. The IRS recently updated the tax compliance guidelines for US taxpayers, but as far as capital gains are concerned “virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.” The Washington judge further said if Zietzke plans to oppose the proposed amended summons, he’s got seven days from the government’s amended actions.

“[The petitioner] may oppose the proposed amended summons only insofar as it requests information that is not relevant to the tax implications of transactions in 2016,” Coughenour declared.

The latest judgment follows the IRS sending out letters to 10,000 Americans concerning cryptocurrency use and tax implications. Following the letters, the IRS also informed the public of a new draft for the latest 1040 tax form, which is used by more than 150 million American taxpayers. The latest court case involving Bitstamp transactions also reminds crypto supporters of when Coinbase was compelled by the U.S. tax agency to provide data on 13,000 customers.

In February 2018, the well known speaker Andreas Antonopoulos tweeted that he was one of the 13,000 Coinbase users. “Received notice from Coinbase today, that my account is one of the 13,000 that they will have to turn over to the IRS under the court order,” Antonopoulos said at the time. “Not surprised, I knew I would be in that group. In case you were wondering, I’ve filed and paid taxes for my bitcoin income, gains/losses.” These broad investigations into crypto exchanges and customer data, reiterates the fact that governments have full access to global exchange trade logs by simply threatening criminal enforcement. With the Washington court judgment, Coughenour doesn’t believe Zietzke’s Fourth Amendment rights will be violated if the tax agency investigates his Bitstamp transactions.

“Because Bitstamp’s records do not implicate the privacy concerns — [William Zietzke] lacks a legitimate expectation of privacy in those records,” Coughenour concluded. “Consequently, the IRS’s request for those records does not infringe upon the petitioner’s Fourth Amendment rights.”

What do you think about the Washington judge denying the petition against the IRS audit? Let us know what you think in the comments section below.

Image credits: Shutterstock, IRS logo, Pacer case # 2:19-cv-01234, Wiki Commons, Schedule 1- 1040, Pixabay, and Fair Use.

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