Brian Armstrong, co-founder and CEO of digital currency exchange Coinbase, has penned down a blog post discussing the ongoing tussle with the Internal Revenue Service (IRS) and possible options to achieve the common goal of tax compliance.



Armstrong said that Coinbase has invested heavily in compliance, adding that tax policy is no exception. He said that the company began filing 1099s (provides a simple summary of gains or losses on trading activity, instead of full transaction records, transcripts with customer support, IP addresses, etc.) for merchants who accept digital currency through Coinbase, responded to numerous subpoenas for specific cases, and even proactively created a cost basis report for its customers to assist them in reporting their taxes.



“Their [IRS] most recent subpoena asks us to turn over records on all customers (including transaction history, IP addresses, transcripts with customer support, etc). Suffice to say, we feel the IRS’s subpoena is overly broad and incorrectly implies that all users of virtual currency are evading taxes”, Armstrong said.



He said that both Coinbase and the IRS ultimately want that all U.S. users of virtual currency should pay their taxes. However, Armstrong said that sending a John Doe summons on all customer accounts is not the best way mutually accomplish this objective.



Armstrong said that a good option to achieve this objective would be to use the same third party reporting mechanism that brokerage firms like Fidelity and Charles Schwab use today: the 1099-B form.



“We’d ideally like to see that structure applied evenly to all companies in the industry, but even if we’re required to go first, we’re ready to implement 1099-B reporting”, he said.



However, as the IRS guidance that treats virtual currency as property, Armstrong said that it may make the 1099 reporting inefficient. For tax purposes, gains on property do not have a de minimis exemption like currency, he explained, adding:



“This would mean that even the sale of a small amount of digital currency (say to purchase a cup of coffee) would generate a 1099 form. A de minimis exemption could be introduced to eliminate the long tail of paperwork. Alternatively, virtual currency could be treated as an actual currency for tax purposes (which already has a de minimis exemption built in). This would be a nice optimization of the reporting process.”



Armstrong said that Coinbase will be forced to contest the overly broad subpoena in court to protect customers’ privacy. He said:



“We will likely incur a legal cost of between $100,000 and $1,000,000 in the process of defending our customers from this overly broad subpoena; funds which could be put to better use building innovative products or hiring more employees…I believe this is one of those situations that could have been resolved with a phone call instead of a subpoena, given our amicable interactions with the IRS in the past. My hope is that we can move toward that type of relationship in the future.”