US government wants to bring cryptocurrency out of the shadows

The anonymity of cryptocurrency makes it a headache for governments, who worry the currency is being used for drug dealing, money-laundering or tax evasion.

A US government request to trawl through the personal data of millions of users of the cryptocurrency exchange Coinbase signals the start of an effort to pull digital currencies like bitcoin into the mainstream, experts have said.

Cryptocurrencies – digital assets which exist entirely online but are exchangeable for goods or services – have grown in popularity in recent years, in part because they grant a degree of user anonymity.

But user confidentiality has also caused headaches for governments, who worry the currencies are being used for drug dealing, money laundering or tax evasion.

Digital currencies are currently taxed as an asset like gold, with capital gains tax due when there is an appreciation in value.

BitcoinIn documentation supporting its petition, the IRS referred to three anonymous cases of taxpayers who had used virtual currencies to evade tax, two of which were corporate entities with annual revenues of several million dollars which used Coinbase wallets and concealed bitcoin transactions as technology expenses on their tax returns.

Several experts in cryptocurrency said that the IRS was on a “fishing expedition”, and pointed out that it followed an excoriating report by the US treasury’s inspector-general for taxation which said the IRS was not doing enough to regulate and investigate cryptocurrencies.

“The government has no idea that anybody has committed a crime,” said Jerry Brito, the executive director of Coin Center, a lobbying and research group focused on cryptocurrencies.

In a statement, Coinbase said: “Although Coinbase’s general practice is to cooperate with properly targeted law enforcement inquiries, we are extremely concerned with the indiscriminate breadth of the government’s request.”

It added: “In its current form, we will oppose the government’s petition in court.”

Some experts, though dismayed by what they saw as the overly broad and invasive nature of the request, said that more government scrutiny on cryptocurrencies was inevitable as they became more mainstream.

“It’s an indication of bitcoin’s growing adoption,” said Chris Burniske, an analyst at ARK Investment Management who focuses on bitcoin.

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