In an order dated November 28, 2017, a U.S. federal magistrate judge ordered cryptocurrency exchange Coinbase to turn over certain limited identifying information on 14,355 of their account holders to the U.S. Internal Revenue Service (IRS). This is the latest move in a case that began in 2016 when the IRS issued a so-called “John Doe” summons to Coinbase for a wide range of information on all U.S. Coinbase customers.

A “John Doe” Summons does not identify the person with respect to whose liability the summons is issued. As we have previously written, the stated purpose of the summons was to determine whether Coinbase customers were accurately reporting their taxable gains on bitcoin transactions to the IRS. The IRS views virtual currency as property and thus its sale is subject to capital gains tax. The IRS had analyzed electronic tax returns and found that only 800 to 900 taxpayers had reported bitcoin gains for the 2013-2015 tax years.

After some Coinbase customers filed motions in court objecting to the disclosure, the IRS decreased the scope of the summons to information on customers who had bought, sold, sent, or received at least $20,000 of bitcoins in any one year for calendar years 2013 through 2015. When Coinbase refused to comply with the summons, the IRS moved to enforce the summons.

In order to have the summons enforced, the IRS had to establish that the summons:

  1. Was issued for a legitimate purpose;
  2. Seeks information relevant to that purpose;
  3. Seeks information not already in the possession of the IRS; and
  4. Satisfies all the administrative steps set forth in the Internal Revenue Code

There was no dispute that the IRS had met the third and fourth elements. The court found that the IRS also met the first element through its demonstrated discrepancy between the number of U.S. taxpayers that had filed bitcoin losses or gains (800-900 each year) and the number of Coinbase customers (more than 14,000), plus the declaration from IRS agent David Utzke who described the reason for issuance of the summons, which was because of the concern of the IRS that virtual currency gains were being underreported.

With respect to the second item, the court ruling was mixed. The court found that the following information would “permit the Government to investigate whether the holder had taxable gains that were not properly declared:”

  • Taxpayer ID number
  • Name
  • Birth date
  • Address
  • Records of certain account activity
  • All periodic statements of account or invoices

Coinbase must supply this information for each of its U.S. customers who had engaged in at least $20,000 in bitcoin transactions (buy, sell, send, or receive) in one year during calendar years 2013 to 2015.

On the other hand, the court denied as overbroad the IRS summons for all of the following information:

  •  Account opening records
  • Copies of passports or driver’s license
  • All wallet addresses
  • Public keys for all accounts/wallets/vaults
  • Records of Know Your Customer due diligence
  • Agreements or instructions granting third party access or control or transaction approval authority
  • Correspondence between Coinbase and the account holder

The court felt that this information was not necessary at this time. Instead, if the IRS could determine that the account holder had a taxable gain, then some of this information might be relevant “if there was some doubt as to the taxpayer’s identity” (emphasis in original). In that case, the court pointed out, the IRS could issue a new summons directly to the taxpayer(s) “a process preferable to a John Doe summons.”

It has not yet been determined whether Coinbase will appeal the ruling.

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