Last week we reported, that in an unprecedented attempt to breach the personal privacy of users of the largest bitcoin exchange in the US, Coinbase, the IRS filed papers seeking a judicial order to serve a so-called “John Doe” summons on the San Francisco-based Bitcoin platform.
The government’s request was part of a bitcoin tax-evasion probe, and seeks to identify all Coinbase users in the U.S. who “conducted transactions in a convertible virtual currency” from 2013 to 2015. What makes a “John Doe” unique, is that it represents a special "shotgun" form of summons to look for tax evaders that allows the IRS to obtain information about all taxpayers in a group or class of people, even if the agency doesn’t know their identities. The IRS has deployed the tactic in its recent crackdown on undeclared offshore accounts, with the implication that any such broad sweep may lead to prosecution.
Coinbase executives were "extremely concerned" and vowed to oppose the government's petition in court.
Our customers may be aware that the U.S. government filed a civil petition yesterday in federal court seeking disclosure of all Coinbase U.S. customers’ records over a three year period. The government has not alleged any wrongdoing on the part of Coinbase and its petition is predicated on sweeping statements that taxpayers may use virtual currency to evade taxes.
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. Our customers’ privacy rights are important to us and our legal team is in the process of examining the government’s petition. In its current form, we will oppose the government’s petition in court.
Coinbase head legal counsel, Juan Suarez, said that "we want to work with law enforcement — that's generally our policy," . "But we can't tolerate sweeping fishing expeditions. We are very concerned about the financial privacy rights of our customers."
We concluded our report by wishing "Good luck to Coinbase fighting the IRS: if America's tax collector is intent on getting the identities of the biggest traders are in America's largest bitcoin exchange, it will certainly succeed (especially if they happen to be conservatives)."
Alas, our best wishes were not enough, and yesterday a federal court in the Northern District of California ordered Coinbase to disclose what the IRS has demanded: all American user transactions from 2013 to 2015.
From the authorization:
A federal court in the Northern District of California entered an order today authorizing the Internal Revenue Service (IRS) to serve a John Doe summons on Coinbase Inc., seeking information about U.S. taxpayers who conducted transactions in a convertible virtual currency during the years 2013 to 2015. The IRS is seeking the records of Americans who engaged in business with or through Coinbase, a virtual currency exchanger headquartered in San Francisco, California.
“As the use of virtual currencies has grown exponentially, some have raised questions about tax compliance,” said Principal Deputy Assistant Attorney General Caroline D. Ciraolo, head of the Justice Department’s Tax Division. “Tools like the John Doe summons authorized today send the clear message to U.S. taxpayers that whatever form of currency they use – bitcoin or traditional dollars and cents – we will work to ensure that they are fully reporting their income and paying their fair share of taxes.”
Virtual currency, as generally defined, is a digital representation of value that functions in the same manner as a country’s traditional currency. There are nearly a thousand virtual currencies, but the most widely known and largest is bitcoin. Because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, taxpayers may be using them to hide taxable income from the IRS. In the court’s order, U.S. Magistrate Judge Jacqueline Scott Corley found that there is a reasonable basis for believing that virtual currency users may have failed to comply with federal tax laws.
One paragraph that will likely get particular scrutiny now that virtually any Bitcoin transaction in the US is open to IRS scrutiny is the following:
The IRS has issued guidance regarding the tax consequences on the use of virtual currencies in IRS Notice 2014-21, which provides that virtual currencies that can be converted into traditional currency are property for tax purposes, and a taxpayer can have a gain or loss on the sale or exchange of a virtual currency, depending on the taxpayer’s cost to purchase the virtual currency (that is, the taxpayer’s tax basis).
The order concludes by saying that the court’s order "grants the IRS permission to serve what is known as a “John Doe” summons on Coinbase. There is no allegation in this suit that Coinbase has engaged in any wrongdoing in connection with its virtual currency exchange business. Rather, the IRS uses John Doe summonses to obtain information about possible violations of internal revenue laws by individuals whose identities are unknown. This John Doe summons directs Coinbase to produce records identifying U.S. taxpayers who have used its services, along with other documents relating to their virtual currency transactions."
Despite the order, Coinbase has vowed to continue the fight: "We look forward to opposing the DOJ's request in court after Coinbase is served with a subpoena," a spokesman for the San Francisco-based company said in an email to Reuters.
Coinbase remains concerned with its U.S. customers' privacy rights in the face of the government's request, he added, although he is likely far less concerned than any people who used Coinbase from 2013 to 2015, and who may soon be getting a visit from the taxman, even if they have done nothing illegal. As for the myth that trading bitcoin by ordinary Americans provides some additional layer of privacy, that is about to be thoroughly debunked.
The executed DOJ order is below (link).