US Court authorises IRS to seek user records from Coinbase bitcoin exchange

The Internal Revenue Service (IRS) has been granted the permission to serve a summons on leading bitcoin exchange Coinbase to disclose its customer records in order to investigate probable tax fraud by its users.

A federal court in the Northern District of California authorised the IRS to serve a “John Doe” summons on San Francisco-based Coinbase Inc., seeking information about U.S. taxpayers who conducted transactions in a convertible virtual currency during the years 2013 to 2015. 

In the court’s order, U.S. Magistrate Judge Jacqueline Scott Corley found a reasonable basis for believing that virtual currency users may have failed to comply with federal tax laws. 

“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.”

The IRS issued guidance regarding the tax consequences on the use of virtual currencies in IRS Notice 2014-21. It states that virtual currencies such as bitcoin that can be converted into traditional currency are property for tax purposes. However, as virtual currency transactions can be difficult to trace and have an inherently pseudo-anonymous aspect, taxpayers may use them to hide taxable income from the IRS.

“Transactions in virtual currency are taxable just like those in any other property,” said IRS Commissioner John Koskinen. “The John Doe summons is a step designed to help the IRS ensure people doing business in the emerging economy are following the tax laws and meeting their responsibilities.”

In its response to the court’s order, Coinbase issued a statement saying (quoted by CoinDesk):

“We are aware of, and expected, the court’s ex parte order today. We look forward to opposing the DOJ’s request in court after Coinbase is served with a subpoena. As we previously stated, we remain concerned with our US customers’ legitimate privacy rights in the face of the government’s sweeping request.”