It’s finally happening: The much-ballyhooed turnover of documents in the battle between the Internal Revenue Service (IRS) and Coinbase, a company which facilitates transactions of digital currencies like Bitcoin and Ethereum, is moving ahead. Coinbase has announced that it has notified affected customers that it will comply with a court order regarding the release of specific data.
In a post about the news, the company wrote:
On February 23rd, 2018, Coinbase notified a group of approximately 13,000 customers concerning a summons from the IRS regarding their Coinbase accounts.
The notice then directed readers to the Order. The case, United States v. Coinbase, Inc. (3:17-cv-01431-JSC), was assigned to Magistrate Judge Jacqueline Scott Corley in the U.S. District Court, California Northern District (San Francisco). You can read the Order in the case here.
The company also advised:
While Coinbase is unable to provide legal or tax advice, please refer to our Taxes FAQ for more information on taxes and digital currency.
The case began in November of 2016 with a request filed on behalf of the IRS to serve a “John Doe” summons on all United States Coinbase customers who transferred Bitcoin, a convertible virtual currency, from 2013 to 2015. A “John Doe” summons is an order that does not specifically identify the person but rather identifies a person or ascertainable group or class through their activities. The IRS argued that the “John Doe” summons was necessary because they had found evidence of noncompliance and underreporting among Coinbase customers – the agency just couldn’t identify the exact identities and scale of the problem without more information. The IRS was initially seeking all records, including third party information, related to Bitcoin transactions conducted by U.S. Coinbase customers over the 2013 to 2015 time period.
The initial request was granted and in response, Coinbase customer and attorney, Jeffrey K. Berns, filed a motion seeking both to intervene and to put aside the summons. The IRS responded with a motion asking the court to deny Berns the right to intervene. The IRS argued, in part, that since Berns had “outed” himself as a Coinbase customer, he was no longer subject to the summons, making the motion moot. Eventually, Berns withdrew his motion to intervene, and in March of 2017, the IRS filed a new action seeking to enforce the summons on Coinbase.
Coinbase also opposed the summons. However, in its defense of the subpoena, the IRS argued that:
There has been an explosion of billions of dollars of wealth in just a few years from bitcoin, a significant amount of which has no doubt accrued to United States taxpayers, with virtually no third-party reporting to the IRS of that increase in income.
The IRS argued that some users of cryptocurrency “have openly acknowledged they consider using bitcoin in order to avoid tax reporting requirements.” The IRS further alleged that “only 800 to 900 taxpayers reported gains related to bitcoin in each of the relevant years” while “more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year.” That, the court wrote, “suggests that many Coinbase users may not be reporting their bitcoin gains.”
The IRS argued that it had “a legitimate interest in investigating these taxpayers.” The Court agreed, though it did find the initial request overbroad. The IRS had sought extensive records on all U.S. Coinbase customers who transferred convertible virtual currency at any time between December 31, 2013, and December 31, 2015. In its November Order, however, the Court ruled that Coinbase must only produce the following documents for accounts with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013 to 2015 period:
- taxpayer ID,
- birth date,
- records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and
- all periodic statements of account or invoices (or the equivalent).
That appears to be the data that Coinbase will now release. An email to Coinbase seeking comment was not returned.
Is this the end of the story? Hardly. Since the case was filed, I’ve noted the similarities between the IRS focus on cryptocurrency and its prior targeting of offshore accounts. Investigations into offshore accounts began with subpoenas to financial institutions and eventually became a full-fledged IRS compliance initiative. In 2014, then-IRS Commissioner John Koskinen issued a statement, warning:
We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late…
When it comes to crypto reporting, I don’t expect any different result.