Challenge and Counter-Proposal

In Part I, we outlined the scope of the November 2016 summons served on Coinbase to identify its users and their transaction activity and the IRS’ justification for requesting this data under 26 U.S. Code § 7602. Section 7602 also provides, however, that any person who is entitled to notice of the summons may challenge it. Note that a taxpayer has a heavy burden to establish the illegality of a summons.

First challenge to the summons

One such challenge to the summons has already been made by a Coinbase user on the grounds that it is overbroad. The IRS has since claimed that the challenger, Jeffrey K. Berns, was no longer subject to its “John Doe” summons because he had revealed his identity. In his answer, Berns’ claimed that the IRS was trying to artificially moot the motion instead of defending an improper summons.

Coinbase’s response and counter-proposal

On January 14, 2017, Brian Armstrong, Co-Founder and CEO of Coinbase, Inc., posted an explanation of the company’s refusal to comply with the summons. In that explanation, Armstrong discusses Coinbase’s ongoing commitment to ensuring tax compliance, but without compromising the privacy of its customers. Armstrong argued that compliance is “key to digital currency’s success” and that although Coinbase has complied with other IRS summonses and strives “to comply with all IRS guidance,” the scope of this particular summons “is overly broad and incorrectly implies that all users of virtual currency are evading taxes.”

Armstrong suggests that the IRS should instead require virtual currency companies like Coinbase to issue Forms 1099-B, Proceeds from Broker and Barter Exchange Transactions. He also states that Coinbase is willing to be the first to implement such procedures in order to facilitate tax compliance while still protecting the privacy of virtual currency users. In addition, Armstrong points out that the IRS might wish to revisit its position on the taxation of virtual currency transactions and either treat the exchange like currency instead of property, or provide a de minimis exemption for transactions involving small amounts of digital currency.

California tax attorneys

The tax team at Moskowitz, LLP regularly defends individuals and businesses in tax controversy matters, white collar crime and regulatory issues. Contact our San Francisco office for a consultation.