Last year the IRS issued a “John Doe” summons on all U.S. Coinbase customers who had used convertible virtual currency between 2013 and 2015. Coinbase’s challenge to the summons has failed in part and succeeded in part – a federal court judge recently ordered Coinbase to release information about Coinbase accountholders, but that order applies only to those who bought, sold, sent, or received cryptocurrency valued at $20,000 or more during the 2013-2015 period.
Why the summons?
Investigations into Coinbase began when the IRS discovered that despite boasting nearly 6 million customers, only 800-900 people had reported gains and losses from digital currency holdings on their federal income tax returns). Thereafter, a court fight commenced in which the IRS demanded the personal information of more than a million Coinbase customers, and details on nearly 9 million cryptocurrency transactions.
Eight months later, the IRS filed a “Notice of Narrowed Summons Request for Enforcement” (“Narrowed Summons”), which narrowed the scope of the request to the 2013-2015 tax years and to transactions of $20,000 or more. Coinbase has indicated that the Narrowed Summons covers an estimated 14,355 Coinbase accountholders and 8.9 million transactions.
The ruling and its implications
On November 29, 2017, the court held that the Powell factors used to determine whether the IRS had “good faith” in requesting the summons had been met: (1) the summons was issued for a legitimate purpose (2) it seeks information relevant to that purpose, (3) the information requested is not already in the possession of the IRS, and (4) the administrative steps set forth in the Internal Revenue Code had been satisfied.
The court held that the large discrepancy between Coinbase accounts and tax records was sufficient to establish that the IRS had a “legitimate purpose” in the requested information. The court did, however, narrow the scope of the records that the IRS could review to the Coinbase accountholders’:
- Taxpayer ID number;
- Transaction logs and other account records that identify the “date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction”; and
- All account statements or invoices.
From 2012-2015 alone, bitcoin (the most popular among many digital currencies on the market) went from $13 to $1,110 and recently made headlines when its price exceeded $11,000 for the first time.
Tax assistance for digital currency users
This case marks the beginning of what is likely to be a sustained IRS effort to ensure that cryptocurrency users pay their taxes. If you are a Coinbase accountholder whose investments in digital currency fall within the scope of this court order, or otherwise use bitcoin (or another cryptocurrency) and want to make certain that you are in compliance with tax laws and regulations, contact the full service tax firm at Moskowitz, LLP today.