Coinbase is a San Francisco-based cryptocurrency exchange company that operates bitcoin and other digital asset transactions and storage for over one million users in 190 countries.
This past November, a “John Doe” summons was issued on all U.S. Coinbase customers who utilized convertible virtual currency between 2013 and 2015. A “John Doe” summons is issued when the IRS cannot specifically identify an individual but knows that they may be ascertained by virtue of their activities.
Justification for the Summons
The Department of Justice’s justification for issuing the summons on behalf of the IRS is the agency’s need to:
- Identify Coinbase users and whether or not they are U.S. persons
- Determine whether or not they used an alias or nominee, or employed another tactic to disguise their identity after the initial account setup
- Gather information on their transaction activity
- Identify sources of funds that may have been undisclosed for tax purposes, and
- Determine the correct U.S. federal tax liability of Coinbase users.
Note that the IRS has broad authority to request this data under 26 U.S. Code § 7602, in order to determine the tax liability of U.S. persons. However, as we will discuss in Part II, challenges are being made claiming that the scope of the information requested in this particular summons is too broad.
Scope of the summons
To accomplish its objectives, the IRS is demanding that Coinbase provide it with the following information:
- Account/wallet/vault registration, aka account records for every account owned or controlled by the Coinbase user, and their complete user profile
- History of changes to the user profile from the time of the account’s inception
- User preferences, user history and security settings, including confirmed devices utilized
- Records associated with Coinbase’s “Know-Your-Customer” (KYC) compliance program, which has in itself been criticized by some users as an invasion of privacy
- Powers of attorney, corporate minutes, and other agreements or instructions given by Coinbase users that provide third party access and/or control over their account
- Records of account activity, including transaction logs and other records that reflect the particulars of a transaction such as dates, amounts, type of transaction, account balances, bitcoin purchases and sales, and names of counterparties
- List of all merchants for which Coinbase acts as Payment Service Provider, including records identifying the user of the wallet charged for every payment that has been processed by that merchant
- Copies of all correspondence between Coinbase and its users, including any third party with access to the user’s account
- Periodic statements of accounts or invoices, or the equivalent
- Records of payments to and from the Coinbase account user, and
- All exception reports produced by Coinbase’s Anti-Money Laundering (AML) System and all records related to investigations of those reports.
In Part II, we will discuss a Coinbase user’s recent challenge to this summons and Coinbase’s public explanation for its refusal to comply.