Bad news for patriotic Americans who want to keep their bitcoin business to themselves this week from the Department of Justice:
A federal court in the Northern District of California entered an order today authorizing the Internal Revenue Service (IRS) to serve a John Doe summons on Coinbase Inc., seeking information about U.S. taxpayers who conducted transactions in a convertible virtual currency during the years 2013 to 2015. The IRS is seeking the records of Americans who engaged in business with or through Coinbase, a virtual currency exchanger headquartered in San Francisco, California.
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"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 court's order grants the IRS permission to serve what is known as a "John Doe" summons on Coinbase. There is no allegation in this suit that Coinbase has engaged in any wrongdoing in connection with its virtual currency exchange business. Rather, the IRS uses John Doe summonses to obtain information about possible violations of internal revenue laws by individuals whose identities are unknown. This John Doe summons directs Coinbase to produce records identifying U.S. taxpayers who have used its services, along with other documents relating to their virtual currency transactions.
The actual order from U.S. District Court for the Northern District of California.
Account/wallet/vault registration records for each account/wallet/vault owned or controlled by the user during the period stated above including, but not limited to, complete user profile, history of changes to user profile from account inception, complete user preferences, complete user security settings and history (including confirmed devices and account activity), complete user payment methods, and any other information related to the funding sources for the account/wallet/vault, regardless of date.
A Coinbase spokesman via email said earlier this week when the DOJ announcement was issued:
Although Coinbase's general practice is to cooperate with properly targeted law enforcement inquiries, we are extremely concerned with the indiscriminate breadth of the government's request. Our customers' privacy rights are important to us and our legal team is in the process of examining the government's petition. In its current form, we will oppose the government's petition in court…..
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 U.S. customers' legitimate privacy rights in the face of the government's sweeping request.
Equally shocking is the weak foundation for making this demand. In a declaration submitted to the court, an IRS agent recounts having learned of tax evasion on the part of one Bitcoin user and two companies. On this basis, he and the IRS claim "a reasonable basis for believing" that all U.S. Coinbase users "may fail or may have failed to comply" with the internal revenue laws.
If that evidence is enough to create a reasonable basis to believe that all Bitcoin users evade taxes, the IRS is entitled to access the records of everyone who uses paper money.
Anecdotes and online bragodaccio about tax avoidance are not a reasonable basis to believe that all Coinbase users are tax cheats whose financial lives should be opened to IRS investigators and the hackers looking over their shoulders. There must be some specific information about particular users, or else the IRS is seeking a general warrant, which the Fourth Amendment denies it the power to do.
Unfortunately, the District Court disagreed with Harper's sensible Fourth Amendment view.
My reporting from back in April 2014 when the IRS first declared that bitcoin is property whose sale creates potential tax liabilities, setting the inevitable stage for something like this. As I wrote then, if you keep your bitcoin use totally in the digital alt-coin world, very hard for the taxman to find you. But as soon as you try to interface with turning them into U.S. currency, certainly through a trying-to-be legitimate business, things will get trickier. (Some thoughts from Bitcoin expert Andreas Antonopoulos on the intersection of bitcoin and "know your customer" banking regs.)
As far as I've been able to ascertain, backed up by experts in the bitcoin exchange space I spoke to, this is the first time the government has tried this particular summons trick on an exchange to root out possible bitcoin tax scofflaws.
