06 Feb 2018
Stefan Cassella of Asset Forfeiture Law, LLC summarises a recent case in which the US tax office demands cryptocurrency exchange Coinbase hand over its customer records, however Coinbase resists.
Court upholds the IRS’s right to insist that Coinbase, an exchange that deals in virtual currency, produce the records of all customers who bought or sold more than $20,000 in bitcoin in a single transaction in a three year period.
The IRS has a legitimate interest in determining if such customers failed to report their capital gains on their federal tax returns.
United States v. Coinbase, Inc., 2017 WL 5890052 (N.D. Cal. Nov. 28, 2017).
N.D. Cal.* The Internal Revenue Service (IRS) treats virtual currencies such as bitcoin as property for tax purposes. Thus, a taxpayer who converts virtual currency into traditional currencies can have a gain or loss on the sale or exchange that has tax consequences.
To determine whether there are US taxpayers who have not been paying taxes on such transactions, the IRS sent an administrative summons to Coinbase, a San Francisco-based exchange that deals in virtual currency, seeking information regarding any US person who conducted a transaction in such currency between 2013 and 2015.
When Coinbase refused to comply with the summons, the IRS filed a petition to enforce it pursuant to Sections 7402(b) and 7604(a).
Coinbase opposed the petition, arguing that the summons was overbroad and burdensome. United States v. Coinbase, Inc., 2017 WL 30355164 (N.D. Cal. Jul. 18, 2017) (September 2017 Digest).
In response, the IRS narrowed the summons so that it applied only to persons who conducted at least one transaction involving $20,000 or more in the three-year period.
Coinbase renewed its opposition to the summons, arguing that it still called for the production of records of more than 10,000 of its customers.
But the court held that the summons, as narrowed by the IRS, “serves the IRS’s legitimate purpose of investigating Coinbase account holders who may not have paid federal taxes on their virtual currency profits.
The court focused on two questions: whether the summons served “a legitimate purpose” and whether the requested records were relevant to that purpose.
According to records produced by Coinbase and the IRS, there were 14,355 Coinbase account holders who conducted a transaction involving at least $20,000 between 2013 and 2015, yet IRS’s record showed that only between 800 and 900 taxpayers per year reported a capital gain involving the sale of bitcoin during that same period.
This “gap,” as the court described it, “suggests that many Coinbase users may not be reporting their bitcoin gains.” Thus, the IRS was on solid ground in seeking the records necessary to investigate the possible underreporting.
Whether all of the records requested by the IRS were relevant to the investigation was a different matter.
The court agreed that the IRS was entitled to records regarding the account holders’ identities and their bitcoin transactions, but it held some of the additional information that the IRS requested – including account opening records, copies of passports or driver’s licenses, and correspondence between the customers and Coinbase – would only become relevant if the IRS first determined that the customer had realized a capital gain and if there was some doubt as to the account holder’s true identity.
Accordingly, the court granted the IRS’s request to enforce the narrowed summons insofar as it requested the account holder’s name, tax ID number, birth date, address, transaction records, and account statements, but denied it as to the additional information without prejudice to the IRS’s making a supplemental request for records when and if they became relevant. SDC
Stefan Cassella, Asset Forfeiture Law, LLC
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