US Court grants IRS request for 'John Doe' disclosure order against Bitcoin users
Thursday, 1 December, 2016
A San Francisco court has granted the US Internal Revenue Service (IRS) a court order against the virtual currency exchange Coinbase, requiring it to identify all its US customers and disclose their transaction records.
Issue of anonymity of ownership
Virtual currencies – of which Bitcoin is by far the most widely used – are computer records that act as an encrypted digital store of value. In the US and some other jurisdictions, virtual currency transactions are deemed to be taxable in the same way as those in any other kind of property (see IRS Notice 2014-21, sourced below). However, the tax authorities are monitoring them closely because ownership of virtual currencies can be difficult to trace. They have 'an inherently pseudo-anonymous aspect', says the IRS, which believes taxpayers use them to hide taxable income or launder illicit funds.
This anonymity creates a problem for the IRS in that it cannot issue disclosure orders against unnamed individuals. Its solution to the problem – not unique to Bitcoin – is to apply for a so-called John Doe order against a financial institution. If granted, this order requires the institution to reveal all records of transactions conducted by US taxpayers, even though the latter's identities are unknown.
Demonstrable evidence of wrongdoing
To obtain the order against Coinbase, the IRS had to demonstrate that it had evidence of wrongdoing. It argued before the Northern California federal court that there is a 'reasonable basis' for believing that virtual currency users may have failed to comply with federal tax laws.
The judge, Jacqueline Scott Corley, agreed and granted the order – which applies to all transactions conducted during the years 2013 to 2015 – although there is no evidence that Coinbase itself has broken any laws. The company did however contest the order to protect its customers' privacy.
A precedent has now been set, and it is likely that the IRS will apply for more such orders. 'As the use of virtual currencies has grown exponentially, some have raised questions about tax compliance', said Caroline Ciraolo, of the US Justice Department's tax division. 'Tools like the John Doe summons send the clear message to US taxpayers that, whatever form of currency they use, we will work to ensure that they are fully reporting their income and paying their fair share of taxes.'