Full Article, Reprint From Lexology  On November 17, 2016, the Internal Revenue Service (IRS) filed a Petition for Leave to Serve a John...

IRS Sinks Subpoena Teeth into Virtual Currency as Taxable Property, Seeks Coinbase's Transaction Records - Venable LLP

Full Article, Reprint From Lexology 

On November 17, 2016, the Internal Revenue Service (IRS) filed a Petition for Leave to Serve a John Doe Summons (subpoena) on Coinbase in the in U.S. District Court for the Northern District of California. The IRS's position is that a large number of taxpayers, many of them holding Coinbase accounts, have not paid tax on gains from trading in virtual currencies, defined as property by the IRS (IR-2014-36, March 25, 2014). The subpoena requests all records of virtual currency transactions by U.S. persons from January 1, 2013 to December 31, 2015. Coinbase reports to have 4.9 million users worldwide. The petition is based on the authority granted to the IRS in 26 U.S.C. 7609(f). This allows the IRS to request a court to issue a subpoena to third parties for information relating to an unknown individual (John Doe) or unknown class of individuals. In order to prevail, the IRS must establish that: The summons relates to the investigation of a particular . . . group or class of persons; There is a reasonable basis for believing that the group may fail or may have failed to comply with "any internal revenue law"; and The information sought is not readily available from other sources. The IRS's petition is supported by a declaration by Senior Revenue Agent David Utzke that focuses on meeting each of the IRS's three burdens. The declaration is a primer on virtual currencies, how they are bought and sold, tax compliance requirements, and Coinbase. This is all before Agent Utzke explains how the John Doe summons requirements are met: The particular class of persons are "particularized from the general public" by being U.S. "persons who transacted in a convertible virtual currency"; The IRS's "reasonable basis for believing that the group may fail . . . to comply" with IRS laws is grounded on three lines of reasoning: Tax noncompliance increases in the absence of third-party information reporting, which is the case here; In Agent Utzke's experience with virtual currency in IRS cases, each taxpayer has concealed the existence of a virtual currency account; and The information and experience of the IRS "suggests that many unknown U.S. taxpayers engage in virtual currency transaction or structures." The requested materials are not readily available from other sources because, although the blockchain on which the virtual currency transactions take place is public, the blockchain does not record information that identifies the parties to the transactions. In this case, only Coinbase has that information. The petition to issue the subpoena follows the release of a report by the Treasury Inspector General for Tax Administration (TIGTA) calling for additional action to ensure taxpayer compliance with regard to virtual currencies. (TIGTA, As the Use of Virtual Currencies in Taxable Transactions Becomes More Common, Additional Actions Are Needed to Ensure Taxpayer Compliance, Reference Number 2016-30-083, Sept. 21, 2016) Coinbase has responded that it will oppose the petition in court. The statistical evidence, however, indicates that the IRS is likely to prevail...
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