On November 17, 2016, the Department of Justice filed a petition in a United States District Court in Northern California asking the court to issue a John Doe Summons to Coinbase, the largest bitcoin exchange in the U.S., asking for the records of all customers who bought virtual currency from Coinbase for the years 2013, 2014 and 2015. A copy of the petition for the John Doe Summons is here. A copy of the memorandum in support of the petition is here. A copy of the affidavit of a Senior IRS Agent in support of the petition is here . A copy of the John Doe Summons is here. The IRS Agent’s affidavit describes the examination of two corporate entities with accounts at Coinbase that admitted they had been using Bitcoin purchases as part of tax evasion plans.
In 2014, the IRS established the Virtual Currency Issue Team. In Notice 2014-21, Virtual Currency Guidance here, the IRS stated that convertible virtual currency for federal tax purposes is treated as property subject to the general tax principles that apply to property transactions and a taxpayer can have a gain or loss on the sale or exchange of a virtual currency, depending on the taxpayer’s cost to purchase the virtual currency.
On September 21, 2016, the Treasury Inspector General for Tax Administration (“TIGTA”) issued a report entitled “As the Use of Virtual Currencies in Taxable Transactions Become More Common, Additional Actions Are Needed to Ensure Taxpayer Compliance” here. The report focused on the increase use of virtual currencies and the IRS plans for addressing the tax issues surrounding virtual currencies. In particular, TIGTA was concerned with the likelihood of the use of virtual currencies in illegal transactions.
The IRS has successfully used John Doe Summonses to obtain information from foreign banks and other entities that led to the IRS Offshore Voluntary Disclosure Initiative and numerous civil and criminal cases. We will have to stay tuned to see if the use of a John Doe Summons will have a similar impact on the virtual currency industry.
My partner, Josh Ungerman, was recently quoted in an article in Tax Notes on this same subject matter. The title of the article is "DOJ Seeks John Doe Summons on Largest U.S. Bitcoin Exchanger."