The IRS has been authorized by the federal court of the Northern District of California to serve a “John Doe” summons on Coinbase Inc. Coinbase operates exchanges of bitcoin -- a virtual or crypto-currency -- as well as other digital assets, and electronic storage in 190 countries. The IRS is seeking information on American taxpayers who have conducted transactions in virtual currency during the years 2013 to 2015. Coinbase has its headquarters in San Francisco.
Principal Deputy Assistant Attorney General Caroline D. Ciraolo of the Department of Justice said, according to a DOJ release, “As the use of virtual currencies has grown exponentially, some have raised questions about tax compliance.” She said that the filing is intended to send a “clear message” to taxpayers that the IRS intends to find how much income they have earned and whether they are paying enough in taxes.
Controversial IRS Commissioner John Koskinen said of the development, “Transactions in virtual currency are taxable just like those in any other property.” Koskinen has appeared several times before Congress since 2012 concerning allegations that the agency under his direction targetted conservative organizations in advance of the general election.
The release from the IRS defined virtual currency as a digital representation of value that functions in the same manner as a country’s traditional currency. “Because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, taxpayers may be using them to hide taxable income from the IRS.” According to the release, Magistrate Judge Jacqueline Scott Corley found that there is a reasonable basis for believing that virtual currency users may have failed to comply with federal tax laws.
The IRS declares that virtual currencies that "can be converted into traditional currency are considered to be property for tax purposes, 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 (that is, the taxpayer’s tax basis)."
Even though the court order gives the IRS permission to serve 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. The IRS is using the John Doe summonses to obtain information about possible violations of internal revenue laws by individuals whose identities are unknown.