Insights: Article

Bitcoin Exchanger Receives Summons

December 02, 2016

In a petition filed November 17, 2016, with the U.S. District Court for the Northern District of California, the U.S. Department of Justice (DOJ) asked the court for a John Doe summons to be issued on bitcoin exchanger Coinbase Inc.

The John Doe summons would require Coinbase Inc., the largest bitcoin exchanger in the U.S., to provide the DOJ with information related to all bitcoin transactions it processed between 2013 and 2015. The DOJ would then share the information received with the Internal Revenue Service to be matched against filed tax returns. The IRS would be looking for bitcoin transactions that have the potential for successful criminal investigation and prosecution.

Potential for Tax Evasion
The IRS has previously stated a position that virtual currency transactions, such as bitcoin, are property on which gain can be realized. The IRS also believes bitcoin transactions provide an opportunity for tax evasion. In fact, according to the IRS, the potential for tax evasion is enhanced via bitcoin transactions, "because there is no third-party reporting of virtual currency transactions for tax purposes ... and the likelihood of underreporting is significant."

The petition request by the DOJ is broader than might usually be granted by the court, and will be resisted vigorously by Coinbase Inc. to protect its user base. But, precedent may be available to the DOJ by looking back to the years when bartering transactions were being introduced.

Take Action
Anyone engaging in bitcoin transactions, particularly those transactions utilizing the exchange services of Coinbase Inc. during the 2013 to 2015 time frame, should take note of the DOJ summons. Reuters reported that Coinbase Inc. acknowledged on November 18, 2016, that a summons for information on its users from the IRS had been received.

If there are any bitcoin transactions that may be of concern, now is the time to take action to review such transactions with your tax advisor. If a reporting issue may exist, voluntary disclosure should be considered. As was found in the IRS investigation of off-shore financial accounts, once the DOJ or IRS gets the names from Coinbase Inc., from either their original petition or as modified to limit the scope, the agencies will likely be much less agreeable to negotiations.

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