In an Order dated 28th November 2017 in United States v Coinbase Inc (Case number 17-cv-01431-JSC in the US District Court for the Northern District of California), United States Magistrate Judge Jacqueline Scott Corley ordered Coinbase to produce specified documents for accounts with at least US$20,000 in any one transaction in any one year during the 2013 to 2015 period. The documents were to contain the taxpayer ID number; name; birth date; address; records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction; and all periodic statements of account or invoices (or the equivalent). A report of the judgment can be found here.
This was a partial success for the IRS. By a summons, it was seeking records regarding nearly all of Coinbase’s customers for a several year period but, after the Court had heard argument on motions against the summons, the IRS narrowed the scope of the summons so that it applied to far fewer, but still more than 10,000 customers. The narrowed summons served “the IRS’s legitimate purpose of investigating Coinbase account holders who may not have paid federal taxes on their virtual currency profits”. The Magistrate Judge said (on page 6):
“Coinbase is the largest U.S. exchange of bitcoin into dollars with at least 5.9 [million] customers served and 6 billion in transactions while only 800 to 900 taxpayers a year have electronically filed returns with a property description related to bitcoin from 2013 through 2015. This discrepancy creates an inference that more Coinbase users are trading bitcoin than reporting gains on their tax returns.”
As well as the information ordered, the IRS sought further information, including “account opening records, copies of passports or driver’s licenses, all wallet addresses, all public keys for all accounts/wallets/vaults, records of Know-Your-Customer diligence, agreements or instructions granting a third-party access, control, or transaction approval authority, and correspondence between Coinbase and the account holder”. To the court, this was broader than necessary:
‘The first question for the IRS is whether an account holder had a taxable gain. If the account holder did not, then correspondence between Coinbase and a user is not even potentially relevant. Similarly, while the Government needs an account holder’s name, date of birth, taxpayer identification and address to determine if a taxable gain was reported, it only needs additional identity information such as copies of passports and driver’ licenses or “Know Your Customer” due diligence if there is potentially a taxable gain and if there is some doubt as to the taxpayer’s identity. If there is not, these additional records will not shed any light on a legitimate investigation.’ (page 10)
On 23rd February 2018, Coinbase announced that it had notified around 13,000 customer regarding the IRS summons.