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The Ongoing Conflict Over Bitcoin And John Doe Summonses

People are still talking about a November 2016 decision that upheld an incredibly broad Bitcoin subpoena.

In the decision, Northern California Magistrate Judge Jacqueline Scott Corley issued a John Doe summons targeting Coinbase Inc. The IRS directed the Bitcoin exchange to turn over all its records covering all its customers between 2013 and 2015. Although the Service regularly uses John Doe summonses to obtain information from taxpayers who may have violated U.S. laws, this case may be the first time that IRS agents used this tool to extract information from Bitcoin holders. IRS Commissioner John Koskinen has declared that Bitcoin transactions “are taxable just like those in any other property,” but no federal court has ruled on the question.

Coinbase objected to the request, because “the IRS offered only the slimmest of support for their expansive request.” A Bitcoin account holder filed a motion to intervene, citing similar grounds. It looked as if there would be a battle royale at a scheduled March hearing, but the IRS at least somewhat backed off its request and both intervenors withdrew their motions.

About 150 million taxpayers a year file their returns electronically, and in 2015, only 802 of these taxpayers reported a transaction on Form 8949 (the Bitcoin form).

John Doe Summonses

To issue summonses against unnamed individuals during a tax investigation, the bar is very low. Pursuant to Internal Revenue Code 7609, the IRS must only show that the:

  • Summons is relevant to an ongoing investigation of any ascertainable group of people,
  • IRS has a “reasonable basis” to suspect that said group has engaged in tax fraud, and
  • Information sought is not “readily obtainable” from any other source.

In this case, the identifiable group was Bitcoin account holders, the reasonable basis was the aforementioned dearth of report forms, and as for readily obtainable, well, the IRS basically just said it couldn’t get the information elsewhere.

Whereas the Service can issue regular summonses sua sponte, federal courts must approve John Doe summonses. That extra step not only prevents overzealous auditors from requesting broad swaths of data from taxpayers, but also gives intervenors (so named because they are not parties to the original subpoena) a somewhat more neutral forum to contest these actions.

Many observers have harshly criticized this practice, especially when the summons covers as much information as the Coinstar matter. But unless Congress modifies the procedure when it debates tax code rewrites this fall, and that prospect is unlikely, John Doe summonses are here to stay.

Bitcoin Issues

In 2013, Bitcoin quite literally had no value at all. Despite a brief spike in 2014, prices remained pretty much the same until late 2016, when they began to rise. Prices skyrocketed in the first half of 2017, and as of August 1, each Bitcoin was worth nearly $2,900. So, it is little wonder that the IRS has suddenly become very interested in the virtual currency.

While most people consider Bitcoin to be currency, especially if it is stored in a digital wallet, the IRS classifies Bitcoin as property. In 2014, the IRS explicitly stated that it did not consider Bitcoin to be reportable under FBAR. However, due to the limited nature of this pronouncement and the Service’s aggressive stance in the Coinstar matter, that attitude may be changing.

Since Bitcoin is property according to the IRS, holdings are subject to the Capital Gains tax. And unlike the prospects for John Doe summonses, there is a fairly good chance Republicans will lower the Capital Gains tax, which is currently 15 percent for most tax brackets.

Given the uncertain and shifting landscape in this area, Bitcoin holders should consult with tax attorneys as opposed to accountants, because conversations with accountants are not privileged.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.