Court Grants Some of IRS's Request to Obtain Customer Information from Bitcoin Exchange

The IRS was granted the right to receive some, but not all, of the information it wished to see related to customers of a bitcoin exchange (United States v. Coinbase Inc. USDC ND California, Case No. 3:17-cv-01431), though not on all customers of the exchange.

The IRS had been originally seeking information on all U.S. customers of the exchange, but the agency had already revised their request to exclude any account with less than $20,000 in one transaction type (buy, sell or receive) during any one year between 2013-2015 and also excluding any customer that had only purchased bitcoin or customers for which Coinbase had issued a Form 1099K.  The IRS also had requested detailed information on each customer, including know your customer due diligence, agreements granting a third party access to the account and correspondence between Coinbase and any party relating to a specific account.

The Court found that the IRS did not have a right to those three specific items, but otherwise found that the IRS’s subpoena otherwise would be enforced.  Thus the court ordered Coinbase to produce the following for the IRS:

Coinbase is ORDERED to produce the following documents for accounts with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013 to 2015 period:

(1) the taxpayer ID number,

(2) name,

(3) birth date,

(3) address,

(4) 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

(5) all periodic statements of account or invoices (or the equivalent).

The opinion notes the reasons the IRS is interested in this data:

The IRS believes that virtual currency gains are underreported. In particular, approximately 83 to 84 percent of taxpayers file returns electronically which are maintained in various databases including the Modernized Tax Return Data Base (“MTRDB”). (Id. ¶¶ 11-12.) Capital gain or loss for property transactions, including those from virtual currency, is reported on IRS Form 8949, which is attached to Schedule D of a Form 1040. (Id. ¶ 11.) Form 8949 includes a space where the taxpayer is asked to report the type of property sold. (Id.) Based upon an IRS search, only 800 to 900 persons electronically filed a Form 8949 that included a property description that is “likely related to bitcoin” in each of the years 2013 through 2015. (Id. ¶ 13.)

The IRS had previously outlined its position for reporting gains/losses in bitcoin in Notice 2014-21.