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U.S. v. Coinbase: Virtual Currency Holders Not Outside the IRS's Reach

Citations

JD Supra covers U.S. v. Coinbase and CEI's amicus brief in the case.

The U.S. District Court for the Northern District of California, on November 28, 2017, ordered the international digital currency broker, Coinbase, Inc., to produce to the Internal Revenue Service (IRS) the records of Coinbase’s account holders, in connection with the IRS’s investigation of allegedly underreported virtual currency gains.1 As discussed below, after Coinbase refused to comply with the IRS’s initial summons to obtain information, the IRS issued a second summons with a significant reduction in the type and amount of information requested; pursuant to the order, the court even further narrowed the types of information to which the IRS would be entitled. The court’s decision raises the issue of balancing the privacy interests of virtual currency account holders with the IRS’s legitimate interest in investigating potential tax evasion and brings virtual currencies further into the regulatory scope of U.S. government agencies.

IRS Seeks Enforcement of Narrowed Summons

In response to Coinbase’s refusal to comply with the Initial Summons, and following months of discussion between the parties, the IRS sought enforcement of a second summons with a narrowed request (Narrowed Summons). The Narrowed Summons sought various information for accounts with at least $20,000 in any single type of transaction (buy, sell, send or receive) in any one-year period from 2013 through 2015. The order refers to Coinbase’s claim that the Narrowed Summons “requested information regarding 8.9 million transactions and 124,355 account holders.” Coinbase also refused to comply with the Narrowed Summons, and three organizations (Competitive Enterprise Institute, Coin Center and Digital Currency and Ledger Defense Fund) filed amici briefs in opposition to the Narrowed Summons. In addition, several Coinbase customers who would have been impacted by the Narrowed Summons anonymously petitioned the court to intervene in the case for the purpose of challenging the Narrowed Summons.

The amici briefs and the petitioners’ opposing briefs cited the right to privacy as an argument against enforcing the Narrowed Summons. The privacy arguments covered a range of legal and policy theories, including that contractual control of the data lies with the account holder and not with Coinbase (per the Coinbase user agreement), and that the IRS’s seizure of such information would have a “chilling effect” on constitutionally protected speech. Competitive Enterprise Institute did concede in its brief, however, that “[p]rivacy interests would not defeat a well-crafted subpoena tailored to discover the identities of persons about whom there is a genuine suspicion of failure to pay taxes. But the subpoena at issue here [the Narrowed Summons] does not meet that standard ...”

Read the full article at JD Supra.