IRS Closer to Obtaining Virtual Currency Records
- Steven L. Walker PLC
- Jan 11, 2018
- 3 min read
Updated: Aug 23
After reviewing the government's petition and supporting documents, on Nov. 30, 2016, the federal district court issued an order granting the ex parte petition for leave to serve a John Doe summons on Coinbase (In re the Tax Liabilities of John Does, No. 3:16-cv-06658-JSC (N.D. Cal. 11/30/16) (order granting ex parte petition for leave to serve "John Doe" summons)). Now that a federal district court has ruled that a narrower version of the IRS’s summons to Coinbase can be enforced, Coinbase’s customers should beware.
U.S. taxpayers who have traded in virtual currencies such as bitcoin, but have not reported and paid tax on the income or gains from those transactions, may face the heat as the IRS continues to press for greater tax compliance in the virtual currency arena. Some taxpayers may evade their tax obligations by concealing or otherwise failing to report their proper
amount of taxable income and thus underpay their taxes, according to the IRS, and the Service has identified several tax-compliance risks associated with virtual currencies, including a lack of third-party reporting.
Tax practitioners should understand how virtual currency transactions work because their clients may already be trading in virtual currency or will be in the near future.
Documents requested by the IRS
The government has been investigating the use of virtual currency that can be converted into traditional currency for the past several years. After the IRS issued Notice 2014-21, which took the position that transactions in virtual currency were property transactions that could result in gain or loss, it then served a John Doe summons on Coinbase Inc., a San Francisco-based virtual currency exchange company, in November 2016. (A John Doe summons, which is issued under Sec. 7609(f), does not name a taxpayer
because the IRS does not know the person's name.)
Most recently, on Nov. 30, 2017, after a lengthy summons enforcement proceeding, a federal district court issued an order granting in part and denying in part the IRS's petition to enforce the summons. The court's order (Coinbase, Inc., No.17-cv-01431-JSC (N.D. Cal. 11/28/17) (order re: petition to enforce summons) requires Coinbase 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:
The taxpayer identification
Name
Birthdate
Address
Records of account activity
All periodic statements.
Once the documents are produced, the IRS will begin sifting through a vast amount of information to identify U.S. taxpayers who the IRS believes are not complying with their tax obligations. Those taxpayers may be subject to civil examinations and potentially owe tax, interest, and civil penalties. Other taxpayers with more serious issues could become subject to criminal investigation — if, for example, they have large amounts of
unreported income over several years.
All of this is yet to be determined as the Coinbase case plays out. Taxpayers who think they may have exposure would be wise to take steps to comply, such as participating in the IRS domestic or offshore voluntary disclosure programs, as opposed to waiting for the IRS to catch them.
Notice 2014-21.
The IRS laid the groundwork for enforcement in the virtual currency world by issuing Notice 2014-21, which provides answers to frequently asked questions (FAQs) on virtual currency, such as bitcoin. The 16 FAQs in the notice discuss the U.S. federal tax implications of transactions in, or transactions that use, virtual currency.
For taxpayers trading in virtual currency, the notice is an important document to understand, and for tax professionals, the notice is a must-read. The IRS also updated its website in March 2014 to include a landing page specifically dedicated to virtual currency and providing an overview of the rules and a link to Notice 2014-21.
The IRS's position is that virtual currency is treated as property for federal tax purposes and that general tax principles that apply to property also apply to transactions using virtual currency (Notice 2014-21, FAQ No. 1).
This means that a taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value (FMV) of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received (FAQ No. 3).
For additional information, please read the full article below.
