[JURIST] A judge for the US District Court for the Northern District of California [official website] ruled [order, PDF] Wednesday that the Internal Revenue Service (IRS) [official website] can serve a “John Doe” summons to digital-currency-services company Coinbase [corporate website] seeking detailed information on their customers’ 2013-2015 transactions. The summons will allow the IRS to have access to the names of all taxpayers in a particular category. Judge Jacqueline Scott Corley concluded:
there is a reasonable basis for believing that such group or class of persons has failed or may have failed to comply with any provision of any internal revenue laws, and that the information sought to be obtained from the examination of the records or testimony (and the identities of the persons with respect to whose liability the summons is issued) are not readily available from other sources.
Caroline Ciraolo, head of the Department of Justice Tax Division [official website], commented [press release] that the John Doe summons sends a clear message to US taxpayers that “whatever form of currency they use—Bitcoin or traditional dollars and cents—we will work to ensure that they are fully reporting their income and paying their fair share of taxes.” Because Bitcoin transactions are difficult to trace, it is possible that taxpayers are using Coinbase to hide income from the IRS. Coinbase responded [WSJ report] to the John Doe summons stating: “We look forward to opposing the DOJ’s request in court after Coinbase is served with a subpoena … we remain concerned with our US customers’ legitimate privacy rights in the face of the government’s sweeping request.”
The creation and use of digital currencies have been a contentious issue across the globe. The popularity of digital currencies stems from the fact that they can be transferred anonymously, unlike most hard currencies created by governments. In October 2015 the Court of Justice of the European Union [official website] ruled [JURIST report] that converting cash into Bitcoin should be exempt from value added tax (VAT) [Swedish government backgrounder] within the 28-country bloc. In April 2014 then-US Attorney General Eric Holder expressed concern [JURIST report] before the US House of Representatives Judiciary Committee [official website] with respect to the proliferation of virtual currencies [CNBC backgrounder], which, he asserts, have created new avenues for money laundering, drug trafficking and other illegal activity. There are nearly a thousand virtual currencies, but the most widely known and commonly used is Bitcoin. The virtual currency, which exists only in electronic format, is generated and stored via computer and traded among holders for goods and services. In 2014 Tokyo-based digital currency exchange Mt. Gox [corporate website, in Japanese] collapsed after announcing the loss of more than USD $500 million worth of bitcoins to hackers. The loss marked the impetus [WSJ report] for federal investigators to carefully examine digital currencies, which remain largely unregulated by US and international banking and currency laws.