Coinbase – the world´s largest cryptocurrency exchange – will turn over “identifying information” of more than 14,000 customers after being ordered by a Californian federal court to partially comply with the Internal Revenue Services´ “John Doe” summons.
In November 2016, the Internal Revenue Service (IRS) filed an ex parte petition with the Californian Northern District Court, asking for permission to serve a “John Doe” summons on the world´s largest cryptocurrency exchange – Coinbase. The purpose of the summons was to identify Coinbase customers evading their tax obligations and using the currency exchange as a conduit for money laundering.
According to the IRS´ petition, Coinbase has 5.9 million customers, yet only 800 to 900 U.S. citizens had declared
a property description related to Bitcoin between 2013 and 2015. The summons demanded Coinbase turn over the records of all its customers between the two years, including details used to open accounts such as passports and driver´s licenses.
Permission to Execute the Summons Delayed
Permission to execute the summons was delayed while challenges against the petition were heard from Coinbase and several “intervenors”. Opponents of the summons argued the overbearing request for information raised “grave privacy issues” and that – due to the IRS´ lax online security defenses – could result in the personal information of millions of customers being exposed to a hacker.
The IRS subsequently narrowed the scope of its summons to include only customers that had transacted more than $20,000 in a single year. Coinbase continued to contest the request for the summons to be executed and, in July 2017, Judge Jacqueline Corley allowed a new “intervenor” to enter the case in order to argue the IRS could not justify the depth of information being required.
Order to Partially Comply Issued
The arguments whether the IRS should be given permission to execute the summons continued until November last year. Eventually Judge Corley ruled the IRS should have limited access to Coinbase´s database and issued an order for Coinbase to release documents relating to customer accounts in which the customer had bought, sold, sent or received at least the equivalent of $20,000 in cryptocurrency.
Although Coinbase described the ruling as a partial victory, the 14,355 customers affected by the decision may not agree. For each of these accounts, Coinbase has to submit the customer´s name, date of birth and taxpayer ID, along with details of the accounts to which – or from which – they have sent/received funds. Coinbase has said it will notify each affected customer individually.
Door Left Open for IRS to Come Back for More
In her ruling, Judge Corley wrote the other records requested by the IRS were not relevant at this stage. However, should the IRS feel there is sufficient evidence to suggest tax evasion or money laundering activities, the agency can come back and ask Coinbase to release further information. In the case of potential money laundering, this would include details about whether customers allowed third parties to conduct transactions on the customer´s behalf.
When the IRS first filed the ex parte petition, the agency said the aim of the summons was to identify
significant underreporting of revenues by large corporations. With the requirement that Coinbase releases details of where funds were sent or from where funds were received, the net could be cast a lot wider than the 14,355 customers initially affected by the summons, and there could be some big names in the corporate world brought into the IRS´ investigation.
Potentially Little Impact for Online Gamblers
The impact of the court order is likely to be minimal for online gamblers. Coinbase stopped processing Bitcoin transfers to and from online poker sites and casinos in 2014 while the company was in pursuit of “money transmitter” licenses. Players wishing to fund online gambling accounts with Bitcoin would have been able to buy the cryptocurrency at Coinbase, but would have had to use a third party wallet in order to complete the deposit process.
Only if players purchased more than the equivalent of $20,000, or won more than $20,000 and transferred their winnings into fiat currency via Coinbase, will the IRS be interested – not only because of the potential under-declaring of tax, but also because the agency will be interested to know where the funds originated from. Any players in this situation should seek advice from a professional legal practitioner.