Case No. 3:16-cv-006658-JSC was set into motion by the IRS on the basis that some individuals may have been using Coinbase and Bitcoin to evade paying taxes. Due to this, the IRS has requested a “John Doe” summon on taxpayers that used Coinbase from the years 2013-2015.
The “John Doe” summon can only be acted upon after the federal court has given IRS approval to do so. It is typically used to find out more about investors that deal with tax shelters as well as holders of a financial institution as the definition from irs.gov describes:
- Under IRC 7609 (c)(3) and 7609 (f), a John Doe summons is a summons that does not identify the person with respect to whose liability the summons is issued. The Internal Revenue Code authorizes the Service to issue a John Doe summons pursuant to an investigation of a specific, unidentified person or ascertainable group or class of persons.
- With a normal summons, the IRS seeks information about a specific taxpayer whose identity is known. In contrast, a John Doe summons allows the IRS to get the names and requested information and documents concerning all taxpayers in a certain group. A John Doe summons can be a useful tool when trying to obtain information like a list of investors in a certain tax shelter, owners of tax-exempt bonds, or account holders at a financial institution.
So while the IRS would be able to follow the transactions using any blockchain explorer, only Coinbase will have the necessary information and documents to associate names to Bitcoin addresses.
While the IRS acknowledges in the court files that not all users are guilty of tax evasion they are still requesting the identity of all users in the scope of the almost three years; Coinbase reports to have nearly five million users according to their website.
While Coinbase will be complying with the government on this order and obeying the subpoena they receive, user privacy is still their priority. Coinbase has not yet formed a legal response, but already has their legal team working on it and made the following statement to The Verge:
“We are aware of and expected, the Court’s ex parte order today,” a representative said. “We look forward to opposing the DOJ’s request in court after Coinbase is served with a subpoena.”
The actions in this court case also set a very scary legal precedent as well as a negative stigma on Bitcoin exchanges or other legitimate users in the Bitcoin sector. Jerry Brito, executive director of Coin Center, stated:
“If we set a precedent that merely dealing in bitcoin could result in a firm’s customers easily losing their financial privacy, it would have severe consequences for bitcoin and the related blockchain ecosystem – cutting-edge technologies that promise to revolutionize business.”
What affects this has on Bitcoin in the following weeks and months will be interesting, to say the least. For example, when the IRS stated that Bitcoin was to be treated as a capital asset just in time for tax season in 2015, the price plunged to a low of $170.