DOJ Seeks to Enforce John Doe Summons Issued to Coinbase Regarding Bitcoin Transactions Not Reported in Income

In November, 2016, the IRS served a John Doe summons on Coinbase, one of the largest institutions holding bitcoins for clients, seeking information about virtually all bitcoin transactions by U.S. customers over a multi-year period (2013-2015).  Initially, aggrieved customers filed an action challenging the summons (perhaps fearing that Coinbase would not do so), but subsequently Coinbase intervened, and the U.S. sought to enforce the summons issued to Coinbase. The matter is currently pending in the Northern District of California. United States v. Coinbase, Inc., No. 3:17-cv-01431-JSC (N.D. Cal. March 16, 2017). Interestingly, in March of 2017, the IRS filed a declaration noting that only 1,000 individual returns from 2013 to 2015 reported gain or loss from the sale of bitcoin (while anecdotal evidence suggests that there were hundreds of thousands of transactions). The IRS considers bitcoin property, rather than a currency (IRS Notice 2014-21), and the failure of taxpayers to report transactions certainly suggests the potential for significant non-compliance. Although the decision is still pending, if the IRS prevails, there could be audits coming down the line.