A federal magistrate judge in San Francisco has granted the U.S. Internal Revenue Service approval for a first step to gain information about bitcoin users who may have failed to pay taxes due.
U.S. Magistrate Judge Jacqueline Scott Corley on Wednesday authorized the IRS to issue a summons requiring virtual currency exchange company Coinbase Inc. to disclose the names and records of its U.S. customers who exchanged bitcoin and other virtual currency between 2013 and 2015.
Coinbase, founded in San Francisco in 2012, is the nation’s largest virtual currency exchange, allowing users to convert virtual currency such as bitcoin to traditional U.S. currency.
Bitcoin is the most used and most prominent type of virtual currency, or online representation of monetary value.
The number of Coinbase users whose names the IRS will request could be up to several million. Coinbase now has 4.9 million users in 33 countries, but does not disclose how many are in the United States, according to spokesman David Farmer.
IRS lawyers told Corley in their request for the summons that because of the relative anonymity of virtual currency, the agency is concerned that people who use it are not reporting taxable income or the capital gains from buying, selling or trading the virtual currency.
Corley said in her order that “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.”
The summons is known as a “John Doe” summons because the identity of the people about whom information is being sought is not known.
According to a copy filed in court with the request for approval, the summons will ask for names and data relevant to tax liability for Coinbase users within the United States between Jan. 1, 2013, and Dec. 31, 2015.
Federal law requires the IRS to obtain court approval before issuing a John Doe summons.
Coinbase said in a statement that the company expected the ruling and will oppose the broad nature of the expected summons after it has been served with the document:
“As we previously stated, we remain concerned with our U.S. customers’ legitimate privacy rights in the face of the government’s sweeping request.”
After the IRS filed its request for approval of the summons last month, the company said that while it has a policy of cooperating with “properly targeted” law enforcement injuries, it was concerned about “the indiscriminate breadth of the government’s request.”
U.S. Justice Department Tax Division chief Caroline Ciraolo said in a statement:
“As the use of virtual currencies has grown exponentially, some have raised questions about tax compliance. Tools like the John Doe summons authorized today send the clear message to U.S. 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.”
The Justice Department noted that there are no allegations that Coinbase engaged in wrongdoing and that the purpose of the summons is to gain information about individuals who may have evaded taxes.