In an ex parte Application for Leave to Serve John Doe Summonses dated November 17, 2016, the Internal Revenue Service requested of the United States District Court for the Northern District of California the authority to obtain the records of Coinbase, Inc. a bitcoin exchange located in San Francisco.

By its own terms, the request is speculative, relying on an undefined “likelihood” that the resulting summons will yield information identifying persons who have not properly filed or paid taxes due the United States. The only defined term upon which the request is based is IRS Notice 2014-21, which described the Services views on virtual currencies and offered the position that bitcoin (and similar devices) are not “currency” but, rather, are property under 26 U.S.C. §1221. Although the Notice reached this conclusion without analysis or authority, it is probably correct, at least for the moment. Only because bitcoins neither circulate nor are they customarily used and accepted as money in the country in which they are issued, they do not meet the definition of currency in the Bank Secrecy Act. 31 CFR 1010.100(m). Presumably, Treasury adopts this definition for tax purposes.

The request has alarmed the cryptocurrency community because it comes in the wake of absolutely nothing. No criminal case, claims of interviews with only three taxpayers who said they has used virtual currencies as a means of evading taxes, and not even a named suspect in the summons request. The report of the Treasury Inspector General for Tax Administration dated September 21, 2016 observes three critical issues:

1. The IRS has no strategy concerning virtual currency;
2. The Criminal Investigation unit of the IRS has undertaken no effort to inquire in matters concerning the improper reporting of bitcoin; and
3. Notice 2014-21, so far the IRS’s only formal articulation of its position regarding bitcoin, characterizes bitcoin as property, not as currency, although the device is commonly accepted as currency by over 100 major organizations including Subway, Microsoft, Reddit, and Expedia. Many users of bitcoin are likely unaware of the Notice or uncertain of its arcane meaning.

Thus, for the IRS to use as its opening salvo into the matter of virtual currency what is described by its target as a “sweeping fishing expedition” gives every participant in a cutting edge technology pause to consider if the IRS should be able to leverage that enterprise to make up ground in its own investigative dilemmas. In short, should Coinbase become an involuntary source of data for the government absent more evidence supporting a wholesale compromise of the privacy of their customers’ information?

Tags: Banking, Christopher Kelly, Joseph Pastore, Security, Tax