According to Law 360 a California federal court Thursday authorized a John Doe summons by the IRS to obtain information from virtual currency exchanger Coinbase Inc. so it can investigate whether the company’s customers avoided paying taxes on transactions made through the company.
San Francisco-based Coinbase itself has not been accused by the IRS of engaging in nefarious activity, but the agency believes records of transactions made via the company’s currency exchange business could reveal the identities of individuals who have failed to pay taxes on transactions made via encrypted digital currencies between 2013 and 2015.
“Transactions in virtual currency are taxable just like those in any other property,” said IRS Commissioner John Koskinen in a statement. “The John Doe summons is a step designed to help the IRS ensure people doing business in the emerging economy are following the tax laws and meeting their responsibilities.”
Unlike traditional cash or banking transactions, exchanges made via cryptocurrencies like bitcoin are anonymous and free of third-party reporting.
According to the IRS’s petition for the John Doe summons, the agency has identified at least one individual and two corporations that held Coinbase accounts and used bitcoin transactions to conceal taxable activities including repatriation of untaxed offshore assets.
The IRS also notes that because exchange rates of virtual currency against traditional currencies are fluid, gains made through the purchase or sale of cryptocurrency are taxable under U.S. law.
The summons will allow the IRS to gain access to Coinbase’s database of customers in order to establish whether those customers have paid their tax liabilities.
In granting the summons U.S. District Judge Jacqueline Scott Corley found there is a reasonable basis for the government to believe virtual currency users may not be in compliance with federal tax laws.
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