The Coinbase vs. IRS litigation has been an ongoing fight for the past year and relates to whether Coinbase must turn over certain customer records. Unless appealed, this fight now appears to be over. According to a November 28 filing in the Northern District of California, U.S. Magistrate Judge Jacqueline Scott Corley found that the IRS’s demand for information is not overly broad.
Ultimately, the Court ruled that Coinbase must turn over: (1) tax ID numbers, (2) names, (3) date of births, (4) addresses, (5) records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and (6) all periodic statements of account or invoices (or the equivalent) for customers “with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013-2015 period.”
To recap, last November, the IRS filed a petition requesting that Coinbase turn over all customer records during the period of January 1, 2013 through December 31, 2015. This information covered nine categories of documents, which Coinbase refused to provide. This led to a year of litigation by Coinbase and some of its customers to prevent the exchange from turning over this information. As litigation proceeded, the IRS narrowed the scope of its request to only seek information regarding accounts with at least $20,000 worth of value in a single transaction in any one year during the 2013-2015 period. According to Coinbase, this still included information regarding 8.9M transactions and 14,355 account holders.
Under federal law, the IRS may issue a summons for “ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax.” For such summons to be enforced by a court, the IRS must first establish “good faith” by showing that the summons: (1) is issued for a legitimate purpose; (2) seeks information relevant to that purpose; (3) seeks information that is not already in the IRS’s possession; and (4) satisfies all administrative requirements. The Court noted that elements #3 and #4 were satisfied without providing further explanation.
The Court ruled that the summons was issued for a legitimate purpose. In reaching its conclusion, the Court noted that only 800-900 taxpayers reported bitcoin gains in each of the relevant years, which is less than the 14,355 account holders that Coinbase said were affected by the narrowed summons. Accordingly, the Court concluded that the IRS had a legitimate purpose for seeking this information.
With regards to the second element, “seeking information relevant to that purpose,” the Court ruled that all the information being requested was overbroad, but that Coinbase would need to turn over certain information. The key question here was whether the request for information was “no broader than necessary to achieve its purpose.” The Court ruled that Coinbase account holders’ identities and transaction records are sufficient to allow the IRS to investigate whether holders had taxable gains that were not properly declared. However, information relating to “account opening records, copies of passports or driver’s licenses, all wallet addresses, all public keys for all accounts/wallets/vaults, records of Know-Your-Customer diligence, agreements or instructions granting a third-party access, control, or transaction approval authority, and correspondence between Coinbase and the account holder” was deemed to be broader than the IRS needed for its investigation.
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