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On November 28, 2017, Magistrate Judge Jacqueline Scott Corley of the United States District Court for the Northern District of California granted in part and denied in part the Government’s petition to enforce the IRS summons served upon Coinbase.

The Court’s order directs Coinbase to produce the following information and documents for customer accounts 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 to 2015 period:

1.     the taxpayer ID number,
2.     name,
3.     birth date,
4.     address,
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).

“That only 800 to 900 taxpayers reported gains related to bitcoin in each of the relevant years and that more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year suggests that many Coinbase users may not be reporting their bitcoin gains,” wrote Judge Corley in the order. “The IRS has a legitimate interest in investigating these taxpayers,” she added.

Berns Weiss LLP, has been challenging the IRS summons on behalf of Coinbase customers since the IRS issued the summons last November. Lee Weiss, a partner at the firm provided ETHNews with the following statement:

“While we remain concerned that the bar for the IRS to obtain taxpayer documents from third-parties through a John Doe summons has been set too low, we are gratified that due to our efforts, and those of Coinbase, the Court has only ordered Coinbase to produce a fraction of the materials that the IRS originally sought. We are also pleased that the Court is not going to permit the IRS to obtain any additional information or records requested in the John Doe summons in the future. Instead, to the extent that the IRS wishes to seek additional Coinbase records concerning a specific Coinbase customer covered by the John Doe summons, it will need to issue a new summons to Coinbase for that information and provide notice to the customer so that the customer has the opportunity to object. We are proud of the result that our efforts helped to achieve for Coinbase’s customers.”

On the Coinbase blog, director of communications David Farmer wrote, “Thanks to Coinbase’s efforts, more than 480,000 customers’ records were preserved from disclosure. This is a 97% reduction in the number of customers impacted by this summons.”

“The quantity of data we must produce for the approximately 14,000 customers who remain in scope has been significantly reduced,” he added. “In narrowing the scope of the summons, we are pleased that the Court acknowledged the privacy rights at stake in this matter.”

As the IRS is focusing on tax compliance for the years 2013-15, it appears that the $20,000 value will be calculated based on the price of bitcoin on the date(s) of the relevant transaction(s) rather than a fixed bitcoin exchange rate or today’s price. Presumably, if a customer purchased $19,999.99 worth of bitcoin and held the bitcoin indefinitely, then the summons would not apply to that customer.

Now that the IRS-Coinbase matter has been resolved, perhaps the tax agency can shift its focus.

“We are hopeful that now that this proceeding has concluded, the IRS will focus its efforts on clarifying its vague and much criticized 2014 guidance regarding the taxation of virtual currency transactions,” said Weiss. “The use of virtual currency transactions has and will continue to expand exponentially, as will blockchain technology applications. The IRS needs to promulgate practical rules that do not unnecessarily burden users in this innovative, ever-growing ecosystem.”