Is IRS Overstepping Boundaries by Issuing Summons to Coinbase?

The eyes of the cryptocurrency community are on Coinbase ever since it got served with a John Doe summons by the IRS. The summon requires Coinbase to hand over all information pertaining to the platform’s users between 2013 and 2015.

The issue of generic, blanket information request by the IRS has given rise to few questions regarding the powers of the government institution and constitutional rights of individuals. Even though Coinbase has filed an appeal against the summons in the court, actions of the government taxation body are worrying. The information demanded by the IRS includes a list of all accounts along with their information, balance, records of activity and transactions.

For starters, the jurisdiction and authority exerted by the IRS itself are questionable. Bitcoin enjoys a unique position in the US financial ecosystem. The digital currency is categorized as money, property, commodity and what not, making it fall under the jurisdiction of multiple government agencies. Even though John Doe summons is issued on multiple occasions by the IRS to banking institutions in the past, it was mainly for fiat currency related transactions and the banks were required to furnish information on US citizens alone.

In the case of Coinbase, a multinational cryptocurrency wallet and exchange service, the information requested is too broad and it may also compromise the private information of many people of different nationalities and domicile. Also, IRS website itself mentions the necessary purpose of the John Doe summons :

  1. “The purpose of a John Doe summons must be to investigate the tax liability of a specific unidentified taxpayer (or a group of such taxpayers), even if a secondary purpose is to gather information for research purposes.”
  2. “The Service should no longer be in the information-gathering or research stage of a project when it decides to seek court authorization to serve a John Doe summons. The project research should be sufficiently developed to enable the Service to identify a specific tax compliance problem. The Service should be prepared to investigate the tax liabilities of specific taxpayers based on the information received from the John Doe summons. A John Doe summons cannot be used to conduct a “fishing expedition.””

By issuing John Doe summons, the IRS has just labeled every Coinbase user as a tax evader. The exercise goes beyond the legal structure which considers every individual to be innocent until proven otherwise. Here IRS has indirectly classified every cryptocurrency user as guilty. In addition, with flawed policies towards virtual currencies (the department’s own admission), the issued summons indicates a potential fishing expedition by the IRS.

The recent development gives rise to another debate about whether the Banking Secrecy Act will be applicable to Coinbase or not. If it does, then will it signify Bitcoin’s legal position as an acceptable mainstream currency in the region? There is only one way to find out, and that is by waiting for the new developments to unravel themselves.

Ref: IRS | Image: NewsBTC