Millions of anonymous users of the crypto-currency exchange Coinbase may soon have their real identities released to the U.S. Department of Justice for potentially violating U.S. tax law.
On Wednesday, the U.S. District Court for Northern California ruled that the Internal Revenue Service, or IRS, may serve what is legally known as a John Doe subpoena upon Coinbase for users' personal information. A John Doe summons does not name specific individuals or entities, but can provide sweeping authority for access to countless records.
The order grants federal access to the identities of U.S.-based Coinbase users who made transfers between crypto-currencies, such as Bitcoin or Ethereum, to traditional currencies, such as dollars, between December 31, 2013, and December 31, 2015. Coinbase recently estimated on its website that just under 5 million users around the world use its services, and analysts note the extensive two-year reporting period could potentially ensnare millions of users.
In court documents, lead IRS investigator David Utzke said his team had "identified and interviewed three taxpayers who were corporate entities" that had sought to hide millions of dollars of transactions through Bitcoin transactions.
Utzke and the Department of Justice argued in court that the relatively anonymous nature of crypto-currencies made it "significantly" likely that many more users were hiding money in Bitcoin or Ethereum and failing to pay taxes on that income.
Attorneys for Coinbase had argued that using a "John Doe" subpoena created major violations of users’ privacy and their expectation of being audited by the IRS. In a statement posted on its website, Coinbase argued "the government has not alleged any wrongdoing on the part of Coinbase and its petition is predicated on sweeping statements that taxpayers may use virtual currency to evade taxes."
But District Court Judge Jacqueline Scott Corley disagreed, ruling that there is a "reasonable basis for believing" that some Coinbase users had been evading U.S. tax law by trying to hide assets.
Crypto-currencies provide relative, but not complete, user anonymity through the use of what's known as blockchain technology. Essentially a large-scale publicly-distributed ledger, a blockchain encodes transactions into "blocks." Each new block is attached at the end of a long string of transactions and locked in place, making tampering with the transaction record theoretically impossible.
Services like Coinbase provide a digital wallet that allows users to save, spend and transfer financial assets back and forth from traditional currencies to digitally-based crypto-currencies.
The ruling, which is likely to be appealed, has the potential to cause major disruptions in crypto-currency markets around the world. It will also be watched closely by many other governments that have struggled to shine a light on this relatively hidden financial sphere.