United States District Court, N.D. California
IN THE MATTER OF THE TAX LIABILITIES OF JOHN DOES, United States persons who, at any time during the period January 1, 2013, through December 31, 2015, conducted transactions in a convertible virtual currency as defined in IRS Notice 2014-21.
CAROLINE D. CIRAOLO Principal Deputy Assistant Attorney
N. HENDON AMY MATCHISON Trial Attorneys, Tax Division U.S.
Department of Justice
J. STRETCH United States Attorney Northern District of
C. SAMPSON Assistant United States Attorney, Tax Division
UNITED STATES' MEMORANDUM IN SUPPORT OF EX PARTE
PETITION FOR LEAVE TO SERVE JOHN DOE SUMMONS
United States of America submits this memorandum in support
of its petition for an order approving the service of an
Internal Revenue Service “John Doe” summons on
Coinbase, Inc. for information related to transactions
conducted in convertible virtual currency as defined in IRS
Notice 2014-21. Pursuant to 26 U.S.C. § 7609(h)(2), the
Court's determination to approve a John Doe summons shall
be made ex parte and shall be made solely on the
petition and supporting affidavits. Thus, the pleadings filed
in this proceeding will not be served upon any person or
entity and no other filings are permitted from other persons
or entities. Accordingly, this matter is ripe for the
Court's consideration. The United States requests that
the Court review the petition and supporting documents and
enter the proposed order at the Court's earliest
is responsible for monitoring ways in which United States
taxpayers evade their United States tax obligations by
concealing or otherwise failing to report their proper amount
of taxable income and thus underpay their taxes. The
ever-changing digital age and innovation pose new risks for
the IRS and tax compliance by United States taxpayers. One
such innovation is the creation of virtual currency which,
unlike U.S. dollars or other government-issued currencies,
does not have a physical coin or bill associated with their
circulation and is not owned by any government.
2009, the use of virtual currency has increased
exponentially. Some users value the relatively high degree of
anonymity associated with virtual currency transactions
because only a transaction in virtual currency, such as
buying goods or services, is public and not the identities of
the parties to the transaction. Because of that, virtual
currency transactions are subject to fewer third-party
reporting requirements than transactions in conventional
forms of payment. However, due to this anonymity and lack of
third-party reporting, the IRS is concerned that U.S.
taxpayers are underreporting taxable income from transactions
in virtual currencies. Further, because the IRS considers
virtual currencies to be property, United States taxpayers
can realize a taxable gain from buying, selling, or trading
in virtual currencies. There is a likelihood that United
States taxpayers are failing to properly determine and report
any taxable gain from such transactions.
order to identify taxpayers who have may have underpaid taxes
associated with transactions in virtual currency, the United
States brings this ex parte proceeding under § 7609(f)
and (h) of the Internal Revenue Code (26 U.S.C.) for leave to
serve a John Doe summons on Coinbase. The John Doe summons
seeks records relating to transactions in convertible virtual
currency as defined in IRS Notice 2014-21. See
Declaration of Senior Revenue Agent Davide Utzke in Support
of Ex Parte Petition for Leave to Serve “John
Doe” Summons (“Utzke Decl”) Exhibit B. The
John Does whose identities are sought by the summons are
United States persons who, at any time during the period
January 1, 2013, through December 31, 2015, conducted
transactions in a convertible virtual currency. The issuance
of the summons is warranted here because (i) the summons
relates to an ascertainable group or class of persons; (ii)
there is a reasonable basis for believing these U.S.
taxpayers failed to comply with internal revenue laws; and
(iii) information sufficient to establish these U.S.
taxpayers' identities is not readily available to the IRS
from other sources.
What virtual currency is and how it works
currency is a digital representation of value that functions
as a medium of exchange, a unit of account, and/or a store of
value. Utzke Decl. ¶ 7. In some situations, virtual
currency operates like “traditional currency, ”
i.e., the coin and paper money of a country that is
designated as legal tender. However, it does not have legal
tender status in any jurisdiction. Id. A virtual
currency is considered “convertible” if it has an
equivalent value in traditional currency or acts as a
substitute for traditional currency. Convertible virtual
currency can be digitally traded between users and can be
purchased for, or exchanged into, U.S. dollars, Euros, and
other traditional or virtual currencies. Id.
order to transact in a virtual currency system, a user would
need to create a “wallet.” A wallet is a digital
computer file that contains information necessary to send and
receive units of a virtual currency. Id. at ¶
8. When the wallet is created, a random wallet address is
generated; this is a unique alphanumeric identifier, which is
conceptually similar to an e-mail address. Id.
wallet holds any number of public keys and their associated
private keys. The public key and private key are conceptually
similar to a user ID and a digital signature, respectively.
In order to exchange units of a virtual currency, a virtual
currency user needs to electronically send their public key
to anyone with whom they want to transact. Id. at
¶ 9. The public key contains information that verifies
the wallet and the private key is used to authenticate a
transaction. Only once the transaction is signed by both
parties, is the transaction complete. A completed transaction
is then introduced to a network of computers monitored by
competing groups of people called miners. After computers on
the network confirm that a transaction is authentic, the
transaction is posted to a “block” - a grouping
of transactions. When a specified number of confirmed
transactions have been grouped, a block is formed.
Id. at ¶ 11. Miners then compete against each
other to find a solution to a mathematical puzzle that
depends on the contents of the block; once a solution is
found, that block will be added to the blockchain.
maintain the integrity of the blockchain: a sequential public
list of all transactions. Miners also validate transactions
that go into the blockchain with the motive of earning
virtual currency. Id. When a new block is added to
the blockchain, new virtual currency coins are generated and
awarded to the miner who discovered the mathematical puzzle
solution that allows the new block to be added to the
blockchain. The cycle then repeats. Id.
transactions in a virtual currency blockchain can be viewed
by the public on any computer connected to the Internet.
However, the blockchain transactional history only reveals
the date, the time, the amount (denominated in virtual
currency), and the wallet addresses associated with a
transaction. The blockchain does not identify the actual
identities of the wallet owners. Id. at ¶ 12.
are nearly a thousand virtual currencies, but the most widely
known virtual currency, and largest by capitalization, is
bitcoin. Other virtual currencies mimicking bitcoin using the
blockchain technology are known as alternative coins or
altcoins for short. Just a few examples of altcoins are
Ethereum, Litecoin, Ripple, Feathercoin, and Dogecoin.
Id. at ¶ 13.
How virtual currency can be obtained and used
order to buy virtual currency with a medium of exchange
denominated in a traditional currency, such as a conventional
check, credit card, wire, or Automated Clearing House (ACH)
electronic payment, a virtual currency user will have to find
some way to transfer traditional currency to someone who
already has virtual currency and wishes to exchange it for
traditional currency. Id. at ¶ 14. In theory,
this could be anyone with a virtual currency; in practice,
this tends ...