Actions by District Courts to (i) Approve a John Doe Summons for Cryptocurrency Client Data and (ii) Order the Government to Show Cause as to Requirements (4/1/21)

 DOJ Tax has announced here that a Massachusetts district court authorized a John Doe Summons (“JDC” be issued to Circle Internet Financial Inc., or its predecessors, subsidiaries, divisions, and affiliates, including Poloniex LLC (collectively “Circle”).  The key excerpts are:

           The court’s order grants the IRS permission to serve what is known as a “John Doe” summons on Circle. The United States’ petition does not allege that Circle has engaged in any wrongdoing in connection with its digital currency exchange business. Rather, according to the court’s order, the summons seeks information related to the IRS’s “investigation of an ascertainable group or class of persons” that the IRS has reasonable basis to believe “may have failed to comply with any provision of any internal revenue laws[.]” According to the copy of the summons filed with the petition, the IRS is requesting that Circle produce records identifying the U.S. taxpayers described above, along with other documents relating to their cryptocurrency transactions.

            The IRS issued guidance regarding the tax treatment of virtual currencies in IRS Notice 2014-21, which provides that virtual currencies that can be converted into traditional currency are property for tax purposes. The guidance explains that receipt of virtual currency as payment for goods or services is treated as income and that a taxpayer can have a gain or loss on the sale or exchange of a virtual currency, depending on the taxpayer’s cost to purchase the virtual currency (that is, the taxpayer’s tax basis).

Readers should also note that a California magistrate judge deferred the Government’s petition to issue a JDS to Payward Ventures Inc. d/b/a/ Kraken (“Kraken”) and its subsidiaries, issuing an order that the Government “SHOW CAUSE why its petition to issue a JDS should not be denied for failure to meet the ‘narrowly tailored’ requirement of 26 U.S.C. § 7609(f), by filing a response to this order (which may include an amended petition or summons) no later than April 14, 2021.”  See In re TAX LIABILITY OF JOHN DOES (Order dated 3/31/21 in Dkt. 21-cv-02201-JCS N.D. Cal.), TN here (with link to pdf).