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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).

 

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