The Department of Justice recently made waves when they filed paperwork in federal court requesting the identities of United States Coinbase customers who transferred virtual currency anytime between 2013 and 2015. Coinbase is a company that facilitates transactions of digital currencies such as bitcoin and Ethereum.

The Department of Justice made the initial request on behalf of the Internal Revenue Service since the IRS can only serve a “John Doe” summons with approval from a federal court. This type of summons identifies a person or ascertainable group by their activities. Examples include investors in a specific tax shelter or account holders at a defined financial institution.

The request has been hotly debated due to the myriad of potential privacy issues and the fact that no notice is required to be given to the taxpayers who may potentially be affected. However, the IRS’ procedure manual makes it clear there must be a reasonable basis for believing that those involved may have failed to comply with any part of the tax code.

The controversial bid to the courts was introduced after the IRS discovered instances of tax evasion from Coinbase customers, including two millionaire taxpayers who “admitted disguising the amount they spent purchasing the bitcoins as deductions for technology expenses on their tax returns.”

Unlike most other financial transactions, there is currently no tax law that details a requirement of separate reporting of virtual currency. The IRS believes that because of this the likelihood of under-reporting is significant. Considering the anonymity of bitcoin, it’s clear to our tax attorneys that the IRS would need more data to complete its inquiry.

As of only a year ago, Coinbase was the fourth largest international exchanger and the principal domestic exchanger of bitcoin into U.S. dollars. Indeed, Coinbase claims that with its 4.8 million users and over $5 billion in virtual currencies traded, it is “the world’s most popular way to buy and sell bitcoin and ethereum.”

More than 100,000 vendors around the world currently accept bitcoin payments, including Expedia, Amazon, and Microsoft. The 2015 annualized transaction value of bitcoin in the U.S. was calculated to be $10,116,817,608.

The IRS claims that those numbers aren’t showing up on tax returns, and so they’ve asked Coinbase to turn over records for users that report any U.S. address, phone number, e-mail address, or bank account. The requested records may also include user profiles and preferences, security settings and history, payment methods, the type of transaction, and all other correspondence.

Many people have expressed their surprise to the slow response of the IRS in addressing the popularity of bitcoin. In fact, it wasn’t until 2014 that the IRS issued a guide to taxpayers on how to treat Bitcoin and other virtual currency for income tax purposes. The guide indicates that Bitcoin and other virtual currencies are treated as a capital asset, and are therefore subject to capital gains taxes.

It’s unclear as of yet how the courts will respond to the IRS’ request or what impact the “John Doe” summons may have on bitcoin transactions. However, our tax attorneys are always available to provide tax planning services and help resolve your tax problems.