Crypto investors are not paying at least half of the taxes they owe on virtual currency trades and the Internal Revenue Service wants brokers and exchanges to identify clients who made supposedly anonymous transactions.
A federal court has authorized the IRS to serve a John Doe summons, a government enforcement tool that goes after unnamed targets, to catch tax cheats on SFOX, a Los Angeles-based crypto prime dealer and M.Y. Safra Bank. Based in New York, M.Y. Safra Bank partnered with SFOX in 2019 to offer SFOX institutional traders cash deposit accounts backed by the Federal Deposit Insurance Corporation (FDIC).
The Department of Justice said in a press release it is seeking information on U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency between 2016 and 2021 with or through SFOX.
A normal IRS summons seeks information about a specific taxpayer whose identity is known. A John Doe summons involves taxpayers in a group the IRS cannot identify by name, and it’s one of the most powerful tools in the IRS arsenal, wrote former DOJ litigator Joshua Smeltzer.
Because crypto transactions can be hard to trace and have “an inherently pseudo-anonymous aspect,” taxpayers may be using them to hide taxable income from the IRS, the DOJ said in a press release.
“Taxpayers who transact with cryptocurrency should understand that income and gains from cryptocurrency transactions are taxable,” said Deputy Assistant Attorney General David A. Hubbert of the Justice Department’s Tax Division.
This isn’t the first time the IRS has used a John Doe Summons on a crypto exchange and more are expected. Coinbase released information on 13,000 customers and the courts also recently approved similar summonses for account holder information from Kraken and Circle Internet Financial.
Collectively, crypto investors fail to pay the IRS at least half of the taxes they owe on their virtual-currency trades, according to an analysis published in May from Barclays Plc.
The IRS is struggling to hold taxpayers accountable because crypto exchanges offer anonymity, even if counterparties are visible on blockchains, according to Joseph Abate, a managing director at Barclays.
A veteran analyst of money markets and Treasury Department funding, Abate used a 2017 IRS calculation to extrapolate that the current tax gap would be around $50 billion per year, or about 10 percent of all unpaid taxes.
The U.S. Congress has passed reporting requirements for digital assets that will go into effect in January 2024 for 2023 taxes. Those requirements may impact the IRS usage of John Doe summonses in the future, Cointelegraph reported.