US court greenlights IRS to track down crypto investors
A federal court has authorized the US Internal Revenue Service (IRS) to issue a so-called John Doe summons for taxpayers who may have failed to report and pay taxes on cryptocurrency transactions.
Specifically, the order enables the IRS to collect information about customers of cryptocurrency prime broker SFOX. The summons requires M.Y. Safra Bank to produce information concerning SFOX customers who conducted at least $20,000 in transactions in cryptocurrency between 2016 and 2021.
The IRS said it plans to make public criminal tax-evasion cases involving cryptocurrency, which opens a new front in the agency’s burgeoning scrutiny of the industry.
As described further in the petition, though taxpayers are required to report any associated profits and losses on their crypto dealings, the IRS’s experience “has demonstrated significant tax compliance deficiencies relating to cryptocurrencies and other digital assets.”
SFOX is a cryptocurrency prime dealer and trading platform that connects digital currency exchanges, OTC brokers, and liquidity providers. The platform counts roughly 175,000 registered users who have collectively undertaken more than $12 billion in transactions since 2015.
Based on its recent experiences with cryptocurrencies, the IRS believes that crypto transactions are not being properly reported on tax returns. Among other reasons, the authority says there is no third-party reporting to the IRS on such transactions, and previous summonses served on other cryptocurrency dealers have revealed significant underreporting of such transactions. Further, IRS investigations have identified at least ten US taxpayers who used SFOX’s services for cryptocurrency transactions but failed to report those transactions to the IRS as required by law.
Recently, there have been numerous reports emerging of tax authorities clamping down and going after cryptocurrency traders. The US Internal Revenue Service (IRS) also sent letters to taxpayers who might have failed to report income and pay the resulting tax from cryptocurrency transactions.
Since 2014, the so-called ‘Notice 2014-21’ has been the only guidance the tax department has published before mailing cryptocurrency holders warning of penalties if they fail to pay tax on crypto transactions.
The IRS also published over 40 Q&As on cryptocurrency tax compliance in a fresh signal of increasing its focus after first being slow to stay abreast of the growing industry.
At the very core, the IRS still deems crypto assets to be property rather than currency for income tax purposes, the same as its regulatory guidance came out seven years ago. That means the authority will continue to tax crypto profits and losses like those for stocks, at capital gains rates.
The IRS has also addressed how to track the fair market value, capital gains, and losses in the context of virtual currencies. When a transaction is facilitated by a cryptocurrency exchange, the value of the taxed deal is the amount that was recorded by the platform in US dollars. Further, the taxpayer’s buy/sell price will determine whether a gain or loss has occurred as well as its duration.