Warning to All U.S. Taxpayers Who Use Cryptocurrency: “Crypto” Doesn’t Mean Your Currency is Secret — or Protected — from the IRS

On August 15, 2022, the federal courtroom within the Central District of California approved the IRS to serve a John Doe summons on SFOX, a cryptocurrency prime supplier headquartered in California. A John Doe summons is a tool (e.g., a subpoena) to collect data from a 3rd celebration, the place the IRS doesn’t know the identification of the individual about whom they’re looking for the data. This isn’t the primary time the IRS has issued a John Doe summons on a crypto-entity, however that is the primary time the IRS has particularly investigated and sought out taxpayers with high-value cryptocurrency transactions. That is additionally marks the primary time the IRS has focused a cryptocurrency buying and selling platform, highlighting the IRS’s curiosity in underreported cryptocurrency transactions.

Though there is no such thing as a allegation that SFOX is engaged in any wrongdoing, the John Doe summons requires SFOX to supply information figuring out U.S. taxpayers who’ve used its providers and some other paperwork referring to the taxpayers’ cryptocurrency transactions. The summons permits the IRS to acquire details about U.S. taxpayers who carried out at the least $20,000 in any 12 months, in cryptocurrency transactions from 2016 to 2020, utilizing SFOX.

This isn’t the primary time a federal courtroom has used a John Doe summons to extract data from non-parties about U.S. taxpayers concerned in cryptocurrency transactions. In 2016, a federal courtroom approved the IRS to serve a John Doe summons on a U.S.-based cryptocurrency alternate. In 2021, two federal courts in California approved the IRS to serve two John Doe summons on two cryptocurrency exchanges and one digital pockets establishment.

When the IRS investigates potential violations of inner income legislation by unknown individuals, teams, or courses of individuals, the IRS will search a John Doe summons, which is allowed underneath Inner Income Code § 7609(f). With a standard summons, the IRS seeks details about a particular taxpayer whose identification is thought; in distinction, a John Doe summons permits the IRS to acquire details about any taxpayer inside an “ascertainable group or class of individuals.” I.R.C. § 7609(f)(1). The IRS additionally should have a “affordable foundation” for believing such group or class of individuals might have violated the interior income legislation. I.R.C. § 7609(f)(2).

John Doe summonses usually are not restricted to cryptocurrency transactions. In 2008 and 2013, the IRS obtained John Doe summonses on Swiss-based banks to acquire details about U.S. taxpayers who used Swiss financial institution accounts to evade U.S. federal revenue taxes.

The IRS has made clear its intent on focusing its efforts on acquiring data on these utilizing cryptocurrency to prosecute violations of the interior income legal guidelines.