August 16, 2022

U.S. District Court Authorizes IRS "John Doe" Summons to Identify Taxpayers Using Cryptocurrencies

Jason Schwartz Commentary by Jason Schwartz

The U.S. District Court for the Central District of California authorized the IRS to serve a "John Doe" summons on a California-based cryptocurrency prime dealer. The IRS is seeking information about as-yet unidentified U.S. taxpayers who, from 2016 to 2021, conducted at least $20,000 in cryptocurrency transactions with the dealer.

According to the DOJ, the District Court Order allows the IRS to serve the John Doe summons in connection with an investigation "to obtain information about possible violations of internal revenue laws by individuals whose identities are unknown." The summons directs the cryptocurrency dealer to produce records identifying U.S. taxpayers who have used its services, along with other documents relating to the cryptocurrency transactions. The DOJ has not alleged that the cryptocurrency prime dealer or any related entities engaged in wrongdoing. Instead, the Court identified a reasonable basis for the IRS to believe that some of the cryptocurrency prime dealer's customers may have violated federal tax laws.

In 2014, the IRS issued guidance noting that virtual currencies that can be converted into traditional currency are property and can therefore have a capital gain or loss for tax purposes.

Commentary

Congress passed reporting requirements for digital assets that will take effect in 2024 for 2023 taxes. Until that time, centralized digital asset exchanges generally are not required to file for digital assets 1099s, although some already do. The IRS previously has issued John Doe summons to obtain information from Coinbase, Circle, and Kraken to compel the production of taxpayer information. (For a general discussion of the taxation of digital assets, see our article "Squaring the Circle: Smart Contracts and DAOs as Tax Entities").

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