IRS Sends “John Doe” Summons to Boston-Based Cryptocurrency ExchangeArticles/News, Offshore Account Update
Posted on May 14, 2021 | Share
The IRS is cracking down on cryptocurrency investors. In order to do so, it is relying on an investigative tool known as a “John Doe” summons. These summonses allow the IRS to seek information about unspecified individuals from third parties. Recently, the IRS issued a John Doe summons to Boston-based cryptocurrency exchange Circle Internet Financial Inc. (“Circle”). Here, Boston tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, explains what this means for cryptocurrency investors who use the Circle platform.
How the IRS Uses John Doe Summonses to Identify Cryptocurrency Investors
The IRS has two primary options when it comes to identifying cryptocurrency investors. First, it can rely on investors to self-report their gain and loss on cryptocurrency transactions. In 2021, the IRS added a checkbox to Form 1040 Schedule 1 that specifically requires taxpayers to affirm whether or not they have acquired or disposed of cryptocurrency during the tax year. But, even in prior years, cryptocurrency investors have been legally obligated to accurately report their investments.
Second, the IRS can seek information about cryptocurrency investors from third parties. These third parties primarily include cryptocurrency exchanges. The Coinbase summons was among the first of these efforts, and the IRS has continued to use John Doe summonses to obtain information from exchanges in the years since.
As summarized on Bloomberg Tax, the John Doe summons issued to Circle, “does not allege that [the company] has engaged in any wrongdoing in connection with its digital currency exchange business. Rather, according to the court’s order, the summons seeks information related to the IRS’ ‘investigation of an ascertainable group or class of persons that the IRS has reasonable basis to believe ‘may have failed to comply with any provision of any internal revenue laws[.]’”
In other words, the IRS is asking Circle to disclose the identities of its customers so that it can determine if these customers have accurately reported their federal income tax liability. In this particular case, the IRS is focusing on taxpayers who have conducted, “at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020.” But, this does not necessarily mean that it will apply the same threshold when issuing additional John Doe summonses.
What Cryptocurrency Investors Need to Know About Tax Law Compliance
The IRS has made clear that it expects cryptocurrency investors to report their investment transactions and pay what they owe. It has also made clear that it will be ramping up its efforts to enforce cryptocurrency investors’ tax law obligations in the years to come. With this in mind, cryptocurrency investors need to ensure that they report their transactions appropriately; and, for those who have failed to report transactions in the past, it will be important to consult with a Boston tax lawyer before the IRS comes calling.
Request an Appointment with a Boston Tax Lawyer at Thorn Law Group
Kevin E. Thorn, Managing Partner of Thorn Law Group, is a Boston tax lawyer who has significant experience representing cryptocurrency investors. If you have questions or concerns about your federal tax obligations, you can call 617-692-2989, email email@example.com or contact us online to request a confidential consultation.