Cryptocurrency users beware: IRS targets unknown taxpayers via John Doe summons

Earlier this month a federal court in the District of Massachusetts granted an order allowing the Internal Revenue Service (IRS) to serve a John Doe summons on a digital currency exchanger. The summons, a tool used to target unknown taxpayers, is aimed at all US taxpayers who have conducted at least US$20,000 in cryptocurrency transactions between tax years 2016 and 2020 via the exchanger's platform. The summons require the crypto exchanger to produce records identifying all such taxpayers falling above this US$20,000 threshold, along with any documentation related to their cryptocurrency transactions.

This development is the most recent attempt by the federal government to capture and impose tax upon virtual currency transactions in the United States. As outlined in IRS Notice 2014-21, a taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency as of the date that the virtual currency was received. Thus, as with any other property, taxpayers must pay tax upon any gain realized as a result of a virtual currency exchange. Other recent tools and developments in this area were discussed in our prior legal update, IRS and global tax enforcers expand war on cryptocurrency fraud: Latest developments increase arsenal.

Due to the pseudo-anonymous nature of e-currency platforms, the IRS has largely been reliant upon, and limited by, the self-reporting of taxpayers. As virtual currency gains traction, the federal government continues to expand its efforts to identify and tax such transactions. As explained by IRS Commissioner Chuck Rettig, "Tools like the John Doe summons authorized today send the clear message to US taxpayers that the IRS is working to ensure that they are fully compliant in their use of virtual currency . . . The John Doe summons is a step to enable the IRS to uncover those who are failing to properly report their virtual currency transactions. We will enforce the law where we find systemic noncompliance or fraud." In the future, we can expect to see similar John Doe summons served upon other digital currency exchangers, with an unknown number of tax audits and assessments against US taxpayers likely to result from such investigations.