The IRS gets the green light on the broker’s request

The tax authorities are on the trail of all deep-pocketed investors who avoided cryptocurrency taxes related to brokerage transactions.

A federal judge on Tuesday authorized the IRS to issue a John Doe subpoena — a tool used to gather information about unknown taxpayers — to institutional crypto broker SFOX on Tuesday.

SFOX will have to hand over information on all customers who were US taxpayers and traded at least $20,000 in digital assets between 2016 and 2021.

The judge has found “reasonable grounds to believe that individuals conducting at least $20,000 in cryptocurrency transactions may have failed to comply with federal tax laws,” the Justice Department said in a statement.

The IRS has been keen to crack down on crypto transactions, which are typically treated like stocks and subject to capital gains tax, in recent years. The agency has been particularly focused on monitoring betting activity and the market for non-fungible tokens (NFTs).

The IRS has sought and been granted John Doe subpoenas for other crypto businesses, including stablecoin USDC supervisor Circle in April 2021 and crypto exchange Kraken a month later.

“The John Doe subpoena remains a very valuable enforcement tool that the U.S. government will use again and again to catch tax evaders, and this is yet another example of that,” IRS Commissioner Chuck Rettig said in a statement. “I urge all taxpayers to comply with their filing and reporting responsibilities and avoid compromising themselves in schemes that may ultimately go badly for them.”

It is up to the taxpayer to report their own gains to the tax authorities, but exchanges have important know-your-customer and trading information that regulators want.

“Reporting is a big issue right now because exchanges are doing different things,” Shehan Chandrasekera, head of taxation at Coin Tracker, told Blockworks ahead of the 2021 tax season. “If you look at centralized exchanges, they issue, I would say, four different types of tax forms, depending on how they interpret the existing tax codes, given the gray area, so people are very confused.”

Investors using decentralized exchanges or more than one exchange may have a particularly difficult time.

“Exchanges only have visibility into what’s going on inside that exchange,” Chandrasekera said. “But to figure out your taxes correctly, you have to connect all the wallets and exchanges and figure out the actual gain or loss.”

The tax authorities have not alleged any wrongdoing on SFOX’s part.

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