What the latest IRS crypto tax summons means for investors

The IRS continues to pursue US taxpayers who failed to report and pay taxes on cryptocurrency transactions with a new court order authorizing a subpoena for customer records.

The agency will issue a so-called “John Doe subpoena” requiring MIN Safra Bank to hand over crypto transaction data for SFOX, a digital currency prime broker that used the bank, with more than 175,000 users and over $12 billion in transactions since 2015, according to it US Department of Justice.

It’s not the first IRS subpoena for crypto records, but it’s unusual because the broker appears to be “pretty small,” signaling the possibility of more to come, said Andrew Gordon, tax attorney, CPA and president of the Gordon Law Group in Skokie , Illinois .

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“The IRS has indicated that this is a very high priority for them.” Gordon added.

While the first subpoena for crypto tax records triggered IRS letters for unreported income and unpaid taxes, the response took a few years, said Matt Metras, a registered agent and cryptocurrency tax specialist at MDM Financial Services in Rochester, New York.

“I’m curious to see what happens with all this data they collect,” Metras said, noting that the IRS may try to match it with investors’ tax returns.

Since 2019, there has been a “virtual currency” question on the front of the tax return, asking filers to disclose their taxable crypto activity.

However, there is still uncertainty about how to answer the question, explained Yu-Ting Wang, vice chair of the Virtual Currency Working Group of the Association of International Certified Professional Accountants.

The organization submitted comments to the IRS on the question in late August, asking for revisions to the query and clearer instructions with examples before the agency completes its 2022 tax returns, she said.

In 2021, Congress passed the $1.2 trillion Infrastructure Act, with a provision requiring annual tax reporting by digital currency brokers beginning in 2023.

The measure could bring in nearly $28 billion over a decade, according to a 2021 estimate from Congress’ Joint Committee on Taxation.

But tax professionals are still seeking guidance on the definition of “broker” to know which companies must comply, Wang said.

Regardless of which companies report activity to the IRS, experts say crypto investors need to be proactive.

If you haven’t reported cryptocurrency income on previous tax returns, you should talk to a tax professional with digital currency expertise, Wang suggested.

“It’s much better to come forward and file an amendment than to have the IRS audit you — or potentially worse, for not reporting crypto,” Gordon said.