Crypto Investors Lost Big In The Crash, Now IRS Is Demanding More Records To Track Down Hidden Profits

While investors scramble to recover funds lost in the 2022 crypto market crash, the Internal Revenue Service is boosting efforts to raise more revenue from crypto owners and targeting U.S. taxpayers who failed to report and pay taxes on crypto transactions.

 A new court order allows the IRS to issue a “John Doe summons” for customer records. A normal IRS summons seeks information about a specific taxpayer whose identity is known. A John Doe summons involves taxpayers in a group the IRS cannot identify by name, and it’s one of the most powerful tools in the IRS arsenal, wrote former DOJ litigator Joshua Smeltzer.

The IRS wants M.Y. Safra Bank to turn over crypto transaction data for SFOX, a digital currency prime broker that used the bank, with more than 175,000 users and $12 billion-plus in transactions since 2015, according to the U.S. Department of Justice, CNBC reported.

Because crypto transactions can be hard to trace and have “an inherently pseudo-anonymous aspect,” taxpayers may be using them to hide taxable income from the IRS, the Department of Justice said in an August press release.

The IRS has issued such summons before for crypto records, and this case seems to be a sign that there may be more to come, said Andrew Gordon, tax attorney, CPA and president of Gordon Law Group in Skokie, Illinois. 

The IRS may try to match the data they’re collecting via the John Doe summons with investors’ tax returns, said Matt Metras, a crypto tax specialist at MDM Financial Services in Rochester, New York.

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Eralier in 2022, the IRS launched “Operation Hidden Treasure” to uncover crypto tax avoidance.

This coincided with a push to get information from crypto exchanges for prior tax years, and new reporting requirements for “digital asset” brokers that are similar to brokers of stocks and bonds.

“Unfortunately, while the IRS has made clear it plans to rake in more revenue from crypto-related transactions, the agency and Congress have provided taxpayers with only limited guidance about how to report (and pay tax) on crypto-related transactions,” wrote Nicholas C. Mowbray, counsel with Baker & Hostetler LLP’s Washington D.C. office.

“This has left many well-meaning tax filers struggling to understand the proper tax treatment of numerous crypto-related transactions, and worrying if they will face costly IRS examinations, penalties, or even prosecution if they under-report or fail to report taxable income from crypto-related transactions,” Mowbray wrote.

When it comes to compliance, experts urge crypto investors to be proactive. If you haven’t reported crypto income on earlier tax returns, speak with a tax professional with digital currency expertise.

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

Taxpayers are up against a well-equipped and aggressive IRS that’s training staff to scrutinize crypto-related transactions. They are also obliged to swear under “penalties of perjury,” that their tax returns are true, correct, and complete, Mowbray wrote for Decrypt.