On March 31, 2021 and April 1st, 2021, the IRS filed John Doe Summons targeting Kraken and Circle in effort to obtain customer information and crack down on crypto tax noncompliance.
The summons seeks to force the cryptocurrency exchange operators to turn over records for customers who have transacted $20,000 or more through the respective exchanges during the years 2016 to 2020.
Chuck Rettig, the Chief of the Internal Revenue Service was quoted saying, “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.”
A John Doe Summons is a tool the IRS can use to conduct investigations for taxpayers with which it does not specifically know the name or identity. A judge can grant authorization of a John Doe Summons provided there's a reasonable basis to presume a group of people may have broken tax laws and if such information isn't accessible by other means.
If a summons gets approved, the third party with whom the summons is issued legally has to comply.
A federal court within Massachusetts did approve of the IRS’s request to serve a John Doe summons to “Circle Internet Financial Inc., or its predecessors, subsidiaries, divisions, and affiliates, including Poloniex LLC (collectively ‘Circle’).”
Circle, who purchased popular cryptocurrency exchange Poloniex in 2018 then later spun it out of their core business, announced that it expects “to work collaboratively with the IRS” in complying with the John Doe summons.
A judge in the Northern District of California did not grant approval of the summons for Kraken customer information stating that the request was “too broad”.
However, it’s likely that eventually the IRS will succeed in getting approval. The government agency will likely narrow the scope of its request and file a new version by April 14.
If any of this sounds familiar, it’s because it has happened before. In 2016, the IRS issued this exact same John Doe summons to Coinbase, and the exchange was forced to turn over records for approximately 13,000 customers.
Years later, the IRS sent warning and action letters to thousands of these customers whose data was turned over.
The IRS is likely to receive information on tens of thousands of customers who pass the $20,000 transaction threshold from these John Doe Summons. From here, the agency will cross-reference the information reported with what got filed on tax returns.
We are likely to see more warning letters and audits come from these efforts in years to come.
IRS Commissioner Chuck Rettig stated that this “is a step to enable the IRS to uncover those who are failing to properly report their virtual currency transactions.”
If you haven’t been reporting your cryptocurrency gains, losses, and income on your taxes, you can always amend a prior year's tax return to get in compliance.
Reporting your cryptocurrency on your taxes is fairly straightforward. Capital gains and losses from your trading activity get reported on IRS Form 8949. This gets included with your 1040 Schedule D.For a complete breakdown, checkout our step-by-step guide discussing How to Report Crypto on Your Taxes.