What is a Crypto John Doe Summons?

Recently, the IRS won John Doe summonses for several major crypto exchanges. We explain what this summons is and what it might mean for you.

Zac McClure
ByZac McClure, MBAUpdated on September 8, 2022 · minute read

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What is a Crypto John Doe Summons?

As part of what it’s calling “Operation Hidden Treasure,” the IRS is stepping up its efforts to enforce taxation of cryptocurrency transactions.[1] One obstacle to achieving this goal is the “anonymity” of many crypto wallets; it’s difficult to tax transactions between unknown parties. 

However, the IRS can turn to the legal system to get the information it needs for enforcement. It does this through petitioning a federal court for a “John Doe” summons. This is a tool that compels exchanges to release user information that the agency can use to determine the identity of U.S. taxpayers who have failed to report their earnings. 

In 2016, the IRS won a John Doe summons for Coinbase, with which Coinbase refused to comply. However, after a legal battle, in 2018 the IRS won a partial enforcement of its request. More recently, the IRS won John Doe summonses for [2] and Poloniex[3], two other large cryptocurrency exchanges. These successes suggest future John Doe summonses against crypto exchanges are a very real possibility. 

Below, we explain what a Joe Doe summons is and how it might affect you.

What is a John Doe summons? 

A John Doe summons is an investigative tool used to determine the identity of unknown individuals who the IRS has reason to believe have been violating tax law. The summons requires a third party—such as a crypto exchange, bank, or credit card company—to provide certain information to the IRS. Before a John Doe summons is issued, it must be approved by a federal court.

In IRM 25.5.7, the IRS outlines the situation in which a John Doe summons may be issued:

“the Service may serve a John Doe summons pursuant to section 7609(f) after a court proceeding in which the Service establishes that:

  1. the summons relates to the investigation of a particular person or ascertainable group or class of persons;

  2. there is a reasonable basis for believing that the person, group, or class may fail or may have failed to comply with any internal revenue provision; and

  3. the information sought from the examination of records and testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources”. [4]

Importantly, John Doe summons are not restricted to U.S-based businesses or individuals; they can also be issued to international entities. For example, previously the IRS has used John Doe summonses to ascertain the identities of U.S. taxpayers using Swiss bank accounts as tax shelters.[5] 

Which exchanges has the IRS targeted?

  • Coinbase (2016, enforced 2018)

  • Kraken (2021)

  • Poloniex (2021)

  • sFOX (2022)

What information have John Doe summonses previously sought?  

When targeting crypto exchanges, the IRS has generally been concerned with individuals who have engaged in transactions totaling $20,000 or more in a single tax year. It asks for a wide range of information including:

  • User preferences

  • Know-Your-Customer records

  • Correspondence between exchanges and users or any third party attempting to access a user’s account

What happens if my data is requested in a John Doe summons?

After the IRS won enforcement on its John Doe summons of Coinbase, it used the information it received to send more than 10,000 letters informing holders that they may have failed to properly report income and giving them the opportunity to comply. 

Some of these cases resulted in tax audits. If an audit reveals a user has deliberately failed to report their income, that individual may be subject to criminal charges, jail time, and/or sizable penalties in addition to their owed taxes. 

So far, criminal litigation for crypto tax evasion has been largely relegated to “big fish,” such as John McAfee[6] and Volodymyr Kvashuk.[7] However, the IRS has indicated that it will be taking a less lenient stance going forward. 

The bottom line: The IRS can compel exchanges to share your personal data 

The IRS’s success winning John Doe summonses against Coinbase, Kraken, and Poloniex makes it clear that for U.S. taxpayers who own cryptocurrency remaining “anonymous” is never guaranteed. 

What’s more, while so far these summonses have targeted U.S.-based exchanges, John Doe summonses have previously been sent to foreign entities, such as banks based in Switzerland or Panama. This means that for U.S. taxpayers, using non-U.S. cryptocurrency exchanges is not a foolproof way to avoid taxation. 

To stay up to date on the latest, follow TokenTax on Twitter @tokentax.

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References

Last reviewed by Zac McClure, MBA on September 8, 2022 · Sources

Zac McClure
Zac McClureCo-Founder at TokenTax
Zac co-founded TokenTax after his career in international finance and accounting at JPMorgan, Imprint Capital and Bain. He has worked in more than half-dozen countries and received his MBA from the UPenn Wharton School.

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