Damian Williams, the United States Attorney for the Southern District of New York, David A. Hubbert, Deputy Assistant Attorney General for the Justice Department’s Tax Division, and Charles P. Rettig, Commissioner of the Internal Revenue Service (“IRS”), announced that U.S. District Judge Paul G. Gardephe entered an order on September 22, 2022, authorizing the IRS to issue a so-called John Doe summons requiring M.Y. Safra Bank to produce information about U.S. taxpayers who may have failed to report to the IRS, and pay taxes on, cryptocurrency transactions. Specifically, the IRS summons seeks information about customers of SFOX, a cryptocurrency prime broker, who used banking services that M.Y. Safra Bank offered to SFOX customers engaged in cryptocurrency transactions. As described further in the IRS’s petition in support of the summons, though taxpayers who transact in cryptocurrencies are required to report any associated profits and losses on their tax returns, the IRS’s experience has demonstrated significant tax compliance deficiencies relating to cryptocurrencies and other digital assets.
U.S. Attorney Damian Williams said: “Taxpayers are required to truthfully report their tax liabilities on their returns, and liabilities that arise from cryptocurrency transactions are not exempt. The government is committed to using all of the tools at its disposal, including John Doe summonses, to identify taxpayers who have understated their tax liabilities by not reporting cryptocurrency transactions, and to make sure that everyone pays their fair share.”
Deputy Assistant Attorney General David A. Hubbert said: “Taxpayers who transact with cryptocurrency should understand that income and gains from cryptocurrency transactions are taxable. The information sought by the summons approved today will help to ensure that cryptocurrency owners are following the tax laws.
IRS Commissioner Charles P. Rettig said: “The government’s ability to obtain third-party information on those failing to report their gains from digital assets remains a critical tool in catching tax cheats. The court’s granting of the John Doe summons reinforces our ongoing, significant efforts to ensure that everyone pays their fair share. Taxpayers earning income from digital asset transactions need to come into compliance with their filing and reporting responsibilities.”
According to the allegations in the documents filed in support of the petition to authorize the John Doe summons, and other information in the public record:
SFOX is a cryptocurrency prime dealer and trading platform that connects digital currency exchanges, over-the-counter virtual currency brokers, and liquidity providers globally. SFOX has over 175,000 registered users who have collectively undertaken more than $12 billion in transactions since 2015. Based on its recent experiences with cryptocurrencies, the IRS has strong reason to believe that many virtual currency transactions are not being properly reported on tax returns. Among other reasons, there is no third-party reporting to the IRS in connection with such transactions, and summonses served on other cryptocurrency dealers have revealed significant underreporting of such transactions. Further, IRS investigations have identified at least ten U.S. taxpayers who used SFOX’s services for cryptocurrency transactions but failed to report those transactions to the IRS as required by law.
SFOX has partnered with M.Y. Safra to offer SFOX users access to cash-deposit bank accounts. SFOX users were able to use their funds at M.Y. Safra to buy and sell positions in virtual currency from SFOX. Based on M.Y. Safra’s arrangement with SFOX, the IRS expects that in response to the John Doe summons, M.Y. Safra will be able to provide information about the identities and cryptocurrency transactions of SFOX users who also used M.Y. Safra’s services—which the IRS will then be able to use in conjunction with other information to examine whether these users complied with the internal revenue laws.
In this action, the district court granted the IRS permission to serve what is known as a John Doe summons on M.Y. Safra. There is no allegation in this action that M.Y. Safra engaged in any wrongdoing. Rather, the IRS utilizes John Doe summonses to obtain information about possible violations of the internal revenue laws by individuals whose identities are unknown. The John Doe summons directs M.Y. Safra to produce records that will enable the IRS to identify U.S. taxpayers who were customers of SFOX and who engaged in cryptocurrency transactions that may not have been properly reported on tax returns. In parallel, the IRS was authorized on August 15 by the U.S. District Court for the Central District of California to serve a John Doe summons on SFOX itself.
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This case is being handled by the Office’s Tax and Bankruptcy Unit. Assistant U.S. Attorney Jean-David Barnea is in charge of the case.