Court Enters Order Authorizing IRS to Serve John Doe Summons on Fintech Circle to Obtain Info on US Taxpayers’ Crypto Transactions

A federal court in the District of Massachusetts recently entered an order that authorizes the US Internal Revenue Service (IRS) to serve a John Doe summons on Circle Internet Financial Inc., “or its predecessors, subsidiaries, divisions, and affiliates, including Poloniex LLC.”

According to a release, the IRS is seeking certain information related to American taxpayers who carried out “at least the equivalent” of $20,000 in transactions involving virtual currency “during the years 2016 to 2020.” The IRS is seeking the records of Americans who may have taken part in business activities with or through Circle, which serves as a virtual currency exchanger  (headquartered in Boston).

Acting Assistant Attorney General David A. Hubbert of the Justice Dept. Tax Unit, stated:

“Those who transact with cryptocurrency must meet their tax obligations like any other taxpayer. The Department of Justice will continue to work with the IRS to ensure that cryptocurrency owners are paying their fair share of taxes.”

IRS Commissioner Chuck Rettig remarked:

“Tools like the John Doe summons authorized today send the clear message to U.S. taxpayers that the IRS is working to ensure that they are fully compliant in their use of virtual currency. 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.”

The release further noted that cryptocurrency is “a digital representation of value.” Since transactions in virtual currencies may be challenging to accurately trace and have an “inherently pseudo-anonymous aspect,” taxpayers could be using them to “hide taxable income from the IRS,” the release noted.

In the court’s order, U.S. Judge Richard G. Stearns determined that there’s a “reasonable basis for believing that cryptocurrency users may have failed to comply with federal tax laws,” the release added.

The release also mentioned that the court’s order gives the IRS permission to “serve what is known as a “John Doe” summons on Circle.” The US’ petition does “not allege that Circle has engaged in any wrongdoing in connection with its digital currency exchange business.” Instead, according to the court’s order, the summons “seeks information related to the IRS’s ‘investigation of an ascertainable group or class of persons that the IRS has a reasonable basis to believe may have failed to comply with any provision of any internal revenue laws[.],” the release clarified.

It further noted that “according to the copy of the summons filed with the petition, the IRS is requesting that Circle produce records identifying the U.S. taxpayers described above, along with other documents relating to their cryptocurrency transactions.”

The IRS issued guidance “regarding the tax treatment of virtual currencies in IRS Notice 2014-21, which provides that virtual currencies that can be converted into traditional currency are property for tax purposes,” the release confirmed. It added that the guidance explains that “receipt of virtual currency as payment for goods or services is treated as income and that a taxpayer can have a gain or loss on the sale or exchange of a virtual currency, depending on the taxpayer’s cost to purchase the virtual currency (that is, the taxpayer’s tax basis).”

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