The IRS is issuing John Doe Summons to Catch Crypto Traders

In the past, virtual currency traders thought that their trading was not taxable.  The IRS began pursuing these traders. The exchange system for virtual assets is young and many thought that actual reporting would protect them.

What many traders failed to realize is that the IRS has the ability to issue John Doe Summons that compel the exchange to surrender this information in the same way banks and the stock exchange can be compelled to do. To make matters worse, there is no requirement to inform the taxpayer of the summons and that taxpayer will only find out after the fact when the letter demanding payment arrives.

In a recent district court ruling involving Coinbase, the IRS was upheld when the summons was challenged on Fourth and Fifth Amendment grounds.  The court held that this was a permissible tool because of the third-party status of the exchange.

The lesson to learn from this case is more broad.  Don’t try to hide money from the IRS.  They have an incredible amount of power and many tools at their disposal to find out what a taxpayer has earned, bought, and sold.  

Always tell your tax professional everything about all transactions and report anything taxable.  If a transaction isn’t taxable and is reported, that is much less costly than if a transaction is taxable and not reported.  

Penalties and interest will accrue for the latter case.  Your tax advisor is the best source of relevant information on the taxability of any transaction.

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