The relationship between the government and crypto fanatics is divided, and that divide appears to be only growing wider. Through the highest peak of the industry, crypto had begun to draw scrutiny from regulators and policymakers. This year, through the turbulence of a market crash, these same government officials are making their moves to strong-arm the market. One agency making this momentum shift very apparent is the Internal Revenue Service () with its “John Doe summons.” What does this service mean to investors?
Entities like the Securities and Exchanges Commission (SEC) and the U.S. Department of the Treasury (Coinbase (NASDAQ:COIN), Kraken and Tornado Cash are among the many companies being subjected to the long arm of the law.) have been increasingly cracking down on the crypto world. After a relatively quiet last year, investigations targeting illicit securities offerings, insider trading and sanctions violations have become the norm in 2022. And, they target some big fish in the space;
Meanwhile, the floodgates are open at the Department of Defense (DOD) and the FBI. The two bodies are also seeking to curb the crypto market by rooting out rampant hacking and scamming taking place over the blockchain. The latter rolled out its crypto division earlier in the year. And the DOD has just launched its own research group dedicated to cryptocurrency as well. This decision comes as more and more hacks and hacking groups tied to U.S. adversaries take place.
Now, it seems that regulators are expanding their efforts beyond companies and criminals to investors themselves. A new move by the IRS is going to shift the crypto clampdown to end-users and traders.
IRS’s John Doe Summons to Target Tax Dodgers
A natural next step in the progression toward a robust crypto infrastructure is taking place through the IRS. As lawmakers draft up bills, and the SEC attempts to create precedent regarding crypto as a security versus a currency, the IRS is ensuring crypto investors follow the same steps as other investors. It’s doing this through a service called a “John Doe summons.”
The John Doe summons is a favorite tool for the IRS in rooting out tax dodgers. And, it is especially effective in the crypto space. Essentially, this summons allows the IRS to investigate taxpayers it has yet to identify by subpoenaing third parties for information. The process became well known in the late 2000s when the IRS used a John Doe summons to uncover thousands of off-shore bank accounts used by investors to hide wealth and evade taxes.
In recent years, the summons has been used by the IRS in the crypto space. But, it appears to be ramping up its efforts significantly, issuing two summonses just weeks apart from one another to two different companies. These summonses will be used to uncover investors who may have been using crypto’s loose regulations to avoid paying taxes. The companies subpoenaed include crypto exchange SFOX, as well as M.Y. Safra Bank.
The use of John Doe subpoenas in crypto this year is especially interesting compared to previous years. In 2021, the number of American cryptocurrency holders exploded. It’s estimated that 27 million Americans held crypto by the end of the year. And with the IRS’s relatively vague tax provisions on crypto, many Americans have either deliberately or accidentally misreported their crypto holdings on their taxes this year. So, the summonses are likely to affect far more citizens than previous ones.
On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.