The IRS Is Probing Major Crypto Broker for Possible Tax Evaders

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Stock image of bitcoin and tax forms

Another day, another crypto scandal. The Southern District of New York has authorized the IRS to dig into the records of (should be) U.S. taxpayers who are customers of the crypto broker SFOX. The new IRS summons is specifically targeting M.Y. Safra Bank, a New York-based financial institution which offers SFOX users cash-deposit bank accounts.

There are about 175,000 SFOX users who’ve collectively been involved in more than $12 billion in crypto transactions since 2015, according to a news release from the Southern District of New York U.S Attorney’s Office. And the IRS believes many of those investors have been skipping out on their tax payments. The agency noted that it has previously identified at least ten SFOX customers who failed to report their transactions.

From the press statement:

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.

This is not the first time the IRS has opened an investigation into a major crypto dealer. A California court authorized a probe into Kraken’s records in May 2021. And Massachusetts approved a search into Circle’s investors last year, as well. Back in 2017, Coinbase faced its own visit from the taxman.

In each case, the IRS was issued a “John Doe Summons” which basically amounts to an investigative blank check. The agency doesn’t need to know the identity of who they’re looking for at the outset, just what they’re looking for (i.e. tax evasion). With SFOX’s user base, the agency is keeping their search to the subset of investors with $20,000 or more in annual crypto exchanges, and looking at records from between January 1, 2016 and December 31, 2021.

“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,” the NY Attorney’s office explained.

In the new SFOX probe announcement, officials took care to remind everyone that, “taxpayers who transact in cryptocurrencies are required to report any associated profits and losses on their tax returns.”

Yet, crypto bros have been doing their best to ignore the IRS for years, as they reap the benefits (or consequences) of the highly unregulated industry. In 2018, for instance, fewer than 100 people using the popular Credit Karma tax filing software reported Bitcoin holdings in their annual tax filings as of Tax Day that year. According to the IRS, only 802 people reported earnings from Bitcoin in 2015. And still, in the year 2022, an estimated half of all cryptocurrency investors aren’t paying the taxes they owe, according an analysis from Barclays Plc.

As the news release summarized it, “the IRS’s experience has demonstrated significant tax compliance deficiencies relating to cryptocurrencies and other digital assets.” And now it seems like the crackdown could finally be coming. On top of the multiple IRS probes, and a presidential push for regulation, the SEC is also digging in. Just last week, the commission’s chairman indicated that the second largest cryptocurrency may end up classified as a security, and fall under SEC purview.