Cryptocurrency exchange Kraken has notified clients that it will turn over user information to the IRS. This was in response to a John Doe summons from the IRS. This type of summons does not explicitly identify the person but instead identifies a person or ascertainable group or class by their activities. To justify a John Doe summons, the IRS must explain why the agency is requesting the info.
The IRS cited statistics indicating that only 800 to 900 taxpayers per year filed tax returns with a property description related to Bitcoin or virtual currency in the period between 2013 and 2015. They also pointed to a 2019 study that showed the overall rate of underreporting of income not subject to third-party information reporting was 55%, compared to just 5% for amounts subject to information reporting but no withholding.
Kraken will turn over data for users with any combination of accounts that exceeded $20,000 in value of transactions in any year for the period Jan. 1, 2016, through Dec. 31, 2020. This includes name, date of birth, taxpayer identification number, physical address, telephone number, email address, and transaction history for 2016 to 2020.
The IRS has been successful in other matters seeking legal records. In 2019, they sent letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions. The IRS also added a question about virtual currency to Form 1040 in 2020. In 2021, they launched ‘Operation Hidden Treasure,’ a partnership between the IRS’ Office of Fraud Enforcement and IRS-Criminal Investigation that was focused on cryptocurrency tax and related noncompliance by taxpayers.
Taxpayers with reportable cryptocurrency transactions should consult with a tax professional and keep excellent records. This includes receipts, sales, exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency.