The tax authorities are investigating a major crypto broker for possible tax evaders

The tax authorities are investigating a major crypto broker for possible tax evaders
The tax authorities are investigating a major crypto broker for possible tax evaders

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) US taxpayers who are customers of crypto broker SFOX. The new IRS summons is specifically targeting MY Safra Bank, a New York-based financial institution that offers SFOX users cash deposit bank accounts.

There are around 175,000 SFOX users who have 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 US ONEthe lawyer’s Ooffice. And the tax authorities believe that many of these investors have skipped 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 release:

Based on their recent experience with cryptocurrencies, the IRS has strong reason to believe that many virtual currency transactions are not being correctly reported on tax returns. Among other reasons, there is no third-party reporting to the IRS in connection with such transactions, and subpoenas served on other cryptocurrency dealers have revealed significant underreporting of such transactions.

This is not the first time that tax authorities have opened an investigation into a major crypto dealer. A court in California authorized a probe into Kraken’s records in May 2021. And Massachusetts authorized a search into Circle’s investors last year too. Back in 2017, Coinbase faced ittheir own visit from taxman.

In each case, the IRS was issued a “John Doe Summons” which basically amounts to an investigative blank check. The agency does not need to know the identity of WHO they are looking for in the beginning, only what they are looking for (ie tax evasion). With SFOX’s user base, the agency keeps its search to the subset of investors with $20,000 or more in annual crypto exchanges, looking at records from between January 1, 2016 and December 31, 2021.

“The IRS expects that in response to the John Doe subpoena, MY Safra will be able to provide information about the identities and cryptocurrency transactions of SFOX users who also used MY Safra’s services – which the IRS will then be able to use along with other information to investigate whether these users complied with the the internal revenue laws,” the NY Attorney’s office explained.

In the new SFOX probe announcement, officials were careful to remind everyone that “taxpayers who trade in cryptocurrencies are required to report any associated gains and losses on their tax returns.”

Yet cryptobros have done their best to ignore the IRS for years, as they reap the benefits (or consequences) of the highly unregulated industry. In 2018, for example, fewer than 100 people using the popular Credit Karma tax filing software reported Bitcoin holdings in their annual tax filings as of that year’s tax day. According to the tax authorities, only 802 people reported earnings from Bitcoin in 2015. And still, in the year 2022, an estimated half of all cryptocurrency investors do not pay the taxes they owe, according to an analysis from Barclays Plc.

As the press release summed it up, “the IRS’s experience has shown significant deficiencies in tax compliance related to cryptocurrencies and other digital assets.” And now it seems that the impact may finally come. On top of several IRS probes, and a presidential indentation for regulation is the SEC also digs in. Just last week, the head of the commission indicated that the second largest cryptocurrency may end up classified as a securityand falls under the SEC’s purview.

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