Damian Williams, United States Attorney for the Southern District of New York, David A. Hubbert, Deputy Assistant Attorney General for the Tax Division of the Department of Justice, and Charles P. Rettig, Commissioner of the Internal Revenue Service (“IRS “), announced that US District Judge Paul G. Gardephe issued an order on September 22, 2022, authorizing the IRS to issue a so-called John Doe subpoena requiring My Safra Bank to produce information about US taxpayers who may have defaulted report to the IRS, and pay taxes on cryptocurrency transactions. Specifically, the IRS subpoena seeks information about customers of SFOX, a leading cryptocurrency broker, who used banking services that MY Safra Bank provided to SFOX customers engaged in cryptocurrency transactions. As further described in the IRS’s petition in support of the summons, although taxpayers who transact in cryptocurrencies are required to report any related gains and losses on their tax returns, the IRS’s experience has demonstrated significant tax compliance deficiencies related to cryptocurrencies and other digital assets.
US Attorney Damian Williams said: “Taxpayers are required to truthfully report their tax liabilities on their returns, and liabilities arising from cryptocurrency transactions are not exempt. The government is committed to using all tools at its disposal, including John Doe subpoenas, to identify taxpayers who have underreported their tax liabilities by not reporting cryptocurrency transactions and to ensure that everyone pays their share their right.
Deputy Assistant Attorney General David A. Hubbert said: “Taxpayers who transact with cryptocurrencies should understand that income and profits from cryptocurrency transactions are taxable. The information requested by the subpoenas approved today will help ensure that cryptocurrency owners are following tax laws.
IRS Commissioner Charles P. Rettig said: “The government’s ability to obtain third-party information about those who do not report their digital asset earnings remains a critical tool in catching tax fraud. The court’s granting of the John Doe subpoena reinforces our ongoing and meaningful efforts to ensure that everyone pays their fair share. Taxpayers who earn income from digital asset transactions must comply with their filing and reporting responsibilities.”
According to allegations in documents filed in support of the petition to authorize the John Doe subpoena, and other information in the public record:
SFOX is a leading cryptocurrency trader and trading platform connecting digital currency exchanges, over-the-counter virtual currency brokers and liquidity providers globally. SFOX has over 175,000 registered users who have collectively undertaken more than $12 billion in transactions since 2015. Based on its recent experiences with cryptocurrencies, the IRS has strong reason to believe that many virtual currency transactions are not properly reported. must in the tax returns. Among other reasons, there is no third-party reporting to the IRS regarding such transactions, and calls made by other cryptocurrency traders have revealed significant underreporting of such transactions. Further, IRS investigations have identified at least ten US taxpayers who used SFOX’s services for cryptocurrency transactions but did not report those transactions to the IRS as required by law.
SFOX has partnered with MY Safra to offer SFOX users access to cash deposit bank accounts. SFOX users were able to use their MY Safra funds to buy and sell virtual currency positions from SFOX. Based on MY Safra’s agreement with SFOX, 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’s services. Safra – which the IRS will then be able to use along with other information to examine whether these users are in compliance with internal revenue laws.
In this action, the district court granted the IRS permission to serve what is known as a John Doe subpoena on MY Safra. There is no allegation in this action that Safra IME engaged in any wrongdoing. Rather, the IRS uses John Doe subpoenas to obtain information about potential violations of internal revenue laws by individuals whose identities are unknown. The John Doe subpoena directs MY Safra to produce data that will enable the IRS to identify US taxpayers who were clients of SFOX and who engaged in cryptocurrency transactions that may not have been properly reported on tax returns. In parallel, the IRS was authorized on August 15 by the US District Court for the Central District of California to send a John Doe subpoena to SFOX itself.
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This case is being handled by the Office’s Tax and Insolvency Unit. Assistant US Attorney Jean-David Barnea is in charge of the case.
