In 2018, Coinbase notified its customers that the company had to provide the IRS with its customer information. Soon after, customers started receiving letters from IRS about the importance of reporting crypto earnings. And that's why tax professionals sat up and took note at two recent conferences when officials from the Internal Revenue Service (IRS) said the IRS would continue to use “John Doe summons”—the legal instruments that can force companies to identify customers with cryptocurrency-related earnings.

And this is something every crypto investor should be aware of: Failing to pay attention now could mean you'll be paying more cash later.

WHAT A JOHN DOE SUMMONS DOES

A John Doe summons is the term for when the IRS sends a notice to a company, asking for records relating to customers who have made types of transactions of interest to the IRS, but the IRS does not know the customers' identities.

The IRS cannot issue a John Doe summons on its own; instead, the IRS must first get court approval to issue one. But last spring, the federal courts twice granted the IRS approval to serve John Doe summons upon cryptocurrency firms. In both cases, the IRS asked the firms to reveal all of their customers who had conducted at least $20,000 in crypto transactions during 2016-2020.

ONCE IDENTITIES ARE KNOWN, LETTERS MAY BE ON THE WAY

Once companies produce their customers' records, we should anticipate that the IRS will start sending soft demand letters to those individuals. In these letters, the IRS will not demand any payment, but it will start to lay out reasons why these individuals may need to file returns for unreported earnings.

RELY ON EXPERIENCED TAX COUNSEL

If you've made any large crypto transactions, don't wait for a letter from the IRS. Instead, get a tax attorney who works with cryptocurrency investors to help you figure out what, if any, liability you may face and to plan a strategy for protecting your interests. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.