U.K. Tax Authorities Join the U.S. in Zeal for Crypto Trading Data

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Part Two in a Series on U.S. and International Cryptocurrency Taxation

Tax authorities around the world are struggling to obtain information on taxpayers with cryptocurrency assets but in the U.S., Canada, and U.K. officials are increasingly relying on their summons powers to compel cryptocurrency exchanges to share customer data. In the U.S. in particular, the Internal Revenue Service’s quest for cryptocurrency-related taxpayer information shows little sign of stopping. In August, the IRS received judicial approval to serve its latest set of cryptocurrency-related John Doe summonses on California-based cryptocurrency prime dealer SFOX. Those summons require the company to release information about U.S. taxpayers who conducted $20,000 or more in cryptocurrency transactions between 2016 and 2021.

The IRS is now six years into its search for cryptocurrency-related tax data, and it has been a trailblazer in many ways. In 2016 the IRS was the first taxing authority to file a cryptocurrency-related John Doe summons against a cryptocurrency exchange. That exchange was Coinbase. At the time, it wasn’t clear if other countries would follow the IRS’ example. In the years since, other English-speaking countries have joined the U.S. in filing summonses against cryptocurrency exchanges. From those summonses, it has become clear that different countries have different standards.

United States

The anonymous nature of cryptocurrency, and ongoing confusion over cryptocurrency tax reporting requirements means that the IRS may be losing out on billions of tax revenue. One estimate places the U.S. cryptocurrency tax gap at $50 billion.

But the IRS does have a powerful information gathering tool at its disposal. Section 7609(f) of the Internal Revenue Code allows the IRS to seek a John Doe summons, which allows the Service to investigate potential tax violations against an individual taxpayer or group of taxpayers whose individual identities are unclear. Those summonses are subject to a three-part test:

  1. The summons must relate to the investigation of a particular person or ascertainable group of persons;

  2. There is a reasonable basis for believing that the person or group of persons may fail or may have failed to comply with any provision of any internal revenue law;

  3. The information and identities sought to be obtained from summoned records must not be readily available from other sources.

To emphasize, this means the IRS, in seeking a summons, must have a reasonable basis that cryptocurrency users may not have complied with their income tax obligations. This is a rather stringent standard to clear.

The IRS must have a “necessary purpose” for seeking the information. According to IRS guidance, a John Doe summons cannot be used to conduct a “fishing expedition.” At the time investigators seek a summons, they should have completed their information-gathering or research stage and must seek the information for a specific compliance problem. They also must be prepared to investigate the tax liabilities of specific taxpayers based on the information they collect. (IRM 25.5.7.4, “Statutory Requirements for a Valid John Doe Summons”).

Canada

Canada has been much slower than the U.S. to use summons power against cryptocurrency exchanges. In March 2021, the Canada Revenue Agency received judicial approval for its first cryptocurrency-related third-party request: a so-called “unnamed persons requirement” on cryptocurrency exchange Coinsquare. So far, the Coinsquare matter is the CRA’s first and only publicly reported cryptocurrency-related request, but the request is important because its information-seeking standard is different than that of the IRS.

Unlike the IRS, the CRA does not need a reasonable basis for believing that taxpayers are noncompliant with their income tax obligations when filing an unnamed persons requirement. When the CRA filed its Coinsquare request in Canada’s Federal Court, it merely wanted information on whether the company’s customers were paying their taxes, but it didn’t have a suspicion of wrongdoing per se.

That is reflected in the depth of the CRA’s request to Coinsquare, as the agency wanted:

  • A list of all active and inactive customer accounts, held alone or jointly with other parties

  • A detailed listing of all cryptocurrency and fiat currency transfers. As part of that request, the CRA also wanted:

    • supporting information, including the source and destination of those deposits and withdrawals;

    • the type of fiat currency or cryptocurrency transferred;

    • the date and time of the transactions;

    • cryptocurrency address and bank accounts, and all other information Coinsquare collects on fundings and withdrawals to customer accounts.

  • A detailed listing of all of Coinsquare's customer trading activity, including over-the-counter and off-exchange trades, and cryptocurrency addresses that were or may have been used by the company’s customers.

The CRA didn’t receive all that it asked for. After negotiations with Coinsquare it agreed to limit its request to Coinsquare’s largest and most active accounts with at least C $20,000 in account values or deposits. But the precedent set by the CRA indicates that cryptocurrency users with Canadian accounts should anticipate government scrutiny into their accounts, even if no wrongdoing is alleged or suspected.

United Kingdom

British authorities have a bit more experience handling cryptocurrency data requests than the CRA, and have cast a wider net. In 2019, HM Revenue & Customs reportedly asked Coinbase, eToro and CEX.IO to divulge information about their customers and those customers’ transactions. HMRC has also taken its inquiries global, according to Gherson LLP, which filed a freedom of information request with HMRC regarding its cryptocurrency data gathering. In that FOI request, HMRC stated that it has used international treaties to obtain information held by foreign crypto asset exchanges.

A Shifting Crypto Tax Landscape

As governments navigate the opaque world of cryptocurrency, it is clear that there is no universal standard on the types of data that taxing authorities could seek from cryptocurrency exchanges. Different countries are pursuing very different strategies. These differing approaches are important considering the mobile and cross-border nature of cryptocurrency.

Questions abound as to what legal lengths taxing jurisdictions can go to claim a right to customer data. Given the ever-expanding precedents,taxpayers with cryptocurrency accounts should not expect their buying and trading activities to be protected. Rather, they should anticipate that their transactions can be discovered by taxing authorities, and should seek the advice of an international tax expert to navigate their filing responsibilities.

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