(Kitco News) - Regulators appear to be making up for lost time on the crypto front, as Thursday brought news that the Internal Revenue Service has set its sights on the cryptocurrency prime dealer SFOX Inc., seeking customer records to ensure that users are paying their taxes.
Based on court filings in New York and Los Angeles, the agency has asked federal judges for clearance to serve summonses to SFOX and M.Y. Safra Bank, the banking partner of SFOX, which offered customers cash deposit accounts backed by the Federal Deposit Insurance Corporation.
The main focus of the investigation is on customers who conducted more than $20,000 worth of cryptocurrency transactions over the course of one year, from 2016 to 2021. According to the rules laid out by the IRS, users can buy digital assets with U.S. dollars and hold them in their wallets without being subject to tax. But once an asset is sold or traded, that becomes a taxable event, and traders are expected to report those activities when they file their taxes.
According to documents provided by the government, the 175,000 registered users of SFOX have conducted more than $12 billion in transactions since 2015.
SFOX was founded in 2014 and is backed by multiple well-known firms, including the Digital Currency Group, Blockchain Capital, Y Combinator and Airbnb co-founder Nathan Belcharczy.
Earlier in 2022, SFOX was approved by the State of Wyoming for a trust charter, which allowed the firm to provide custodial and other crypto-related services to institutional clients. The charter allowed the firm to operate as the SAFE Trust Company, which serves institutional clients, private clients and advisers.
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The hunt for crypto tax dodgers
In May, Barclays Plc released an analysis that showed cryptocurrency investors are paying less than half of the taxes that they own, leading the IRS to make cracking down on the industry a top priority.
According to court papers filed on Monday in Los Angeles, "Transactions in cryptocurrency have grown substantially in recent years, and the IRS is concerned that taxpayers are not properly reporting these transactions on their tax returns."
SFOX is not the first exchange to face such demands from the IRS as multiple large U.S.-based organizations, including Coinbase, Kraken and Circle Internet Financial, have been subject to these "John Doe" summonses by federal regulators.
This week's actions against SFOX come amid a broader push by U.S. regulators to establish greater oversight of the crypto industry. Recent developments include the introduction of a bill to classify Bitcoin (BTC) and Ethereum (ETH) as securities and the passage of a proposal that will require hedge funds to report their cryptocurrency exposure.
