The IRS recently obtained a “John Doe” summons on Circle. Circle uses blockchain technology to help internet businesses accept payments and send payments globally on their platform. Circle developed and launched the USD Coin (USDC), which is a stablecoin that people can use to transmit value between parties. USDC is redeemable on a 1:1 basis for US dollars and is backed by fully reserved assets.
According to the press release, the IRS is seeking information about US taxpayers who conducted at least $20,000 in transactions with or through Circle between 2016 and 2020. This summons is a step towards the IRS uncovering taxpayers who may be remiss in their tax reporting of cryptocurrency transactions.
This John Doe summons signals that the IRS is continuing to work to ensure that taxpayers are compliant in their tax obligations as they relate to cryptocurrency, and should serve as a reminder to anyone who buys, sells, transfers, or transacts in cryptocurrencies that they need to comply with their tax obligations. As a reminder, anyone filing a tax return this year on Form 1040 must answer whether they received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency (but if the only transactions were buying cryptocurrency for cash, the answer to that question is no).
Interestingly, if a US taxpayer acquires a true stablecoin using US dollars and subsequently disposes of the stablecoin for US dollars, then there should be no gain or loss recognized for US tax purposes. This is because the taxpayer’s cost basis in the stablecoins should be equivalent to the amount realized on the disposition.
However, if the taxpayer uses other cryptos to acquire the stablecoin, such as USDC, then the taxpayer would have a taxable event. When using stablecoins to acquire a crypto, then the US dollar value of the stablecoins will become the taxpayer’s tax basis in the newly acquired crypto.
Note that this is not tax advice—you need to consult your own tax adviser on this matter.