The rise of Bitcoin has captured the imaginations of investors hoping to making a quick buck or million, leading the Internal Revenue Service to turn its ever-watchful eye toward crypto-currency exchanges as those dreams become reality.

The IRS’s efforts to get its cut gained traction when the U.S. District Court in the Northern District of California granted a judgment on November 27 against crypto-currency exchange Coinbase. According to court records , the IRS wants to know the identities and federal tax liabilities of Bitcoin account holders who have failed or may be failing to comply with federal tax obligations.

“These records may be relevant in assisting with tax non-compliance investigations by identifying beneficial owners and parties involved in virtual currency transactions conducted through aliases, pseudonyms, or nominees as well as identifying internet protocol and email addresses of U.S. persons,” wrote David Utzke, a senior revenue agent with the IRS, in his declaration to the court.

The Coinbase investigation could lead to new rules concerning digital currency trading, according to Kari Larsen, an attorney in Reed Smith’s FinTech and Financial Regulation Group.

“New guidelines would be a benefit to the industry because there’s not only Bitcoin but also digital assets like tokens, which are on the rise,” Ms. Larsen told PacerMonitor.

In addition to taxpayer ID number, type of transaction and post transaction balance, Coinbase is ordered to disclose periodic statements of account or invoices from 2013 to 2015 for transactions from $20,000, which means now is a good time for Coinbase investors who sold Bitcoin at a profit to review their tax forms.

“If you gained money as a Coinbase investor, contact a CPA about refiling your tax return and declaring the gain,” said Rob Wrubel, a certified financial planner with Cascade Investment Group in Colorado Springs, Colorado.

Bitcoin and ethereum are digital currencies that were originally created for people to buy and sell goods online as an alternative to traditional payment methods.

“Bitcoin transactions and transactions made with other tokens like ethereum are completed and recorded independently in a ledger known as a blockchain, which is unaffiliated with any central banking system,” said Kit Carson, head of banking and fintech with Globaldata.com.

Because tokens mask the identity of the person buying and selling goods online, Bitcoin is increasingly being used as an investment and, in some cases, for illegal purposes.

“The legitimate service that Bitcoin can provide us is transfer of value across borders at a relatively inexpensive rate,” Ms. Larsen said. “Once there is further development on digital identification and addressing money laundering concerns, there will be significant traction for digital currencies all around.”

Bitcoin prices are believed to have dropped 20% on the news of the Coinbase court order , but they have since recovered, according to news reports . The volatility is to be expected, according to David Levine, a virtual currency investor and CEO of Indeco, a crypto-asset developer in Reston, Virginia.

“Insiders thought hedge funds would short Bitcoin but that didn’t happen so it’s hovering between $16,000 and $18,000,” Mr. Levine said.

“There are new people coming into the Bitcoin trading market everyday, which keeps it afloat,” Mr. Levine said “That’s what happens with market bubbles and frenzies, which is why the SEC wants to regulate it and the IRS wants to get information because these agencies have a responsibility to prevent money laundering and to protect the American people.”

The fact that people in countries like Venezuela, Zimbabwe and India buy and hold digital assets to mitigate the risks of demonetization or hyperinflation could detrimentally impact the U.S, according to Mr. Levine.

“The market is large enough now that a collapse in the price could significantly impact individual portfolios and possibly the broader economy,” said Mr. Levine.

To protect themselves, he advises American investors to limit trading in Bitcoin and other crypto-currencies to portals that are regulated by Regulation D 506c, Regulation Crowdfunding or Regulation A+ under the JOBS Act.

“Avoid trading platforms that claim crypto assets are a property or utility token that anybody can buy, sell or exchange,” Mr. Levine said. “The truth is that the entire coin industry falls under the jurisdiction of securities law.”

Coinbase isn’t the first target of a government raid on digital tokens. For example, the cyber unit of the Securities and Exchange Commission announced December 4 it had filed charges against Dominic Lacroix, alleging he’d marketed and sold securities called PlexCoin on the internet to U.S. investors.

“This first Cyber Unit case hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing,” said Robert Cohen, chief of the SEC’s Cyber Unit. “We acted quickly to protect retail investors from this initial coin offering’s false promises.”

The alleged scheme raised up to $15 million from thousands of investors since August by falsely promising that the Initial Coin Offering (ICO) would return a 13-fold profit in less than a month.

In September, acting Manhattan U.S. Attorney Joon H. Kim announced in a statement online the forfeiture of $48,238,116 in proceeds from the sale of the 144,336 Bitcoins that were recovered from the laptop computer of Ross William Ulbricht.

“Many in the crypto community have believed for such a long time that they are above and beyond the law because they operate anonymously under a global Distributed Autonomous Organization (DAO) that knows how to navigate around the laws on the dark web,” Mr. Levine told PacerMonitor.

Also known as a Decentralized Autonomous Organization, the legal status of a DAO’s business organization is unclear.

Meanwhile, Mr. Ulbricht was found guilty in 2015 of distributing narcotics and conspiring to commit money laundering in connection with his operation of the Silk Road underground website.

“Digital currencies are becoming too big of an industry to ignore, and the technology is evolving so that more tokenization may occur to facilitate commercial purposes, which will likely bring more regulation,” Ms. Larsen said.

Another problem with crypto-currency is that it remains unsupported by equities. “The dotcom boom was backed by tech stocks like Priceline and Amazon,” said Leon LaBrecque, a financial advisor in Troy Michigan who is also an attorney. “In this case, we’ve got just a transactional currency that is based completely on everybody’s perception with no underlying significant value. It’s rising in cost now because everybody’s buying it.”

The international online crypto-currency market cap is valued at $189 billion, according to GlobalData , and is expected to grow because of an increasingly global business and connectivity environment, but full adoption by regulators around the world isn’t likely anytime soon.

This week a California company, called Munchee Inc., which was selling digital tokens to raise capital, halted its ICO after being contacted by the Securities and Exchange Commission. Munchee had been seeking $15 million in capital to improve an iPhone app offering restaurant reviews. But, in the course of the offering, the company and other promoters allegedly emphasized that investors could expect that efforts by the company and others would lead to an increase in value of the tokens.

“Our primary focus remains investor protection and making sure that investors are being offered investment opportunities with all the information and disclosures required under the federal securities laws,” said Steven Peikin, co-director of the SEC’s Enforcement Division.

Most recently, the SEC chose not to approve a Bitcoin exchange-traded fund application. “The SEC wants tokens on the market that comply with their rules,” Mr. Levine said. “The problem with an ETF is Bitcoin as an underlying asset is uncertain.”

Yet, there are plenty of alternate federally regulated platforms in which interested investors can park their money in Bitcoin swaps, Bitcoin options and Bitcoin futures on exchanges like CME and CBOE.

“The NASDAQ has similarly said they plan to list digital currency futures product so that may change the game in the long run for Bitcoin products that the SEC has rejected,” said Ms. Larsen.

Although it’s up to crypto token issuers to comply with securities law, legal action such as a fine or even arrest potentially awaits an individual investor who innocently buys a renegade token and then sells it without complying with the appropriate regulations.

“The SEC has been increasingly vocal and clear that some tokens that have been created or issued could be deemed securities, and if they are, they have to comply with all the applicable securities regulations or exemptions,” Ms. Larsen said.

That’s because the sale of a crypto asset, like any security, on the secondary market is required to conform with Blue Sky laws, which vary by state and typically require sellers to disclose their transactions and provide financial details to state regulators.

“Stay compliant no matter what you invest in because it’s not worth the penalties, the jail time or the tax liability,” Mr. Wrubel told Pacer Monitor News.

A space where private investors trade among each other, the secondary market, its regulatory procedures and authority is currently being negotiated between federal jurisdiction under the SEC and state jurisdiction by the North American Association of Securities Administrators (NAASA).