In a significant development, the popular cryptocurrency exchange Kraken has been ordered to provide user information to the Internal Revenue Service (IRS) by a federal court. This ruling raises important questions about user privacy and the extent of government authority in obtaining personal data from cryptocurrency platforms.
The court order requires Kraken to hand over information on its users who conducted transactions of at least $20,000 in cryptocurrency between 2016 and 2020. This information includes user names, tax identification numbers, addresses, and transaction records. The IRS argues that it needs this data to ensure compliance with tax laws and prevent tax evasion within the crypto space.
“The agency said it needed the information to determine if any of the exchange’s users had underreported their taxes.”[1]
The ruling has sparked concerns about user privacy within the cryptocurrency community. Many users value the pseudonymous nature of cryptocurrencies and choose to transact without revealing their personal information. This court order has the potential to erode this privacy and expose individuals to potential risks, such as hacking, identity theft, or unwarranted surveillance.
All of the above stems from the fact that “In February, the IRS submitted a court petition in the Northern District of California shortly after Kraken reached a settlement with the U.S. Security Exchange Commission (SEC) over claims of securities law violations related to its staking service.”[2]
The IRS asserted that it had summoned Kraken in 2021, which the exchange allegedly ignored. Thus, this is not new for Kraken as last April, a judge rejected the IRS’s requests to inspect Kraken’s documents. However, as per now, a higher court granted the permission to proceed with the investigation. Hence the IRS is currently looking into the tax liabilities of users who transacted in cryptocurrencies between 2016 and 2020.
Nevertheless, “Judge Joseph Spiro denied a number of separate petitions by the IRS, which included requests for information on money laundering activities, clients’ net worth, and their source of wealth, among others.”[3] According to the magistrate, the court must determine if the government’s summons is sufficiently focused, which means it shouldn’t go beyond what is required to serve its intended objective.
In addition to the information mentioned above, “Kraken will be required to release blockchain addresses and transaction hashes, which are already included in the transaction data available for sharing. The exchange may also be asked to provide raw data to the IRS.”[4]
The case involving Kraken is part of a broader debate on the regulatory oversight of the crypto industry, and arises at a time where there has been an extensive repression on the cryptocurrency industry. In the last months, the SEC has taken Coinbase and Binance.US for alleged unregistered securities offering. Within the Kraken case, the one of Coinbase has been widely referenced.
It’s important to note that according to the IRS agent leading the case, “Kraken is one of the largest digital currency exchanges with over four million clients and over $140 billion in trading activity since 2011. It has been reported that as of the end of 2017, Kraken was registering up to 50,000 new users a day.”[5]
The outcome of the Kraken case will have significant implications for the future of user privacy and regulatory oversight in the crypto industry. It raises important questions about the extent to which governments can access personal data from cryptocurrency exchanges without violating individuals’ privacy rights. The recent court order requiring Kraken to provide user information to the IRS underscores the challenges posed by the intersection of cryptocurrencies and regulatory oversight.
Note: You can read the full issuance of the order by the United States District Court Of Northern District Of California here: https://storage.courtlistener.com/recap/gov.uscourts.cand.407965/gov.uscourts.cand.407965.34.0.pdf
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[1] https://cointelegraph.com/news/kraken-ordered-by-court-disclose-user-data-irs-tax-compliance
[2] https://cointelegraph.com/news/kraken-ordered-by-court-disclose-user-data-irs-tax-compliance
[3] https://decrypt.co/147023/kraken-irs-customer-user-records-data-information
[4] https://cointelegraph.com/news/kraken-ordered-by-court-disclose-user-data-irs-tax-compliance
[5] https://storage.courtlistener.com/recap/gov.uscourts.cand.407965/gov.uscourts.cand.407965.1.1.pdf
