Cryptocurrency traders who have engaged in $20,000 or more in annual trading on the Kraken exchange between 2016 and 2020 may have their personal information shared with the Internal Revenue Service, a judge ruled last week.
The IRS, which wants the data for an investigation of underreported tax liability, requested the information from Kraken earlier this year. After Kraken refused, the IRS asked a judge to enforce a summons issued to Payward Ventures, the exchange’s holding company.
“The IRS is conducting an investigation to identify U.S. taxpayers who have used cryptocurrency to determine whether they have complied with the internal revenue laws,” wrote U.S. Magistrate Judge Joseph Spero in San Francisco. “In furtherance of that investigation, this court approved the service of a summons to Payward Ventures.”
Kraken now must turn over 160 million transaction records and provide the IRS with information on more than 59,000 accounts. However, the IRS wasn’t granted all its requests, Kraken said in a statement Friday to CoinDesk.
"We fought the IRS because they sought intrusive and unnecessary information about U.S. clients, including IP addresses, employment information, sources of wealth, net worth, and banking details," a spokesperson from Kraken told CoinDesk. "We appreciate that the Court ... recogniz[ed] that the IRS requests were 'much broader than what is necessary.'"
Kraken had said supplying such a volume of information was too costly and difficult.
Spero, however, asserted, “enforcement of a summons seeking relevant records will not be denied just because the summons seeks production of (or a search through) a great many records or will result in significant expenditure of the recordkeeper’s time and money.”
The IRS’s demands are supported by the comparative lack in taxpayers filing returns that include Bitcoin-related investments, which are “dwarfed by the amount of trading activity that occurs on Kraken,” Spero said.
An IRS agent found that Kraken had 4 million clients between 2011 and 2017 and conducted more than $140 billion in trades during that time.
“Agent [Karen] Cincotta has also pointed to evidence that under-reporting of income is substantially higher where there is no third-party information reporting, as is the case with Kraken,” Spero said.
Spero’s ruling comes at a time of great challenge and regulatory scrutiny in the crypto industry. Last month, the Securities and Exchange Commission charged cryptocurrency trading platform Coinbase with operating an unregistered national securities exchange, broker and clearing agency, and also charged Coinbase for failing to register the offer and sale of its staking-as-a-service program.
A day earlier, the SEC charged Binance, its U.S. affiliate, and their founder Changpeng Zhao with 13 violations of U.S. securities laws, and alleged that Zhao and Binance secretly controlled the operations of the Binance.US platform despite claims that it was separate and independent.
Regulatory scrutiny of crypto firms ramped up following the collapse of FTX in November, which led to several other crypto firm collapses. Multiple pieces of crypto-related legislation have been proposed since FTX’s downfall.
