The recent court order requires Kraken to provide information about users who have conducted transactions exceeding $20,000 within a calendar year for Tax Compliance.
The Internal Revenue Service (IRS) has obtained a court order from the United States District Court for the Northern District of California, compelling cryptocurrency exchange Kraken to disclose user data for the purpose of tax compliance. This development comes after the IRS filed a court petition in February, following Kraken's settlement with the U.S. Securities and Exchange Commission (SEC) regarding alleged violations of securities laws associated with its staking service.
Under the court order, Kraken is mandated to provide comprehensive information about users who conducted transactions exceeding $20,000 within a calendar year. The data to be disclosed includes a range of details such as names (real or pseudonyms), birthdates, taxpayer identification numbers, addresses, phone numbers, email addresses, and other relevant documents. The IRS had previously issued a summons to Kraken in 2021, which the exchange failed to comply with, leading to the current legal action.
In addition to the user data mentioned before, Kraken will also be required to disclose blockchain addresses and transaction hashes, which are already included in the available transaction data. The exchange may potentially be asked to provide raw data to the IRS, although specific details regarding this request have not been provided so far.
The court order revealed that Kraken, one of the largest cryptocurrency exchanges with a global daily trading volume of roughly $650 million, boasts a userbase of over 4 million clients who conducted over $140 billion in trades between 2011 and 2017. The exchange was also experiencing a significant influx of new users, with registrations reaching as high as 50,000 per day during that period.
The IRS's investigation seeks to examine the tax obligations of users who engaged in cryptocurrency transactions between the years 2016 and 2020. By compelling Kraken to disclose the requested user data, the IRS aims to determine if any users have potentially underreported their taxes. The IRS “has a legitimate purpose for seeking the materials,” said Judge Joseph Spero, further citing that the volume of trading activity on Kraken far surpasses the number of taxpayers who report Bitcoin-related investments on their tax returns.
However, the IRS didn’t win everything it was trying to get from Kraken, with Judge Joseph Spero, having rejected certain aspects of the IRS's demands, despite his acknowledgment of the rationale behind the agency's demands. The judge denied several of the IRS's requests, including the attempt to obtain employment information and source of wealth from Kraken.
In evaluating the IRS's requests, Judge Spero emphasized the need for the court to ensure that the government's summons is appropriately focused. Meaning that the scope of the summons should not exceed what is necessary to achieve its intended purpose, indicating the judge's concern for striking a balance between the IRS's investigative needs and protecting individuals' privacy rights.
Friday’s ruling coincides with a continually intensifying crackdown on cryptocurrencies in the United States, with the SEC filing 2 separate lawsuits just last month against major exchanges, accusing Coinbase of operating illegally, and accusing Binance.US of mishandling customer funds, providing misleading information to investors and regulators, and violating securities regulations. The recent legal actions highlight the increasing scrutiny and focus on the cryptocurrency sector within the US.