U.S. cryptocurrency exchange Kraken will send user data to the Internal Revenue Service (IRS) in November under a court order in June. The exchange reportedly sent an email to affected users, notifying them that it is set to share user information “by the court’s order in early November 2023.” Kraken gave no further comment on the matter.
In February this year, the IRS filed a petition with the District Court in the Northern District of California to order Kraken’s revelation concerning user data.
The IRS claimed Kraken failed to comply with a John Doe summons issued by the federal agency in 2021. A John Doe summons is a type of subpoena that allows the IRS to obtain information about taxpayers whose identities are unknown.
Kraken Set to Reveal User Database
The IRS expects to launch an investigation into the tax affairs of users who made cryptocurrency transactions from 2016 until 2020. The purpose is to determine whether any exchange users had underreported their taxes.
On June 30, the federal court ordered Kraken to provide detailed information about users who had engaged in transactions exceeding $20,000 in the set period. These details include user real names or pseudonyms, date of birth, taxpayer identification number, address, phone number, and email address, among other documents.
The IRS had requested access to extra information, such as IP address, registration details, income, and banking details. However, Judge Joseph Spero was unwilling to approve unless the government could present a strong rationale for it.
The judge emphasized that the IRS needed to specifically justify why each type of information they were seeking was directly pertinent to their investigation.
Furthermore, they should evaluate whether requests for more extensive and invasive information could be deferred until the IRS has reviewed basic account registration information and transaction history.
In addition to the reduced database, Kraken noted in the email of notification that the court had agreed to reduce the number of affected customers from 59,331 as per IRS request to 42,017.
With more regulations coming for crypto, there are likely to be more regulatory crackdowns as well. Many crypto users who trusted exchanges may be impacted, or even face criminal charges.
Investors Brace For More Crypto Crackdowns
Cryptocurrency investments have been a point of concern for tax authorities, as they can potentially be used for tax evasion due to the relative anonymity they provide. The IRS attempts to obtain this information to ensure that individuals engaged in cryptocurrency transactions comply with tax regulations.
The IRS’s decision to request registration details and transaction history in light of the recent survey findings is a proactive measure to address tax compliance issues in the cryptocurrency space.
However, Kraken is not the only crypto entity that is obliged to share information. Before Kraken, the IRS had access to user identities of other cryptocurrency platforms such as Coinbase, Circle, and Poloniex.
In 2018, Coinbase shared details of around 13,000 users with the Internal Revenue Service (IRS) after being served with a John Doe summons.
In 2021, the IRS issued similar summonses to crypto exchange Poloniex and stablecoin issuer Circle. These summonses sought information about US taxpayers who had conducted crypto transactions valued at least $20,000 on these platforms.
The U.S. regulators are increasingly using their authority to investigate and prosecute cryptocurrency tax evasion. In 2022, the IRS created a new office dedicated to cryptocurrency enforcement. The agency has also begun sending taxpayers letters warning them about cryptocurrency transactions’ tax implications.
Cryptocurrency users should be aware that the IRS has the authority to obtain information about their transactions from exchanges and other crypto businesses. Taxpayers who fail to report their cryptocurrency income or gains may face penalties and interest.
