In a recent court ruling, the prominent cryptocurrency exchange, Kraken, has been ordered by a federal court to provide the Internal Revenue Service (IRS) with user account and transaction information. This decision stems from an IRS allegation that Kraken users may have underreported their taxes.
A federal court has ordered Kraken, a major cryptocurrency exchange, to comply in part with an Internal Revenue Service summons seeking customer records to aid an investigation into tax compliance.
On Thursday, the United States District Court for the Northern District of California ruled that Kraken must produce basic identifying information for account holders who conducted at least $20,000 worth of cryptocurrency transactions during any year between 2016 and 2020. This includes names, birth dates, addresses, phone numbers, email addresses, and taxpayer IDs.
The court also ordered Kraken to provide transaction records and logs reflecting all cryptocurrency purchases, sales, transfers, loans, and margins trades during that period. However, the court denied the IRS’s request for broader categories of information, including records of changes to users’ personal information and IP addresses over time, anti-money laundering reviews, and funding sources beyond standard transaction records.
The summons was issued as part of an IRS investigation into possible tax underreporting by owners of cryptocurrency. According to court records, the number of taxpayers reporting cryptocurrency transactions has increased in recent years but still appears disproportionately low relative to estimates of market activity.
In a declaration, IRS agent Karen Cincotta said the information was needed to determine “the identities and federal tax liabilities” of cryptocurrency owners and “whether those users have failed or may be failing to comply with the internal revenue laws.” The IRS narrowed an initial summons after the court questioned whether some requests were overbroad.
In its order, the court found that disclosing users’ basic information and transaction details could aid the IRS’s investigation. But the court ruled that requests for more extensive records, like those reflecting users’ internet addresses over time, were “clearly broader than necessary.” Providing that data at this stage, the court said, amounted to an unjustified “fishing expedition.”
The court also cited a 2017 case, United States v. Coinbase, in which a different court rejected similarly sweeping IRS requests for cryptocurrency customer records. The IRS had issued a “John Doe” summons, for unidentified individuals, in that case as well.
Kraken had argued that compliance would be unduly burdensome and invasive, in part because of the large volume of records and questions about the security of transmitting data to the IRS. Kraken said it serves over 4 million customers and has facilitated $140 billion in transactions since 2011.
The IRS investigation and summons are part of a broader agency focus on potential tax evasion tied to virtual currencies. In a declaration, Agent Cincotta cited research suggesting cryptocurrency owners significantly underreport taxable gains and noted several examples of known tax violations by Kraken users.
The court order represents a partial victory for Kraken in limiting the scope of disclosures, but the firm had sought to quash the entire summons. Kraken has not said whether it plans to appeal the ruling. A Kraken representative did not immediately respond to a request for comment.
An IRS representative declined to comment on pending litigation. The agency has until July 5 to file a status report on its investigation for the court.
