A US Magistrate Court has ordered Kraken to provide the personal information of its users to the Internal Revenue Service (IRS) as part of the agency’s investigation of underreported tax.
In a June 30 ruling, Magistrate Judge Joseph Spero ended Kraken’s fight to stop the IRS from having access to its users’ data. The order would see the crypto exchange provide information on all accounts that traded at least $20,000 in cryptocurrencies between 2016 and 2020.
Judge Spero directed Kraken’s parent company Payward Inc. to provide information such as users’ names, taxpayer identification numbers, phone numbers, emails, addresses, and other transactional information.
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Court Justifies Decision Against Kraken
According to the judge, the IRS has a legitimate reason to get the information because the amount of trading activity on Kraken far exceeds taxpayers filing returns related to cryptocurrency investments.
“The Government has a legitimate purpose for seeking the materials described in the summon. As discussed above, the summons was issued in connection with an investigation by the IRS to determine the identity and correct federal income tax liability of U.S. persons who conducted transactions in cryptocurrency during the period 2016-2020.”
In his ruling, Judge Spero cited an IRS agent who claimed that Kraken had over 4 million customers that traded over $140 billion on the platform between 2011 and 2017. According to BeInCrypto data, Kraken is one of the top cryptocurrency exchanges in the U.S., processing over $500 million in trades in the last 24 hours.
The judge also agreed that the lack of third-party information reporting from Kraken contributes to substantially higher underreporting of income.
Meanwhile, the Court rejected the IRS demand for information on anti-money laundering investigations and other details in Kraken’s due diligence questionnaires, such as users’ net worth, source of income, and employment.
In 2021, IRS issued a John Doe summons to Kraken, requesting the exchange to provide information about its users. The platform refused to honor this request, forcing the federal agency to file a court petition.
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What Does This Mean for Crypto Industry?
While this is not the first time the IRS would request users’ information from exchanges for tax purposes, the timing of this decision matters as the crypto industry is facing several challenges from regulatory authorities in the U.S.
Besides that, recent rhetoric from U.S. President Joe Biden suggests that the government wants to close all loopholes that could result in low taxes for crypto investors. In a June 28 speech, Biden said his administration would make the tax system fair “by eliminating loopholes for crypto traders, hedge fund managers.”
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