Kraken will provide user data to the IRS after a legal battle over crypto tax reporting. Image by Michael O'Keene, Adobe Stock. Major US cryptocurrency exchange Kraken will provide limited user information to the Internal Revenue Service (IRS) next month following a court order received in June. The data concerns certain Kraken users who made transactions of more than $20,000 between 2016 and 2020.
IRS Gets Limited Access to Kraken User Data
The legal battle between Kraken and the IRS began in May 2021 when a federal court authorized the tax agency to serve John Doe summonses against Kraken. The goal is to identify potential tax evaders among exchange users. Kraken initially rejected the broad request.
After several rounds in court, Kraken managed to convince the court to substantially reduce the scope of information it had to produce, as well as the number of affected users.
According to a June court order, Kraken must provide names, dates of birth, taxpayer identification numbers, addresses, telephone numbers, email addresses and transaction history for users with transactions of more than $20,000 in a single year from 2016 to 2020.
The initial IRS request covered a broader range of user data including IP addresses, employment information, sources of wealth, net worth and banking details. The court denied the IRS access to this information.
The number of affected Kraken users was lowered to 42,017, down from the initial number of 59,331 the IRS sought information about. Kraken notified affected users via email this week that it expects to share the covered data with the IRS in early November.
This development is the latest example of tensions between crypto exchanges and government tax authorities. In 2018, Coinbase shared details of about 13,000 users with the IRS after receiving similar calls.
IRS Targets Crypto Exchanges to Uncover Potential Tax Evaders
The IRS also targeted other large crypto companies such as Circle and Poloniex with John Doe summonses to uncover potential tax evaders among their user base.
Some industry experts argue that these calls undermine user privacy and go beyond sensitive personal financial data. Others argue that tax agencies have the right to request relevant transaction information to enforce tax compliance.
Cryptocurrency taxation is a complex issue given the lack of clear guidance from the IRS on how different types of crypto activity should be reported. At this time, users are responsible for properly tracking and documenting their transactions.
Tax Implications for Crypto Traders as Scrutiny Increases
Kraken's latest order should be seen as a reminder for US cryptocurrency traders to ensure tax obligations are met. Failure to report income and capital gains from crypto investments can potentially trigger an IRS audit, fines, and interest charges.
Consulting a qualified crypto tax specialist is recommended for users who are unsure about how to handle tax reporting. Software tools for generating transaction reports can also help traders collect the necessary data.
Maintaining accurate records is key. The IRS treats digital assets as property, meaning capital gains taxes apply. Exchanging one coin for another is a taxable event. Although the regulatory situation poses challenges, crypto users should make good-faith efforts to comply with tax regulations to avoid problems.
Kraken's situation illustrates how exchanges face pressure to provide user data. As cryptocurrency adoption increases, government scrutiny of taxation will likely increase. Users should prepare now to avoid problems later.
