Crypto Exchange Must Comply With IRS Summons

According to Law360, in an order on June 30, 2023, U.S. Magistrate Judge Joseph C. Spero said Payward Ventures Inc., which does business as Kraken, has to hand over information to the Internal Revenue Service on customers who conducted transactions of at least $20,000 in any year from 2016 through 2020. That information includes names, dates of birth, addresses and phone numbers, according to the order, which said such information could aid the agency in its probe of the tax compliance of cryptocurrency holders.

The federal judge narrowed an IRS summons for customer information from cryptocurrency platform Kraken and also has to furnish transactional ledgers spanning the same period, the order said. 

But Judge Spero found that some of the agency's five requests, including its request for a customer questionnaire that included information on wealth sources and employment, were overly broad under the factors for such IRS summons outlined by the U.S. Supreme Court in U.S. v. Powell. 

"While This Information Might Shed Light On A Tax Violation By An Account Holder, At This Stage Of The Government's Investigation, It Is Only Speculating On That Point." 

The federal government filed a petition in February seeking to force Kraken to comply with the summons, which had been approved by the court in May 2021. The summons had sought documents on the identities of Kraken customers and their transactions of at least $20,000 in the aggregate, including names, taxpayer identification numbers and addresses, as well as transaction information, like details on the purchases and sales of cryptocurrency and on account funding, according to filings. 

The IRS has been probing the tax compliance of cryptocurrency holders. It sent 10,000 letters to holders in 2019 as part of its investigation into potential reporting errors or omissions by digital currency owners on their tax returns. The agency had issued a summons seeking customer information to cryptocurrency exchange Coinbase, but the agency has had a challenging time identifying Coinbase account holders and still doesn't know the identities of about 750 account holders largely due to missing taxpayer identification numbers, an IRS agent said in a declaration.

Kraken has contended that the Coinbase litigation set certain standards for IRS John Doe summonses for cryptocurrency accounts, including limits on the volume of accounts the IRS can seek information on in such third-party summonses. 

But Judge Spero said in his order On June 30, 2023that both the U.S. and Kraken "have made statements that border on mischaracterizing the holding and legal significance of Coinbase."

"The Court Recognizes That The Limitations Placed
On The Summons In Coinbase, While Instructive,
Are Not Binding In This Case," The Order Said.

Judge Spero said the IRS can obtain some of the basic information it sought in its summons. But it doesn't now need historical account information or information from know-your-customer questionnaires that users fill out, according to the order, which noted the agency can pursue more summonses if it decides it needs more information to conduct its investigation. 

"We fought the IRS because they sought intrusive and unnecessary information about U.S. clients, including IP addresses, employment information, sources of wealth, net worth, and banking details," the spokesperson said. "We appreciate that the court rejected all these demands, recognizing that the IRS requests were 'much broader than what is necessary.'

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