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Crypto Tax Info Shared With IRS: Kraken’s Compliance Has Two Sides

Published October 30, 2023 5:12 PM
Josh Adams
Published October 30, 2023 5:12 PM
Key Takeaways
  • After much argument, Kraken will release user data to the IRS.
  • The US tax authority is keen to ensure everyone has paid their fair share.
  • But there is more than one way to see the incident.

The cryptocurrency exchange Kraken is set to hand over the personal information of tens of thousands of users to the Internal Revenue Service (IRS) next month. 

The San Francisco-based company posted a notice  on its website stating that it will provide data on approximately 42,000 accounts to the IRS in compliance with a court order  issued in June of this year.

A Massive Handover Of User Data

The exchange has been embroiled in a legal battle with the IRS since May 2021, when the tax agency first demanded the exchange hand over extensive records on a large swathe of its American customers.

According to the exchange, the original IRS summons was excessively broad in scope. Kraken filed a petition challenging the order because it threatened user privacy and exceeded the IRS’s authority.

After more than a year of litigation, a compromise was reached. The IRS agreed to substantially scale back the number of Kraken users impacted and the breadth of data requested. However, in return, the tax collector insisted on obtaining information on accounts that met certain transaction thresholds indicating potential tax liabilities.

Specifically, Kraken will now deliver data on users who conducted more than $20,000 in crypto transactions – including trades, deposits, and withdrawals – during any year from 2016 to 2020. The information handed over will include names, dates of birth, addresses, tax IDs, contact details, and complete trading histories.

In its online notice , Kraken sought to reassure clients that it fought hard to protect their privacy. But the exchange said it had no choice but to comply with the amended summons given the court order.

Two Ways To See It

The impending handover of Kraken user information to the IRS presents a complex issue with arguments on both sides.

On one hand, increased compliance from cryptocurrency firms could help legitimize the asset class in the eyes of regulators. If the government can collect taxes more reliably from crypto gains, it may be more inclined to enact clear, innovation-friendly policies.

From this view, Kraken’s acquiescence is a necessary step on the road to crypto’s mainstream acceptance . The IRS is simply trying to ensure all citizens pay their fair share as required by law.

However, the counterpoint is that mandatory data sharing with tax authorities contradicts the ethos of financial privacy and empowerment that attracts many to cryptocurrency. There’s also the reality that for heavy users of crypto, revealing transaction data is a heavy intrusion into people’s privacy.

There are concerns that the Kraken case sets a far-reaching precedent for exchanges to routinely divulge customer information without sufficient safeguards. This could threaten user privacy and security.

No Appetite For Exceptions

Ultimately, the reality is that crypto firms based in the US have little choice but to comply with demands from the IRS. Tax evasion is illegal and there is bipartisan consensus in Washington around collecting owed revenue, whether from crypto gains or elsewhere. Protests from privacy advocates, including a long-running court case  challenging the disclosure, are unlikely to sway legislators or change the final destination.

For users who want to minimize scrutiny from the IRS, the only option may be turning to overseas exchanges with less transparency. But even there, there’s no guarantee of life-long anonymity as global regulators cooperate more closely. Given the immense scale of the crypto market, most experts agree some compliance with tax authorities is inevitable as the asset class matures.

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