IRS John Doe summons on Kraken

[bbc.reporter]

Jesse Powell should fight this in court. However, similar to the other cryptocoin exchanges under the annonyance of the American government, I predict an annoucnement from Kraken telling their users that they will begin leaving US jurisdiction and stop accepting American customers.



On March 30, the Department of Justice, Tax Division, filed a petition for leave to serve a “John Doe” summons on Payward Ventures, also known as “Kraken,” requesting account information for all United States taxpayers who held accounts there with the equivalent value of $20,000 or more in cryptocurrency for any one year from 2016 through 2020. In the petition, which is styled In Re Tax Liability of John Does, Docket No. 3:21-cv-02201-JCS in the United States District Court for the Northern District of California , DOJ tax maintains that the “John Doe” summons is needed because it doesn’t know who the account holders are, Kraken does know, and there is reason to believe that Kraken account holders “may fail, or may have failed, to comply with one or more provisions of the internal revenue laws.” In other words, the IRS believes that Kraken account holders have not been accurate reporting and paying taxes on their cryptocurrency, and it is asking the court to order Kraken to turn over their names.

Read in full https://www.forbes.com/sites/irswatch/2021/03/31/irs-lawsuit-to-get-crypto-account-holder-information-signals-it-is-time-for-kraken-crypto-account-holders-to-get-taxes-in-order/

[bbc.reporter]

Did anyone read? I am shaking my head on this case. The IRS was telling Kraken users to self report their taxes. The users self reported their taxes and the IRS said they were wrong. Users ask the IRS how it should be, however, the IRS said no and they will fine users for filing their tax reports wrong hehehe.

[Darker45]

This doesn't look good at all.

Kraken users do not seem to have much option here but to consult a professional and iron things out as required by the IRS. After all, they must have revealed their names, emails, birthdays, phone numbers, addresses, and so on by the time they activated crypto deposits and withdrawals.

Well, for the time being, they can wait if they are indeed one of those non-compliant taxpayers as soon as the summon is already narrowly tailored. But, generally, I'm afraid tax evasion is not an option here for any Kraken user.

[bbc.reporter]

@Darker45. The first impression I had is the IRS does not have the capabilities or the legislation to enforce taxes on trading in the cryptospace. They are using abusive tactics to scare the users that might cause them to honestly file their taxes.

What would the basis of the correct amount of taxes if the IRS cannot tell the user how much it should be?

[LeGaulois]

We couldn't expect to see cryptocurrencies adopted without seeing the government putting its nose in our affairs

Don't be too surprised to see them using as much as they can to get a maximum of information about the taxes payers. In a near future, we could easily see exchange platforms forced to share information in the same way international banks do with FACTA, CRS, and other stuff.
The end of bank secrecy will also apply to crypto exchanges, especially when you see how cryptos and more precisely the stablecoins start to be "accepted" and related regulations adopted.

As far as the IRS is concerned, I am sure that the vast majority did not report anything, thinking that everything will be fine. Those who do may be surprised in a short time to come.

In my country, we're forced to report each account we have with an exchange, otherwise, we risk a fine of 750€ per account omitted. Yep 750€. Not something you want to mess with. Perhaps they currently have no way to control that but it may change in some months, so better safe than sorry.
I believe even if you report wrongly the postal adress of an exchange you can be in trouble.

[o_e_l_e_o]

This is pretty much exactly the same as when the IRS demanded that Coinbase hand over details of all their customers and their trading activities a few years ago, and honestly, I'm pretty surprised it's taken this long for them to start going after other exchanges too. Perhaps COVID limited their capacity for additional activities beyond standard taxation. If you are a US customer who has completed KYC on any major crypto exchange, then expect the IRS to get their hands on your personal information and trading history at some point.

The first impression I had is the IRS does not have the capabilities or the legislation to enforce taxes on trading in the cryptospace. They are using abusive tactics to scare the users that might cause them to honestly file their taxes.

They absolutely do. The IRS have released a number of notices and publications specifying how cryptocurrencies are taxed. If you fail to report and they find out, then they will punish you as they would any tax evasion.

https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21
https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies
https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

What would the basis of the correct amount of taxes if the IRS cannot tell the user how much it should be?

The IRS only do not know at the moment because they do not have the trading information from Kraken. They suspect that a number of Kraken customers have not filed their taxes correctly, so they request Kraken hands over a list of customers and their trading activities. Once they have that, they can start auditing people whose reported taxation doesn't match what the IRS believe it to be.

[bbc.reporter]

@o_e_l_e_o. The argument is the IRS will know if the self reported tax reports are wrong only if it has all the information about the trading activities in Kraken which they presently do not have. Also, does the IRS have the authority to demand all their customers trading information? Does this not break privacy protection laws?

In any case, my prediction is the same. Kraken will leave the American jursidiction to avoid the government’s abusive tactics and the complaince nightmare.

[cabron]

IRS is just looking for users who will report something that they know nothing about how to do and then will make it like the user's fault. So they could have grounds to check. Lucky are the ones who are not from US.

@o_e_l_e_o. The argument is the IRS will know if the self reported tax reports are wrong only if it has all the information about the trading activities in Kraken which they presently do not have. Also, does the IRS have the authority to demand all their customers trading information? Does this not break privacy protection laws?

In any case, my prediction is the same. Kraken will leave the American jursidiction to avoid the government’s abusive tactics and the complaince nightmare.

They should have left US a long time ago. This violates the privacy of users but its the government, there is no escape to that as long as they are in the US ground.

[o_e_l_e_o]

The argument is the IRS will know if the self reported tax reports are wrong only if it has all the information about the trading activities in Kraken which they presently do not have.

Which is why they are demanding Kraken hand these details over. Coinbase handed them all over, I see no reason to suspect that Kraken won't too (if they haven't already).

Also, does the IRS have the authority to demand all their customers trading information? Does this not break privacy protection laws?

I imagine they would initially go through the same approach that they did for Coinbase. Tell Kraken to provide details for everyone who has traded at least x thousand dollars in a given year, and then compare that list again people who have declared and paid taxes related to crypto on their tax returns. Anyone who doesn't match gets threatening letters +/- an audit. If the IRS audit you, then they can absolutely demand all your trading information.

Lucky are the ones who are not from US.

The Land of the Free Surveillance State is leading the way with this, but don't think just because you are lucky enough not to live here you will get to avoid all this. Governments and tax agencies in Europe are starting to do the same thing. If you have provided your details to a centralized exchange, your government will get their hands on your information sooner or later.

[bbc.reporter]

@o_e_l_e_o. That was the basis for my argument. If Kraken has not handed them to the IRS how can the IRS accuse and fine the user for wrongful self reporting?

In any case, I change my prediction. The skeptical me now thinks Jesse Powell might be pressured to give everything the IRS needs hehe.

[o_e_l_e_o]

@o_e_l_e_o. That was the basis for my argument. If Kraken has not handed them to the IRS how can the IRS accuse and fine the user for wrongful self reporting?

I don't think they are fining anyone yet. They simply suspect that some Kraken users have not accurately reported their taxes, and so they want Kraken to provide a list of all US users whom they will then send letters to as they did Coinbase users. Anyone with a significant disconnect between what they have reported and what they have traded will then get looked in to more closely.

In any case, I change my prediction. The skeptical me now thinks Jesse Powell might be pressured to give everything the IRS needs hehe.

Path of least resistance for them. Either sell out their customers or face restrictions on their business and have their profits suffers as a consequence. It's obvious which one they will choose, same as every centralized exchange the IRS sets their sights on.

[suchmoon]

In any case, my prediction is the same. Kraken will leave the American jursidiction to avoid the government’s abusive tactics and the complaince nightmare.

I don't think leaving the US would allow them to ignore the subpoena. In other words, even if they leave they would still need to hand over the data about past activities conducted with US citizens and residents, at which point they might as well continue doing business and continue snitching on their customers.

[LoyceV]

I'm pretty surprised it's taken this long for them to start going after other exchanges too.

I expected they would have done this already. I'm surprised they didn't, and I'm also surprised they only want to know accounts above $20,000.

Governments and tax agencies in Europe are starting to do the same thing. If you have provided your details to a centralized exchange, your government will get their hands on your information sooner or later.

That's always a safe assumption when dealing with taxes

I predict an annoucnement from Kraken telling their users that they will begin leaving US jurisdiction and stop accepting American customers.

Unlikely. Kraken is based in San Francisco. Stock brokers don't abandon US customers because of the IRS either, they just comply.

[Quickseller]

Jesse Powell should fight this in court. However, similar to the other cryptocoin exchanges under the annonyance of the American government, I predict an annoucnement from Kraken telling their users that they will begin leaving US jurisdiction and stop accepting American customers.

This is pretty much exactly the same as when the IRS demanded that Coinbase hand over details of all their customers and their trading activities a few years ago,

Coinbase fought this years ago and lost. I believe they were able to get the scope of the summons narrowed somewhat, and Jesse Powell may be able to get the scope of the summons reduced somewhat.

[o_e_l_e_o]

In other words, even if they leave they would still need to hand over the data about past activities conducted with US citizens and residents, at which point they might as well continue doing business and continue snitching on their customers.

Absolutely. They aren't going to abandon one of their biggest markets and biggest income sources because it would mean they have to help the IRS to shaft their users. The sooner people realize that exchanges don't actually care about you, only their profits, the better.

I'm also surprised they only want to know accounts above $20,000.

I believe they were able to get the scope of the summons narrowed somewhat

The $20,000 limit is essentially what Coinbase negotiated to. The IRS had initially demanded the details of all Coinbase's US customers, and the final settlement was all customers who had traded over $20,000 within a year. Given that is what Coinbase handed over, I wouldn't expect Kraken to be able to negotiate any significantly different arrangement.

[LoyceV]

The $20,000 limit is essentially what Coinbase negotiated to. The IRS had initially demanded the details of all Coinbase's US customers, and the final settlement was all customers who had traded over $20,000 within a year. Given that is what Coinbase handed over, I wouldn't expect Kraken to be able to negotiate any significantly different arrangement.

Interesting. Are banks treated the same way in the US? When I file my taxes, even bank accounts without a balance are pre-filled, and literally every cent is accounted for.

[suchmoon]

Interesting. Are banks treated the same way in the US? When I file my taxes, even bank accounts without a balance are pre-filled, and literally every cent is accounted for.

See that's the advantage of living in a surveillance state... you don't need to bother declaring bank balances in the US except foreign accounts, IRS probably already knows domestic ones

Banks (and e.g. PayPal/Amazon/etc) are supposed to report payment totals (like credit card receipts) above $20k. IRS gets the info, tax payer gets 1099-K or whatever the form is, however you need to pay taxes the same way regardless if you traded above or below $20k so it's a meaningless limit really.

Stock brokers report every cent and are probably pissed at Coinbase/Kraken/et al getting an exception to not do so.

[Quickseller]

I'm also surprised they only want to know accounts above $20,000.

I believe they were able to get the scope of the summons narrowed somewhat

The $20,000 limit is essentially what Coinbase negotiated to. The IRS had initially demanded the details of all Coinbase's US customers, and the final settlement was all customers who had traded over $20,000 within a year. Given that is what Coinbase handed over, I wouldn't expect Kraken to be able to negotiate any significantly different arrangement.

Jesse Powell gave pushback against giving information to NY regulators a few years back when Kraken was not allowing New York resident to use his service, so he may put up a bigger fight than Coinbase gave.

Interesting. Are banks treated the same way in the US? When I file my taxes, even bank accounts without a balance are pre-filled, and literally every cent is accounted for.

No. Certain bank transactions above thresholds are reported to the government, but this is mostly for AML purposes, not necessarily tax fraud/collecting tax purposes. The IRS does not have access to bank balances, although there is a means for the IRS to get your balances:

Interesting. Are banks treated the same way in the US? When I file my taxes, even bank accounts without a balance are pre-filled, and literally every cent is accounted for.

See that's the advantage of living in a surveillance state... you don't need to bother declaring bank balances in the US except foreign accounts, IRS probably already knows domestic ones

The Bank Secrecy Act restricts when banks can disclose information to the government or other third parties.

[o_e_l_e_o]

Jesse Powell gave pushback against giving information to NY regulators a few years back when Kraken was not allowing New York resident to use his service, so he may put up a bigger fight than Coinbase gave.

You are probably right that they will try to fight this, but I just don't see the outcome being significantly different. If they made Coinbase report over $20k, but only make Kraken report over $50k (for example), they are just opening a can of worms for themselves. And in the long run, I don't think it really matters. We are heading towards a situation where all centralized exchanges report all their users to the IRS, regardless of trading activities or volumes. Arguments over arbitrary volume limits are just a bump in the road before we get there.