IRS asks Kraken for consumer identities and information

Earlier this month, the United States District Court in the Northern District of California approved the Internal Revenue Service (IRS) motion to hold a subpoena from “John Doe” to the parent company of the popular Kraken cryptocurrency exchange. The order calls on the company to hand over records of all U.S. citizens who used the exchange to conduct transactions worth $ 20,000 or more from 2016 to 2020. This is the latest in a series of unprecedented IRS efforts to identify and screen people who may not be reporting adequately on cryptocurrency and other digital assets.

IRS Commissioner Chuck Rettig, quoted in a Justice Department press release on the matter, said: “There is no excuse for taxpayers to continue to fail to report the income and taxes on virtual currency transactions. This subpoena from John Doe is part of our effort to expose those who are trying to circumvent reporting and avoid paying their fair share. ”

What is a John Doe conjuration?

If a taxpayer fails or refuses to comply with an IRS investigation, one of the agency’s primary tools is the subpoena, which resembles a subpoena, to compel the individual or company to produce the records requested. But what if the IRS has reason to believe that there has been a violation but doesn’t know exactly who committed it or who to address the subpoena? This is where the lesser known John Doe subpoena comes into play.

A subpoena from John Doe enables the IRS to obtain names and documents on any taxpayers of a particular group who it believes are in violation of tax law, often from a third party keeping financial records for the group. For example, when the IRS suspected that a law firm was helping one of its clients avoid US taxes by setting up foreign accounts in 2019, a federal judge allowed the IRS to use a subpoena from John Doe to identify the other clients’ names Law firm gathering to see if the practice was more widespread. Taylor Lohmeyer Law Firm PLLC v United States, 385 F. Supp. 3d 548 (WD Tex. 2019). In the Kraken case, the IRS does not claim any inappropriateness by the company itself, but it has reason to believe that some Kraken users have reported underreporting.

What it means for crypto owners

Kraken is currently the fourth largest cryptocurrency exchange in the world, according to CoinMarketCap. Given the size of the exchange, this subpoena from John Doe opens up the possibility of scrutiny for a significant segment of U.S. cryptocurrency holders and at least adds to the IRS database of taxpayers who owned or owned digital assets.

A similar subpoena was issued by John Doe in April 2021 to investigate improper reporting among users of Circle, a smaller Boston-based crypto exchange. Back in 2017, Krakens rival Coinbase was forced to generate tax information for 14,000 of its users. Ultimately, the IRS can be expected to use more of these John Doe subpoenas in the future to help understand who is using cryptocurrency and who is not reporting it.

The most important thing for crypto owners is to ensure that their transactions are properly reported on their income tax returns and to be ready to keep a record of their transactions if an audit is conducted. The IRS previously issued some guidance on these rules in an FAQ format.