Judge Compels Kraken to Surrender Client Information to IRS

Updated: 04 July 2023

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For its probe into underreported tax obligations, the Internal Revenue Service (IRS) has secured a judicial mandate instructing cryptocurrency exchange Kraken to disclose a broad spectrum of user information. This order comes in the wake of the US intensifying its scrutiny of cryptocurrency, with the Securities and Exchange Commission recently filing separate lawsuits against Coinbase for alleged operation of an unlawful exchange and Binance.US on the grounds of mishandling customer funds, deceiving investors and regulators, and violating securities regulations.

unwarranted treasure hunt

The IRS is particularly interested in information from Kraken accounts that executed at least $20,000 worth of cryptocurrency transactions annually, from 2016 to 2020. Kraken, countering this request, labeled the agency’s summons as an “unwarranted treasure hunt,” arguing that it exceeded the limits determined in a comparable tussle with Coinbase around half a decade ago.

A significant win was awarded to the government when Judge Joseph Spero supported the demand. Despite not winning all the information it requested from Payward Inc., the company founded in 2011 that operates Kraken, the San Francisco-based firm was instructed to yield users’ personal and transactional data. This includes users’ names, birth dates, taxpayer identification numbers, addresses, contact numbers, email addresses, some documentation, and transaction ledgers.

The judge cited the “legitimate purpose” behind the IRS’s request, which is to “establish the identity and accurate federal income tax obligation” for users in the specified timeframe. The legitimacy of the agency’s demands was further backed by the observation that the trading activity on Kraken far outweighed taxpayers’ Bitcoin-related returns. The order acknowledged that the exchange had a client base of 4 million executing over $140 billion in trades from 2011 to 2017, with up to 50,000 new registrations per day.

According to CoinMarketCap, Kraken ranks among the leading crypto exchanges, boasting a daily global trading volume of approximately $650 million. The company has yet to provide a response to an email inquiry about the verdict.

Worries About Under-Reporting

Judge Spero concurred with the IRS that the under-reporting of income tends to be “significantly higher where there is no third-party information reporting,” as is the case with Kraken. The judge also referred to a past conflict between Coinbase and the IRS, where the latter had to reduce its initial request while Coinbase remained resistant. The judge ruled that the IRS’s summons aimed at over 14,000 of Coinbase’s users wasn’t excessively invasive since the agency held a legitimate interest in probing taxpayers who might not declare their Bitcoin earnings.

The verdict clarified that the previous ruling with Coinbase did not, contrary to what Kraken suggested, establish a restriction on the number of cryptocurrency accounts the IRS can target. On the other hand, the judge dismissed the IRS’s request for information contained in Kraken’s due diligence questionnaires, including data about users’ employment, net worth, and wealth sources. Additionally, the judge declined to compel Kraken to surrender details from anti-money laundering probes.

The case is officially known as United States of America v. Payward Ventures Inc., 23-mc-80029, in the US District Court, Northern District of California (San Francisco).