On June 30, 2023 the District Court in the Northern District of California granted a petition to enforce the cryptocurrency exchange Kraken to release customer information. Specifically, Kraken was ordered to produce the name, date of birth, taxpayer identification number, physical address, telephone number, and email addresses for customers having at least $20,000 of transactions in any year from January 1, 2016 through December 31, 2020. Kraken, on its website, has indicated that it will comply and expects the information to be given to the IRS in November 2023.
The fight with the Kraken cyptocurrency exchange started a long time ago without the knowledge of Kraken or any of its customers. The government recognized that Kraken has over 4 million customers and over $140 Billion in trading activity since 2011 and that didn’t match its own analytics for cryptocurrency transaction reporting. The IRS has proposed regulations, pursuant to the Infrastructure and Jobs Act, that would require digital asset “brokers” to report certain transactions on a Form 1099 – but those provisions are still being considered and are not currently required. Therefore, the IRS must rely on individual taxpayer reporting and that isn’t happening according to the data. Therefore, the government used a very powerful tool used to investigate potential tax reporting errors by taxpayers they do not yet know – the John Doe Summons.
A normal IRS summons seeks information about a specific taxpayer whose identity is known; a John Doe summons involves taxpayers in a group the IRS cannot identify by name. At least, not yet. A John Doe summons allows the IRS to obtain the names of all taxpayers within a clearly defined group, so long as they receive judicial approval. This is exactly what happened with Coinbase, resulting in the release of information for 13,000 customers. Coinbase told those affected that it would turn over personal information and transaction records from 2013-2015 to the IRS. Kraken will now be turning over similar information on its customers.
The government seeks permission to serve a John Doe Summons from the federal district court ex-parte (i.e. for one party and without opposition). In the Kraken lawsuit, however, the District Court itself raised concerns over whether the summons was sufficiently narrowed but the court ultimately approved service of the summons while inviting a challenge from Kraken or its customers. That challenge did eventually find its way to the court and Kraken, like Coinbase, was able to narrow the information provided but not eliminate the need entirely to provide information.
If a Kraken customer properly reported their transactions to the IRS then they might only worried about disclosure of private financial information. One Coinbase customer has been engaged in lengthy, but ultimately unsuccessful, litigation with the government over the constitutionality of the IRS use of John Doe summonses. See Harper v. Rettig, 2023 WL 3689528 (D. NH). If a Kraken customer failed to report a transaction they have the option of amending their return to report those amounts or, if there is potential criminal exposure, using the voluntary disclosure procedure at the IRS. Which option is appropriate depends on the specific facts involved, so an effected taxpayer should consult their tax advisor since it is no longer a question of if, but when the information is disclosed.