FINTECH: Users of this major crypto exchange will soon have their data sent to IRS

As published on: thestreet.com, Thursday 2 November, 2023. 

Starting this November, San Francisco-based crypto exchange Kraken will begin disclosing the personal data of more than 40,000 users to the United States Internal Revenue Service (IRS) in order to comply with a June court order.

The change will immediately impact any American user whose transactions amount to more than $20,000 on the crypto exchange during a recent four-year time period (2016 to 2020).

The company notified U.S. users this month about the change: “Kraken expects to share this information covered by the court's order in early November 2023,” an email read.

In May 2021, Kraken and its subsidiaries were slapped with a “John Doe” IRS summons demanding a large trove of data related to U.S. customers. Ostensibly, the IRS was hoping to crack down on U.S. tax dodgers amassing wealth in crypto and failing to report it to tax authorities.

Tax evasion using crypto has turned into such a large problem that even the International Monetary Fund has weighed in, saying “tax systems need updating to cope with crypto assets, whose anonymity and decentralized nature poses challenges.”

Among the key problems that the IMF pointed out earlier this year was that crypto transactions were “pseudonymous." In other words, it said, "transactions use public addresses that are extremely difficult to link with individuals or firms. This can make tax evasion easier."

The IMF, however, pointed out that centralized exchanges were essentially low-hanging fruit required to run know-your-customer checks and already harboring troves of data on customers.

According to court documents, Kraken initially declined to reveal user data to the IRS, but was forced to by a June court order. It also was initially asked to hand over the data of nearly 60,000 users, but managed to limit the number of impacted users to around 42,000.

Among the data the company says it will be forced to hand over are user details related to:

Their name
Date of birth
Tax ID or social security number
Contact information like phone numbers, emails
And any transaction history from 2016 to 2020

However, Kraken said that it managed to avoid sharing data related to:

IP addresses
Net worth
Bank information
Employment details
Sources of wealth

Kraken recently clarified that it values the security of users, and said that “all sensitive account information is encrypted at rest at both the system and data level.”

But as the IMF points out, ardent tax dodgers have another tool at their disposal: centralized exchanges based outside the U.S. “Reporting obligations could induce people to keep tax authorities ignorant by instead using centralized exchanges abroad,” the IMF said.

“A more troubling possibility is that reporting rules (and the failures of some crypto intermediaries) could induce people to transact increasingly through decentralized exchanges or directly through peer-to-peer trades where no central governing body oversees these transactions. Those are still extremely difficult for tax administrators to penetrate,” the IMF added.


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