Kraken Loses Lawsuit With IRS

The avalanche of regulations sweeping over crypto just got worse as Kraken loses a lawsuit with the IRS. Individuals in the US who profit from crypto transactions are obligated to pay taxes on their capital gains. This is the same way as with stocks, real estate, or any asset that can be bought and sold. Many still attempt to hide their transactions from the taxing authority. That just got harder as Kraken was ordered to turn over user information to the IRS.

IRS Lawsuit Against Kraken

The IRS sued Kraken asking for account information for customers who did at least $20,000 in crypto trading during any year from 2016 to 2020. Kraken said that the IRS was asking for more information and being more intrusive than when they sued Coinbase six years previously. While Kraken called the suit a treasure hunt that was unjustified, the IRS said that they were merely trying to discover unreported tax liabilities. The court ruling comes as a blow at a time when the SEC has filed lawsuits against the largest crypto exchange in the world (Binance) and in the US (Coinbase).

IRS Success Limited by Ruling

The IRS lawsuit was against Payward Inc. which is the company that has operated Kraken from its San Francisco headquarters since 2011. While the judge ordered Payward Inc. to hand over tax ID numbers, birth dates, names, email addresses, addresses, and ledgers of transactions, there were also limits imposed. The company was not obligated to hand over information from internal anti-money laundering investigations or information regarding user net worth, employment, or source of wealth.

Why Court Ruled Against Kraken

The basic argument that the IRS used in this case was that the amounts of crypto trading gains listed on tax returns by Kraken customers were miniscule in comparison to the trading volume that takes place on Kraken. Kraken registered up to 50,000 new users daily from 2011 to 2017. It recorded $140 billion in crypto trades and had four million clients during this time. According to Coin Market Cap, Kraken has about $650 million in crypto trades every day. The IRS argued that when there is no third-party reporting of income, there tends to be underreporting of income. The judge agreed. What the judge did not agree with was Kraken’s assertion that the previous Coinbase ruling somehow provided limits to how the IRS could proceed in this case. As such, the previous ruling with another company did not limit how many accounts the IRS can have access to in this case. United States of America v. Payward Ventures Inc., 23-mc-80029, US District Court, Northern District of California (San Francisco) is the case.

What the Kraken Case Decision Means for Crypto

The original idea behind crypto was that one could do business over the internet without middlemen. There would be no governmental oversight of peer to peer transactions. In the case of Kraken or any other crypto exchange these folks are middlemen. The exchange provides a market for buying and selling cryptocurrencies. This is a necessary function in crypto as anyone who wants to use the system needs a place where they can purchase tokens using their dollars, yen, euros, or pound sterling. Nevertheless, trading on a crypto exchange is not the same thing as making a purchase or taking out a loan with another individual via the internet.

There is nothing in the original concept of Bitcoin that it would grow wildly from a tiny fraction of a cent to be worth tens of thousands of dollars. There was nothing in the original Bitcoin concept that it would be an arena for wild speculation. There was nothing in the concept that said individuals would be free from tax liabilities normally incurred by those who invest in or trade stocks or commodity futures as opposed to crypto tokens.

What the Kraken case decision means for crypto is that crypto businesses, investors, and traders will need to play by the same rules as everyone else in regard to taxes on profits. None of this will change one’s ability to do business with someone else without middlemen using crypto tokens and the internet.

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