Kraken Resists IRS Request, Seeks Court Intervention

Kraken, a cryptocurrency exchange, is contesting the Internal Revenue Service's (IRS) request for user data and has sought court intervention to refuse the request. The exchange has termed the request an "unjustified treasure hunt" and has joined hands with Coinbase to push back against regulatory scrutiny by U.S. regulators. Kraken has filed a motion to partly quash the IRS's summonses for records of user accounts from 2016-2020, citing lack of "probable cause" and "legal authority" in the request.

The IRS had issued a John Doe summons against Kraken, seeking information about taxpayers who had conducted at least $20,000 transactions in cryptocurrencies in a financial year, from 2016-2020. The IRS had alleged that Kraken had failed to comply with the tax code in identifying the users and reporting their transactions. However, Kraken has countered that the IRS's request would require it to release a significant amount of confidential information that would not be relevant to the request and could lead to a violation of user privacy rights.

Kraken has urged the court to consider the "overbroad" scope of the IRS's request, which includes irrelevant data such as "internal accounting and administrative documents" and claimed that the request was a violation of the Fourth Amendment. Kraken's move follows a similar challenge by Coinbase, which won a partial victory when a judge restricted the IRS's request to only user accounts with transactions of at least $20,000 in a single year. However, the IRS has appealed the decision, and the case is currently pending in a court of appeals.

The legal challenges by Kraken and Coinbase come amid increased regulatory pressure on cryptocurrency exchanges and investors to comply with tax laws and reporting requirements. The IRS has stepped up its efforts to track down instances of tax evasion and non-compliance in the cryptocurrency space, given the high degree of anonymity and opacity that the industry offers. However, the exchanges have argued that the regulatory burden is excessive and that the IRS's approach could lead to a violation of consumer privacy rights. The outcome of the court case could have significant implications for the cryptocurrency industry and could set a precedent for future regulatory action.