The IRS has been authorized to seek information on certain users of Kraken, the popular cryptocurrency exchange platform, in an effort to enforce tax compliance.
In a move reminiscent of the Coinbase drama of 2017, a federal court in the Northern District of California ordered Kraken (and parent company Payward Ventures) to hand over the records of users who conducted at least $20,000 worth of transactions on the platform between 2016 and 2020.
This comes just 5 weeks after the IRS was authorized to seek records from Poloniex, another cryptocurrency exchange. The fact that the IRS has targeted 2 exchanges in such a short time span shows just how aggressively the agency is pursuing tax compliance.
Who is affected by this decision?
Anyone who transacted $20,000 worth of crypto or more on Kraken from 2016 to 2020 may have their records handed to the IRS under this court order.
The threshold is based not on how much users earned, but how much they transacted on the platform—so purchasing crypto with fiat, cashing out crypto for fiat, and exchanging various cryptos all count toward the $20,000 total. Because of this, users may find themselves under scrutiny even if they had minimal gains or a net loss on their Kraken trades.
Kraken users who have not reported cryptocurrency on their tax returns, or who haven’t reported it fully, should work to correct those mistakes ASAP.
What will happen to Kraken users identified by the IRS?
While the IRS has not released its plans, we can guess what will happen next based on the drama that unfolded when cryptocurrency exchange Coinbase was forced to hand over records on more than 14,000 users in 2017.
First, the IRS sent a batch of warning letters with various levels of severity. IRS letters 6173, 6174, and 6174-A were sent to taxpayers who the IRS suspected had unreported cryptocurrency activity, based on the Coinbase records.
The letters outlined crypto tax requirements and encouraged recipients to go back and properly report. Some letters gave vague warnings of IRS “follow ups” (aka an audit or investigation), while others specifically required a response.
Next, the IRS began sending CP2000 notices to crypto investors. Unlike warning letters, CP2000 notices contain an actual amount that the IRS believes the taxpayer owes.
In the case of Coinbase, the records obtained by the IRS gave a very incomplete picture of users’ tax liability. Many of our clients received outrageously high tax bills based on this inaccurate information. Hopefully, Kraken will take that lesson to heart and provide better records so its users won’t face the same problems; however, Kraken users should be prepared for a similar situation.
If you’re worried about IRS issues in the wake of this development with Kraken, we highly recommend taking action to correct your past tax returns now, rather than waiting for the IRS to come after you. Call our experienced crypto tax attorneys to learn how we can help!
Will Kraken keep reporting to the IRS in the future?
To guess what Kraken will likely do going forward, we can again look to Coinbase. After Coinbase was forced by the courts to send records on its users to the IRS, the exchange also began reporting some information to the IRS every year.
Specifically, Coinbase began sending annual 1099-Ks for users engaging in at least $20,000 worth of trades or 200 transactions. (Coinbase recently began sending the 1099-MISC form instead. While this form generally causes less of a tax headache than the 1099-K, neither form accurately represents taxpayers’ full crypto tax situation.) Any of these tax forms that are sent to users are also sent to the IRS, so the tax man has an idea of who’s not paying their share.
Kraken currently does not send out any tax forms, according to its website. Now, we expect Kraken will start sending some type of tax form (to users and the IRS) each year for those who meet a certain transaction threshold. This would mean that Kraken users who don’t report crypto taxes correctly could be at high risk of a cryptocurrency audit or worse.
Need help with crypto tax returns?
Gordon Law Group is a leading crypto tax law firm—we’ve been doing this since 2014! Our team can prepare your full tax return, including cryptocurrency reports, or go back and amend old returns. Contact us to schedule a confidential consultation!