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The IRS is targeting Kraken and Circle users it thinks are avoiding taxes on crypto trades

FILE PHOTO: A collection of Bitcoin (virtual currency) tokens are displayed in this picture illustration taken December 8, 2017. REUTERS/Benoit Tessier/File Photo/File Photo
Crypto traders have expressed frustration with the lack of IRS guidance around how their digital assets are taxed. Reuters

  • The IRS wants to know the users who have traded over $20,000 per year.
  • The Feds said some users of Kraken and Circle have been hiding crypto assets.
  • A similar dragnet for Coinbase users in 2018 led to $13 million in tax assessments.

Two lawsuits filed by the federal government last week serve as a reminder for traders in the bull market for cryptocurrencies: Don't forget to pay taxes on your crypto gains.

On March 30, the IRS went to court to uncover the names of people who used exchanges run by Circle Internet Financial Inc. and Payward Inc., better known as Kraken. The agency said there are signs people aren't reporting income from their crypto transactions on the platforms.

One Kraken user who traded more than $39 million in crypto assets since 2017 hasn't filed a tax return in five years, IRS agents said in court papers. Another taxpayer who disclosed having a trading business for digital assets appears to have underreported his income by $1 million. And some Circle users failed to disclose hundreds of transactions that may have resulted in taxable income.

"I think there's going to be a real reckoning with respect to the 2020 tax year," said Kayvan Sadeghi, a partner at Schiff Hardin who advises clients on digital-asset matters. He noted that crypto holders generally made more money in 2020 than in 2019 or 2018.

The value of digital currencies such as bitcoin and ether has ballooned since last September. The dominant digital currency, bitcoin, is trading at around $58,100 per token after starting 2020 at $7,300 and ending the year at around $29,300, data from CoinMarketCap.com found. Ether, the token used on the Ethereum network, has risen from around $130 to $2,100 since the start of 2020.

The lawsuits don't accuse either Circle or Kraken of wrongdoing, but they come about five years after the Feds filed a similar action against Coinbase. That case ended with a court ordering Coinbase to turn over account information for users who engaged in high transaction volumes.

Crypto traders have expressed frustration with the lack of guidance around how their digital assets are taxed. The most important guidance document, IRS Notice 2014-21, was issued seven years ago, when few people held or traded crypto assets and there weren't as many ways to use them.

The IRS's campaign for virtual-currency compliance could yield millions of dollars in tax revenue, court documents said. The agency's Coinbase crackdown led to $13.1 million in new tax assessments, which are taxes that the IRS determines are owed, even if they haven't been paid yet. The agency estimated that another $11 million is due from other virtual-currency users.

A federal judge in Boston has granted the IRS's request for Circle user data, which covers anyone who traded over $20,000 in any year since 2016 with a US "address, telephone number, e-mail domain, internet protocol address, or associated bank or financial account information."

But a judge in San Francisco handling the Kraken request has asked the government to narrow its search. Citing the Coinbase case, the judge said it may be more prudent for the IRS to seek "basic account registration information and transaction histories" before asking for a broader sweep of information.

A representative for Circle said the agency would cooperate with the IRS. A Kraken representative didn't respond to a request for comment.

Law

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