Kraken Data Release to IRS: Implications for Your Tax Returns by SANDRA BROWN, ROBERT HORWITZ and PHILIPP BEHRENDT
Introduction: The term “Release the Kraken” may bring to mind its origin in the movie “Clash of the Titans,” but the real battle is now in the realm of tax compliance. In a recent development that could have significant implications for cryptocurrency users, one of the largest cryptocurrency exchanges, Kraken, has notified its customers that it will release user data to the IRS. This follows a recent district court ruling enforcing a 2021 John Doe summons issued by the IRS to Kraken’s parent company to obtain information on digital asset transactions between 2016 and 2020.[i] While the court’s decision limited the scope of the data Kraken must provide, it remains crucial for cryptocurrency investors to understand the potential implications of this disclosure for their tax returns.
What information will be shared: Kraken will be supplying “limited data” on its users to the IRS, as mandated by the court. This data will include information on accounts with at least $20,000 worth of transactions in any one year between January 1, 2016, and December 31, 2020, and will include user details such as name, date of birth, tax identification number, address, phone number, email address, and transaction data from the 2016-2020 period.
CP2000 Notices: One of the immediate consequences of this data release could be the issuance of CP2000 notices by the IRS to affected taxpayers. CP2000 notices are sent when the IRS identifies discrepancies between a taxpayer’s reported income and information reported to the IRS by third parties. These notices serve as a preliminary step in the IRS’s efforts to determine whether a taxpayer’s return correctly reports income, gain, deductions, and credits. They often require a response from the taxpayer. See https://www.irs.gov/taxtopics/tc652.
Why You Shouldn’t Ignore CP2000 Notices: It’s crucial to understand that receiving a CP2000 notice should not be taken lightly or ignored. In this case, the data provided by Kraken may be incomplete or may contain inaccuracies, such as missing data, omitted transactions, or misclassifications of income as ordinary or capital gains. Responding to a CP2000 notice is crucial. However, this response must be accurate and timely. It is recommended that taxpayers who receive a CP2000 Notice consult with a tax professional to determine the appropriate response. Ignoring the notice can lead to problems later in down the road.
Possible IRS Actions: While CP2000 notices are one potential outcome, it is essential to be aware that the IRS may also initiate audits or, in rare instances, even criminal investigations based on the data received. These potential actions by the IRS underscore the need for taxpayers who used Kraken to consult with a qualified tax professional.
Taking Action: If you are a Kraken user who may be affected by this data release, you should consider taking the following steps:
- Review Your Tax Returns: Assess whether your previous tax returns accurately reflect your cryptocurrency transactions, especially those during the 2016-2020 period.
- Consult a Tax Professional: If you suspect any errors or discrepancies in your tax filings, it is advisable to consult with a certified public accountant (CPA) or a tax lawyer who can help you rectify any issues.
- Amend Your Tax Returns: If necessary, you may need to amend your tax returns to ensure that your cryptocurrency income is accurately reported. In certain instances, a voluntary disclosure might be required. Your tax professional will be able to navigate you through these intricacies.
- Respond to IRS Notices: If you receive a CP2000 notice or any other communication from the IRS, respond promptly and provide the requested information. You may wish to consult with a tax professional, who can interact with the IRS, to address these IRS notices.
Conclusion: While this situation may seem daunting, being proactive in addressing any discrepancies can help you navigate these turbulent waters effectively.
The release of Kraken’s user data to the IRS carries implications for taxpayers who may have had cryptocurrency transactions during the specified period. Being informed and taking appropriate action now can help you avoid potential tax issues in the future. Don’t hesitate to seek professional guidance to ensure your tax returns accurately reflect your cryptocurrency activities and the appropriate action to take if there are errors or inaccuracies.
[i] United States v. Payward Ventures, Inc., and its subsidiaries (collectively “Kraken”), Case No. 21-cv-02201-JCS (N.D.Cal.).