Release the Kraken…
The kraken was a giant sea monster that appeared in the excellent 1981 film, the Clash of the Titans (we don’t talk about the 2010 remake).
Of course, the film included the stop motion animation of the genius Ray Harryhausen.
In the films, the Kraken is sent by Zeus to destroy the city of Argos (the city, rather than the catalogue shop).
Perseus, the hero of the story, must slay the Kraken in order to save the city. Perseus uses Medusa’s head to turn the Kraken to stone.
However, in this humble article, the Kraken being targeted is not a mythical titan. It is, perhaps, a titan amongst cryptocurrency exchanges. Further, it is being targeted not by Perseus brandishing the head of a gorgon, but by the IRS.
What’s it all about then?
Ruling
In a recent development, the United States District Court for the Northern District of California ruled in favour of the IRS and ordered Kraken to disclose user account and transaction information.
The IRS has sought this information to investigate potential instances of underreported taxes by Kraken’s users. This court order marks another milestone in the US government’s intensified scrutiny of the cryptocurrency industry.
Court Order mandates user data disclosure
According to the court order issued on June 30, Kraken is obligated to furnish the IRS with specific details of users who have engaged in transactions exceeding $20,000 within a calendar year.
The required information includes names (real or pseudonyms), birthdates, taxpayer identification numbers, addresses, phone numbers, email addresses, and additional relevant documents.
This move aims to assist the IRS in assessing the tax obligations of individuals who conducted cryptocurrency transactions on the exchange between 2016 and 2020.
However, the judge deemed the IRS’ attempts to obtain employment information and source of wealth from Kraken unnecessary and denied these specific requests.
Where do we stand in the UK?
In my view, HMRC doesn’t need to apply to Court (or find a gorgon’s head) to obtain this kind of information.
Instead, HMRC holds so-called “data gathering” powers under FA 2011, Sch. 23.
The powers may be used to require a “relevant data holder” to provide “relevant data”. That data may be general in nature or may relate to a particular person or issue.
These powers are in addition to the general information powers that HMRC posses. However, importantly, they may not be used in place of those information powers listed above to check the tax position of the data holder.
Data holders can be drawn from a potentially wide list of characters.
It is clear that this list is wide enough to cover a centralised exchange to check the tax position of its customers. It is clear that HMRC have already used this power in relation to such businesses. For example, here is text from an email sent by Coinbase to its users in previous years:
“We’re writing to let you know about a notice HMRC have issued to Coinbase under Paragraph 1, Schedule 23 to the Finance Act 2011. This notice requires us to provide information on your Coinbase account to HMRC.
The notice requires the disclosure of customers with a UK address who received more than £3,000 worth of cryptoassets from Coinbase from April 6, 2020 to December 31, 2020.”
It is likely that other popular centralised exchanges have already received, or will receive, similar notices from HMRC.
Indeed, it is likely to be a popular tool in HMRC’s kitbag going forward.
Conclusion
The US ruling in the Kraken case is a significant development and might have a chilling effect on a certain profile of crypto enthusiast. It is likely to lead to increased scrutiny and enforcement by tax authorities.
However, it is also possible that the ruling could lead to greater transparency and compliance in the cryptocurrency industry.
The UK position is somewhat different.
HMRC has statutory powers that allow it to require exchanges to provide similar information. This means that cryptocurrency users in the UK should be aware that HMRC has the ability to track their transactions and identify any potential tax liabilities.
Only time will tell how the IRS’s ruling and the UK’s data gathering powers will ultimately impact the future of cryptocurrency.
However, it is clear that both jurisdictions are taking a more proactive approach to regulating cryptocurrency. This is likely to have a significant impact on the way that cryptocurrency is used and traded in the years to come.”
Epilogue
In the original Clash of the Titans, the three blind Stygian Witches, who have vast knowledge and can predict the future with a shared magical eye, tell Perseus the only way to defeat the seemingly invulnerable Kraken.
Crypto-investors need to be aware that, although IRS and HMRC don’t yet have a future predicting magical eye, do have access to a lot of information and powers to reap further info.
And this isn’t limited to dealing with Krakens…
If you have any queries about this article about Kraken, Kraken’s in general, anything related to Clash of the Titans and, I guess, tax, then please get in touch.
For more resources on crypto taxes, please see my website, www.cryptotaxdegens.com, for further resources