Kraken-based IRS activity highlights tax burden of crypto


More cryptocurrency tax news this morning shows that the IRS is pursuing data collection on individuals utilizing the Kraken exchange for more than $20,000 worth of cryptocurrency procurements from 2016 to 2020.


Sebastian Sinclair at Coindesk reports that the IRS can use something called a ‘John Doe summons’ to request the data if they don’t know the asset holder’s name.


This isn’t the first heads-up that investors have gotten about tax transparency with crypto, but the edict, issued by the Northern District of California court, provides an additional warning that crypto holdings must be scrupulously documented and reported in annual filings.


Part of the confusion, for many traders and investors, is around the original evolution of Bitcoin, where many people thought of it as more of a payment medium, something a merchant would take in exchange for, say, a cup of coffee.


Over the past few years, it quickly became apparent that Bitcoin was much more popular as an investment asset than a coin that you spend – and that subsequently triggered all kinds of tax catch-up activity by the agencies in question.


IRS specifies the new move targets the “investments of an ascertainable group or class of persons.” A potential sticking point with these targets is that the investigation goes back further than the conventional three years of tax records commonly anticipated. Hilariously, the IRS in typical byzantine fashion, describes its conventional tax documentation expectation this way:


“Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.”


And then enumerating these three exceptions:

“Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.

Keep records indefinitely if you do not file a return.

Keep records indefinitely if you file a fraudulent return.”


Aside from the assumption that someone who files fraudulently or fails to file would be conscientious enough to keep records, the rules show that what’s applied to some crypto holders is, in a sense, beyond the pale.


Poloniex is another example of an exchange for which the IRS has sought to collect these records on those holding more than $20,000 worth of cryptocurrency.


All of this has made some investors wary. Others have jumped in and now regret it, as in this Reddit screed from a hapless young person who has not filed for the years in question:


“I didn’t know anything about taxes so I never bothered to set aside anything. They really never do teach this stuff. I gambled in more than a few bad ICOs to start 2018, had some money in coins that absolutely plummeted with no chance of recovering, etc. Today my portfolio sits at $125k, a far cry from my $880k . My estimated tax liability for 2017 is about 400k (live in California).”


The bottom line? If you go crypto, go there with the paperwork in hand.