As per general norms that tend to apply to, and be adopted by, all cryptocurrency exchange platforms, exchanges keep all data of traders/investors secure from unlawful collection, exactly as a centralized financial institution like a bank would. However, recently it doesn’t seem to go down that way – especially in the US, where the IRS thinks you’re probably engaging in tax evasion.
Unlawful data collection from the IRS
On July 15, 2020 – the USA’s Tax Day, New Civil Liberties Alliance (NCLA) filed a lawsuit against the Internal Revenue Service (IRS) on behalf of New Hampshire resident James Harper. Mr. Harper has challenged IRS’s unlawful collection of his information as a crypto trader and violating his privacy.
Harper received a letter from the agency in August 2019 that alerted him about cryptocurrency tax filing requirements; it seems he was held accountable for committing the ‘crime’ of holding a Bitcoin wallet. The lawsuit argues that the IRS has acquired the unbridled power to both demand and seize all Americans’ private financial information from third parties without any judicial process- in defiance of the Fourth and Fifth Amendments and statutory protections.
According to Mr. Harper’s case, he bought his first Bitcoin in 2013, and since then has paid all applicable taxes and reported his trades related to Bitcoin holdings. His transactions were facilitated through three digital cryptocurrency exchanges: Coinbase, Abra, and Uphold. Now, all these platforms are contractually bound to protect all clients’ private information.
And yet, last year Harper became one of the 10,000 crypto holders who suddenly received a letter from the IRS stating that the agency had obtained their financial records from various cryptocurrency exchanges, that too without any particular misgivings. The IRS also didn’t give Harper any advanced notice or opportunity to challenge the seizure of his property- in direct violation of the Fifth Amendment.
Coinbase received 1800+ information requests for tax evasion investigations
As per the Electronic Frontier Foundation’s (EFF) request for transparency, Coinbase recently stated in their first ever transparency report that they have received more than 1,800 requests for criminal information from law enforcement in the first half of 2020. Additionally, the platform also received a number of civil/administrative requests from government agencies, for a total of over 1,900 requests. Notably, more than 1,100 of the requests came from US agencies including the FBI, and 441 came from the United Kingdom.
In a recent blog post, Coinbase states, “As a financial institution with a duty to detect and prevent prohibited activity on its platform, we respect the legitimate interests of government authorities in pursuing bad actors who abuse others and our platform… Yet we do not hesitate to push back where appropriate, even when it is inconvenient or costly to do so. That’s why each request we receive is handled by a team of experienced specialists in accordance with set procedures to confirm the validity of the request and narrow or object to requests that are overly broad.”