How a federal judge ruling of may have put dent ob crypto users’ privacy rights.

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The Internal Revenue Service is unlikely to face repercussions for collecting information on a cryptocurrency customer from Coinbase or Abra.

A federal judge has suggested that a person does not have the power to compel the Internal Revenue Service, or IRS, to destroy financial documents obtained from cryptocurrency exchanges.

In granting a motion to dismiss filed in December, Judge Joseph DiClerico of the District of New Hampshire indicated that the Internal Revenue Service is under no requirement to honour demands to purge crypto transaction data obtained from Coinbase or other exchanges pertaining to federal tax documents. The civil rights lawsuit brought by plaintiff James Harper against IRS commissioner Charles Rettig, the department, and its officers was dismissed in part for loss of authority after almost a year in court.

Today’s dismissal said that Harper was not entitled to compensation for damages, or to limit the IRS’ ability to obtain tax information from the exchanges, mainly due to the Anti-Injunction Act. Only applicable to federal taxes, the statute prevents federal courts from exercising jurisdiction in certain cases to hinder “the assessment or collection of any tax.”

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“The effect of Harper’s requested declaratory and injunctive relief would be to prevent the IRS from assessing Harper’s or others’ taxes using the information it has obtained through the John Doe third-party process,” said Judge DiClerico. “Consequently, his suit, to the extent it seeks injunctive and declaratory relief, is barred by the Anti-Injunction Act.”

Harper opened an account at Coinbase in 2013, initially accepting Bitcoin (BTC) deposits as payment for consultancy work. He says that he declared the crypto trades on his tax returns as capital gains until 2016, when he liquidated and sold any holdings off the market, as well as any BTC on Abra and Uphold.

In 2019, the IRS sent 10,000 letters to cryptocurrency owners, clarifying the tax disclosure conditions for digital assets and ostensibly advising them to compensate any unreported back taxes. The letter included a veiled warning that cryptocurrency consumers would be “subject to potential civil and criminal compliance action” if they did not duly register and pay taxes on their assets.

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Harper allegedly had no crypto holdings on Coinbase since 2016, and the exchange stated in its terms of service that it will secure users’ personal information from “damage, abuse, unauthorised entry, exposure, modification, and destruction.” However, when he had received the IRS message, Harper deduced that either Abra or Coinbase — or both — had supplied the organisation with his personal information. He filed a civil rights complaint against the IRS in July 2020, arguing that the tax office violated his Fourth and Fifth Amendment rights.

According to court records, the IRS collecting personal financial details from Coinbase in 2017 was categorised as “tax enforcement, not research” that “serves the lawful investigative intent of implementing the tax laws against those who benefit from dealing in virtual currency.” That decision, as well as the one taken today, could mean that crypto users have limited choices if an exchange, such as Coinbase, hands over their personal information in response to an IRS subpoena or request for information.

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The ruling of the judge came just three weeks before the April 15 deadline for paying taxes in the United States.

 

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