United States v. Payward Ventures, Inc. (Kraken), Order granting in part IRS John Doe summons petition, No. 3:23-mc-80029, Dkt. 34 (Part 1 of 2)
Document text
Research, not advice. Part of the Bitcoin research archive (October 2026). Claims labelled unverified, contested or fringe are reported, not endorsed; statuses of bills and rules are as of the date checked. Government, court and patent records are public domain; the research notes are CC BY 4.0.
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 1 of 51
1
2
3
4
5 UNITED STATES DISTRICT COURT
6 NORTHERN DISTRICT OF CALIFORNIA
7
UNITED STATES OF AMERICA,
8 Case No. 23-mc-80029-JCS
Plaintiff,
9
v. ORDER GRANTING IN PART AND
10 DENYING IN PART PETITION TO
PAYWARD VENTURES, INC., ENFORCE IRS SUMMONS
11
Defendant. Re: Dkt. Nos. 1, 17, 19, 24, 26
12
United States District Court
13
14 I. INTRODUCTION
15 This case involves a summons issued by the Internal Revenue Service (“IRS”) as to
Northern District of California
16 Payward Ventures, Inc. and subsidiaries (collectively, “Kraken”), an online cryptocurrency
17 exchange platform, that the Court preliminarily approved in a prior proceeding, In the Matter of
18 the Tax Liabilities of John Does, Case No. 21-cv-02201-JCS (N.D. Cal.) (“Kraken I”). After
19 Kraken failed to comply with the summons, the United States of America (“the Government” or
20 “the United States”) initiated the instant action by filing a petition to enforce the summons
21 pursuant to 26 U.S.C. §§ 7402(b) and 7604(a) (“Petition”). The Court issued an order to show
22 cause why the Petition should not be enforced and the parties have provided briefing in response.
23 A hearing on the Petition was held on June 9, 2023. For the reasons set forth below, the Court
24 GRANTS in part and DENIES in part the Petition. 1
25
26
27
1
28 The parties have consented to the jurisdiction of a United States magistrate judge pursuant to 28
U.S.C. § 636(c).
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 2 of 51
1 II. BACKGROUND 2
2 A. Kraken
3 Kraken “operate[s] a digital currency exchange under the trade name Kraken through the
4 website www.kraken.com [https://perma.cc/3A4V-8TWG].” Kraken I, First Cincotta Decl. ¶ 55.
5 “A digital currency exchange functions much like a traditional currency exchange, except it deals
6 with the conversion of cryptocurrency for traditional currency or vice versa, as well as the
7 exchange of one cryptocurrency for another cryptocurrency.” Id. ¶ 18. Kraken offers its services
8 to both U.S. and international users in more than 190 countries. Kraken II, dkt. no. 19-4
9 (Declaration of Todd Siemers in Support of Payward Ventures, Inc.’s Opposition to Petition to
10 Enforce Internal Revenue Service Summons) (“Siemers Decl.”) ¶ 4.
11 Kraken offers a variety of account levels and types of services, and the type of information
12 users must provide to register for an account depends on the type of account they are registering
United States District Court
13 for. Siemers Decl. ¶¶ 7-9; Kraken II, Cincotta Petition Decl. ¶¶ 70-76. Kraken data engineer
14 Todd Siemers describes the requirements for registering accounts at Kraken’s different levels of
15 service as follows:
Northern District of California
5. To use Kraken’s exchange services, a user must first open an
16 account. Kraken currently offers several different levels of accounts:
Starter, Express, Intermediate, and Pro. In general, Starter and
17 Express accounts offer more limited services and thus require lower
levels of verification by the user. Intermediate and Pro accounts, on
18 the other hand, permit a wider variety of funding methods and
transaction types and have higher withdrawal and transaction limits.
19 Consequently, Intermediate and Pro account users are required to
provide additional verification. During the 2016 to 2020 timeframe,
20 all account levels required the user to input certain identity
information, including first and last name, date of birth, address, email
21 address, and phone number.
22
23 2
The Government has supplied a series of declarations in support of the summons in Kraken I and
24 the Petition in this action by Supervisory Internal Revenue Agent Karen Cincotta (“Agent
Cincotta”). These declarations are referred to as follows: Kraken I, dkt. no. 1-2 (Declaration of
25 Karen Cincotta in Support of Ex Parte Petition for Leave to Serve “John Doe” Summons)
(“Kraken I, First Cincotta Decl.”); Kraken I, dkt. no. 8-1 (Second Declaration of Karen Cincotta in
26 Support of Ex Parte Petition for Leave to Serve “John Doe” Summons (“Kraken I, Second
Cincotta Decl.”); United States v. Payward Ventures, Inc., Case No. 23-mc-80029-JCS (N.D. Cal.)
27 (“Kraken II”), dkt. no. 1-1 (Declaration of Karen Cincotta in Support of Petition to Enforce
Internal Revenue Summons (“Kraken II, Cincotta Petition Decl.”)); Kraken II, dkt. no. 26-2
28 (Second Declaration of Karen Cincotta in Support of United States’ Petition to Enforce Internal
Revenue Service Summons, (“Kraken II, Cincotta Reply Decl.”).
2
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 3 of 51
6. To register for either an Intermediate or Pro account, the user is
1 required to confirm their identity and physical address by uploading
an identification document (such as a passport or driver’s license) and
2 proof of residence. Pro account holders are additionally required
to complete a Know-Your-Customer Questionnaire, which, among
3 other things, asks questions about the account holder’s occupation,
source of income, and intended use of the account.
4
7. Starter, Express, and Intermediate accounts are available only to
5 individuals, while the Pro account can be held by either an individual
or a business.
6
7 Siemers Decl. ¶¶ 7-9.
8 According to Agent Cincotta, under Kraken’s terms of use, verification requirements for
9 all three levels available prior to 2021 – Starter, Intermediate and Pro 3 – include two-factor
10 authentication for login; email address; full name; date of birth; phone number; and physical
11 address. Kraken II, Cincotta Petition Decl. ¶ 74. “In addition, valid ID, proof of residence,
12 occupation, and a taxpayer ID number (for U.S. clients) are required for intermediate-level and
United States District Court
13 pro-level accounts” and “[a]n identification confirmation photo may also be required as part of
14 either intermediate-level or pro-level account verification.” Id. ¶ 75. She states that “[n]o
15 taxpayer ID number is required for starter-level accounts.” Id. Agent Cincotta notes, however,
Northern District of California
16 that “[t]he oldest information the IRS has relating to Kraken’s account verification requirements
17 is from August 2019.” Id. ¶ 84. 4
18 Agent Cincotta describes the types of transactions that can be conducted at the different
19 account levels as follows:
None of the account levels place[s] any restrictions on trading volume
20 or value. This means that an individual with a starter account can trade
cryptocurrency in unlimited amounts (and generate significant
21 amounts of taxable gain) without needing to provide a taxpayer ID
number. All three account levels permit the user to trade on margin,
22 although limits are placed based on account level, and all three
account levels permit the user to earn additional cryptocurrency by
23 participating in the running and maintenance of blockchain. The
intermediate and pro levels also allow users access to additional
24 trading options such as futures trading and over-the-counter trading.
25
3
26 It is not clear when the Express account discussed by Mr. Siemers in his declaration was created.
Agent Cincotta does not discuss that level of account in her declarations. At the hearing, Kraken
27 stipulated that the Express account is a type of starter-level account.
4
At the hearing, Kraken stipulated that it does not require users to provide a taxpayer ID for
28 Starter and Express accounts and that it only started collecting that information as to the
Intermediate and Pro accounts in 2019.
3
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 4 of 51
1 Id. ¶ 77; see also Kraken I, Second Cincotta Decl., ¶ 23 (“All three account levels permit the user
2 to trade on margin, although limits are placed based on account level, and all three account levels
3 permit the user to earn additional cryptocurrency by participating in staking.”); Kraken I, dkt. no.
4 8 (United States’ Response to Order to Show Cause Why Petition Should Not be Denied (“Kraken
5 I, Response”) at 7 n. 3 (“‘Staking,’ more specifically ‘on-chain staking’ is a process through which
6 a user holding certain types of cryptocurrency can participate indirectly in the validation and
7 confirmation of cryptocurrency transactions to the blockchain by ‘staking’ their units. While
8 staked, the user cannot sell or withdraw the units but can earn rewards (payouts) in return for
9 staking.”).
10 B. The IRS Investigation
11 Agent Cincotta describes two government reports identifying tax compliance issues related
12 to cryptocurrency – one by the Government Accountability Office (“GAO”) completed in 2013
United States District Court
13 and another by the Treasury Inspector General for Tax Administration (“TIGTA”) completed in
14 2016. Kraken I, First Cincotta Decl. ¶¶ 5-6; Kraken II, Cincotta Petition Decl. ¶¶ 26-27. In the
15 2013 study, the GAO “identified several tax compliance risks associated with virtual currencies,
Northern District of California
16 ranging from lack of knowledge of tax requirements and uncertainty over how to report virtual
17 currency transactions to deliberate underreporting of income and tax evasion.” Kraken II, Cincotta
18 Petition Decl. ¶ 27. The 2016 TIGTA study found that “taxpayers’ use of virtual currencies,
19 including cryptocurrencies, had expanded significantly in recent years” and that “while there are
20 legitimate reasons to use virtual currency . . . some virtual currencies are . . . popular because the
21 identities of the parties involved are generally anonymous, leading to a greater possibility of their
22 use in illegal transactions.” Id. ¶ 27.
23 Agent Cincotta also offers more general evidence of possible tax noncompliance by
24 cryptocurrency users. First, she points to the results of a 2019 study using data from 2011-2013
25 indicating that “the overall rate of underreporting of income that was not subject to third-party
26 information reporting was 55 percent, compared to 5 percent for amounts subject to substantial
27 information reporting but no withholding, and 1 percent for amounts subject to substantial
28 information reporting and withholding.” Id. ¶ 33. Second, she cites to the IRS’s determination
4
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 5 of 51
1 that only 800 to 900 taxpayers per year filed tax returns with a property description related to
2 bitcoin or virtual currency in the period between 2013 and 2015, even though Coinbase, another
3 cryptocurrency exchange (discussed further below), had “serviced more than 5.9 million
4 customers and handled more than $6 billion in transactions” in the same period. Id. ¶ 36.
5 According to Agent Cincotta, the IRS has found that although the number of taxpayers reporting
6 cryptocurrency has increased since that time (4,164 taxpayers in 2016, 88,040 for 2017, 93,848 in
7 2018, 102,278 in 2019, 253,265 in 2020, and 842,888 in 2021), “these numbers still fall far short
8 of what would be expected given the number of users, transactions, and value that the virtual
9 currency exchanges publicize occur on an annual basis.” Id. ¶ 37.
10 According to Agent Cincotta, in response to concerns about cryptocurrency tax
11 noncompliance, the IRS expanded its Electronic Payment Systems Initiative (“EPSI”), which was
12 begun in 2005 to identify U.S. taxpayers who use electronic funds transfer and payment systems
United States District Court
13 for tax avoidance purposes, “to address U.S. taxpayers who use virtual currencies for tax
14 avoidance purposes, recognizing that some U.S. taxpayers use such currencies to expatriate and
15 repatriate funds to and from offshore accounts.” Kraken I, First Cincotta Decl. ¶ 7; Kraken II,
Northern District of California
16 Cincotta Petition Decl. ¶¶ 28-29. As part of this initiative, Agent Cincotta states, the IRS
17 established a Virtual Currency Issue Team (“VCIT”). Kraken I, First Cincotta Decl. ¶ 8; Kraken
18 II, Cincotta Petition Decl. ¶ 29. “The VCIT was established to study the issue and then consider
19 the compliance impact related to virtual currencies.” Id. According to Agent Cincotta, the
20 summons at issue in this case is “one of the tools being used in the investigation.” Kraken II,
21 Cincotta Petition Decl. ¶ 29; see also id. ¶ 30 (“[T]he IRS is pursuing this John Doe summons to
22 Kraken in order to obtain customer and transactional information belonging to members of the
23 John Doe class that can be used to conduct examinations of persons that may not have complied
24 with the internal revenue laws.”).
25 Agent Cincotta explains in her declarations that “digital currency exchanges . . . provide
26 valuable information about an individual customer’s cryptocurrency transactions that can be used
27 in conjunction with other publicly available blockchain information to adequately examine
28 whether an individual has complied with internal revenue laws.” Kraken I, First Cincotta Decl. ¶
5
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 6 of 51
1 29; see also Kraken II, Cincotta Petition Decl. ¶ 25. She describes various ways cryptocurrency
2 use can relate to tax compliance:
• Wages, salary, or other income paid to an employee with virtual currency is reportable by
3
the employee as ordinary income and subject to employment taxes paid by the employer.
4 • Virtual currency received by a self-employed individual in exchange for goods or services
is reportable as ordinary income and is subject to self-employment tax. This would include
5 a person who “mines” virtual currency as a trade or business.
• Virtual currency received in exchange for goods or services by a business is reportable as
6 ordinary income.
7 • Gain on the exchange of virtual currency for other property is generally reportable as a
capital gain if the virtual currency was held as a capital asset and as ordinary income if it is
8 property held for sale to customers in a trade or business.
• Gain on the sale of property held as a capital asset in exchange for virtual currency is
9 reportable as a capital gain.
10 • Payments made in virtual currency are subject to information reporting requirements to the
same extent as payments made in fiat currency or instruments denominated in fiat
11 currency.
12 Kraken I, First Cincotta Decl., ¶ 31. She also provides five specific examples of taxpayers who,
United States District Court
13 based on information available to the IRS, are Kraken users and have violated the tax code. Id. ¶¶
14 70-74. Finally, she points to public records reflecting that some Kraken users have routed the
15 proceeds of criminal activity through Kraken. Id. ¶¶ 75-78.
Northern District of California
16 C. Coinbase
17 The summons in this case is similar to the summons the Government sought to enforce in
18 United States v. Coinbase, Inc., No. 17-cv-01431-JSC, 2017 WL 5890052, at *6–7 (N.D. Cal.
19 Nov. 28, 2017) (“Coinbase”)). Kraken points to the Coinbase court’s approval of a much
20 narrower summons than the Government originally requested in that case while the Government
21 questions the approach that was taken by the Coinbase court and asserts that it hampered the IRS’s
22 investigation.
23 In Coinbase, the IRS served a summons on Coinbase, Inc., a virtual currency exchange,
24 “seeking records regarding nearly all of Coinbase’s customers for a several-year period.” 2017
25 WL 5890052, at *2. In the initial summons, the Government “requested nine categories of
26 documents including: complete user profiles, know-your-customer due diligence, documents
27 regarding third-party access, transaction logs, records of payments processed, correspondence
28 between Coinbase and Coinbase users, account or invoice statements, records of payments, and
6
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 7 of 51
1 exception records produced by Coinbase’s AML system.” Id. at *1. After Coinbase refused to
2 comply and the Government brought a petition to enforce – but before the court had ruled on the
3 petition – the IRS issued a narrower summons that did “not include users: (a) who only bought and
4 held bitcoin during the 2013-15 period; or (b) for which Coinbase filed Forms 1099-K during the
5 2013-15 period.” Id. at *2. The information requested in the narrowed summons was largely the
6 same as the original summons except that the Government dropped the request for exception
7 records produced by Coinbase’s AML system. Id. The narrowed summons was challenged by
8 Coinbase and four Doe intervenors. Id.
9 Applying the standard for enforcing an IRS summons set forth in United States v. Powell,
10 379 U.S. 48 (1964), discussed further below, the court in Coinbase found that only two of the
11 Powell factors were in dispute: whether the Government’s summons served a legitimate purpose;
12 and whether the information requested in the summons was relevant to that purpose. Id. at *4. As
United States District Court
13 to the first factor, the court found that the summons had a legitimate investigative purpose of
14 “investigating the reporting gap between the number of virtual currency users Coinbase claims to
15 have had during the summons period and U.S. bitcoin users reporting gains or losses to the IRS
Northern District of California
16 during the summoned years.” Id. (internal quotations and citations omitted). The court pointed to
17 evidence offered by the Government that “Coinbase is the largest U.S. exchange of bitcoin into
18 dollars with at least 5.9 customers served and 6 billion in transactions while only 800 to 900
19 taxpayers a year have electronically filed returns with a property description related to bitcoin
20 from 2013 through 2015.” Id. It found that “[t]his discrepancy creates an inference that more
21 Coinbase users are trading bitcoin than reporting gains on their tax returns.” Id. It noted further,
22 “[t]hat only 800 to 900 taxpayers reported gains related to bitcoin in each of the relevant years and
23 that more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000
24 worth of bitcoin in a given year suggests that many Coinbase users may not be reporting their
25 bitcoin gains.” Id.
26 Turning to the relevance factor, the court in Coinbase recognized that “the Coinbase
27 account holder’s identity and transaction records will permit the Government to investigate
28 whether the holder had taxable gains that were not properly declared.” Id. at *6. The court
7
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 8 of 51
1 found, however, that the information requested under the Government’s summons was broader
2 than that:
[T]he Government . . . also seeks account opening records, copies of
3 passports or driver’s licenses, all wallet addresses, all public keys for
all accounts/wallets/vaults, records of Know-Your-Customer
4 diligence, agreements or instructions granting a third-party access,
control, or transaction approval authority, and correspondence
5 between Coinbase and the account holder. The Government claims to
need these records to verify an account holder’s identity and
6 determine if the holder used others to make transactions on the
account holder’s behalf. However, at this stage, where the
7 Government is seeking records on over 10,000 account holders, these
requests seek information than is “broader than necessary.” See
8 Bisceglia, 420 U.S. at 151. The first question for the IRS is whether
an account holder had a taxable gain. If the account holder did not,
9 then correspondence between Coinbase and a user is not even
potentially relevant. Similarly, while the Government needs an
10 account holder’s name, date of birth, taxpayer identification and
address to determine if a taxable gain was reported, it only needs
11 additional identity information such as copies of passports and
drivers’ licenses or “Know Your Customer” due diligence if there is
12 potentially a taxable gain and if there is some doubt as to the
United States District Court
taxpayer’s identity. If there is not, these additional records will not
13 shed any light on a legitimate investigation.
14 2017 WL 5890052, at *6. The court rejected the Government’s argument that its summons
15 properly “included such broad swaths of records . . . so that it [would] not need to return to court
Northern District of California
16 to ask for them if and when needed[,]” citing its duty to ensure that the Government was not
17 collecting “thousands and thousands of personal records unnecessarily.” Id. It further observed
18 that “[i]f the Government later determines that it needs more detailed records on a taxpayer, it can
19 issue the summons directly to the taxpayer or to Coinbase with notice to a named user—a process
20 preferable to a John Doe summons.” Id.
21 In Kraken I and in this action, the Government rejects what it describes as Coinbase’s
22 “novel summons process by which the IRS had to pursue its investigation in phases,” arguing that
23 such an approach is not called for under 26 U.S.C. § 7609(f), governing Doe summonses, and
24 would, as a practical matter, require the IRS to issue multiple John Doe summonses to the same
25 third-party, which it asserts would be “extremely burdensome and time consuming.” Kraken I,
26 Response at 2. According to the Government, this approach is not practical in light of the statute
27 of limitations that applies to information obtained from a Doe summons, which under 26 U.S.C. §
28 6501(a) and 26 U.S.C. § 7609(e)(2) is only tolled while responsive information is being produced
8
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 9 of 51
1 under the summons. Id. at 6 n. 1.
2 Moreover, the Government contends, the basic information provided under the Coinbase
3 summons is insufficient due to the complexity of the tax code violations it is investigating:
4 Cryptocurrency is treated as property for federal tax purposes. See
Notice 2014-21, 2014-16 I.R.B. 938, 2014 WL 1224474 (Mar. 26,
5 2014). When reporting gains and losses from the sale of
cryptocurrency, a taxpayer may use different methods for calculating
6 that gain or loss. For example, a taxpayer may use the specific
identification method to pair the sale of a specific unit of
7 cryptocurrency against a specific acquisition. See IRS Virtual
Currency FAQs, FAQ#39 & 40, available at: Frequently Asked
8 Questions on Virtual Currency Transactions |Internal Revenue
Service (irs.gov). Alternatively, where a taxpayer has not used the
9 specific identification method or lacks records to fully support the use
of that method, the taxpayer must rely on the so-called “first-in-first-
10 out” accounting method that simply pairs the sale of a unit of
cryptocurrency against the oldest-acquired unit chronologically. Id. at
11 FAQ#41. These approaches allow a taxpayer flexibility in how they
calculate gains or losses on the sale of cryptocurrency units held as
12 capital assets. As a result, the IRS cannot make a “taxable gain”
United States District Court
determination by looking at an account holder’s transaction
13 information in isolation. The IRS must (1) identify the account holder,
(2) determine whether that individual filed a tax return for the relevant
14 tax year, (3) determine whether that individual reported
cryptocurrency transactions on that return, and (4), if so, whether
15 what was reported, or the approach taken in reporting the information,
Northern District of California
indicates compliance with the internal revenue laws.
16
17 This analysis can become even more complicated because many
taxpayers operating in the cryptocurrency space have accounts at
18 more than one cryptocurrency exchange and also make use of
personal user wallets. For example, the IRS has conducted
19 examinations where the taxpayer involved had cryptocurrency
transactions at three or more distinct exchanges and, at times, upwards
20 of ten exchanges. [Kraken I,] Second [Cincotta] Declaration at ¶ 6.
Current tax reporting requirements do not require a taxpayer to
21 identify on their tax return on which cryptocurrency exchange taxable
transactions occurred. Id. This makes rooting out tax non-compliance
22 much more complex than simply reviewing the account transaction
information for one account holder on one exchange in isolation. . .
23 .[H]aving additional specific information about the nature of an
account holder’s non-transactional activity is necessary when the IRS
24 is making its initial determination about who the correct taxpayer is,
and in what other activity that individual may be engaging. This
25 information is required for the IRS to reach a reasonably-accurate
conclusion about tax compliance. The IRS’s investigation is not
26 solely focused on identifying tax non-compliance for account holders
at a single exchange like Kraken, but rather to identify tax non-
27 compliance for individuals transacting in cryptocurrency with
accounts at that exchange who may have additional accounts at other
28 exchanges.
9
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 10 of 51
1 Kraken I, Response at 3-4.
2 According to Agent Cincotta, because the court in Coinbase limited the identifying
3 information Coinbase was required to produce to “basic information such as name, date of birth,
4 taxpayer ID number, and physical address[,]” there are still 750 taxpayers – out of approximately
5 13,000 Coinbase customers who received notice of the required disclosures – that it has not been
6 able to identify, accounting for “more than $100 million in gross proceeds from the sale of
7 cryptocurrency during the years covered by the Coinbase John Does summons.” Kraken II,
8 Cincotta Petition Decl. ¶¶ 49-50. 5 She further states that because of the “partial enforcement of
9 the summons in Coinbase” the IRS was “prevented . . . from having discussions with Coinbase
10 about what other additional identifying information it had in its records that could be used to help
11 the IRS positively identify the unidentifiable users, like telephone numbers or email addresses.”
12 Id. ¶ 50. As to the Coinbase users the IRS was unable to identify, Agent Cincotta attributes these
United States District Court
13 failures largely to the lack of a taxpayer ID numbers. Id. ¶ 47. Agent Cincotta states, “[w]here
14
5
15 Agent Cincotta provides a detailed explanation of the difficulties the IRS had identifying some
Northern District of California
Coinbase account holders, stating as follows:
16
43. In reviewing the information provided in response to the John Doe summons issued to
17 Coinbase, the IRS ran into several problems when trying to positively identify the account holders.
18 44. The information provided by Coinbase lacked taxpayer ID numbers for approximately
10% of the users (over 1,300 taxpayers). There were also over 150 instances where the account
19 data did not include a name and approximately 170 instances where the name was a pseudonym
rather than an actual name. There were over 500 instances where no date of birth information was
20 provided and roughly 1,000 instances where no physical address information was provided.
21 45. The IRS worked with Coinbase to attempt to obtain the missing information. Coinbase
was able to provide some of the missing information, reducing the unknown names to only a few.
22 Missing address information was reduced to approximately 650 instances and missing date of birth
information was reduced to slightly below 500. Coinbase was not able to provide any of the
23 missing taxpayer ID numbers.
24 46. During discussions with Coinbase, it explained that some of the account information may
be missing because it had not necessarily been collected for some of the oldest accounts. As
25 discussed in paragraph 44 above, basic identity information such as name, taxpayer ID number,
date of birth, and physical address was insufficient in these situations to positively identify the
26 actual taxpayer account holder.
27 Kraken II, Cincotta Petition Decl. ¶¶ 43-46.
28
10
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 11 of 51
1 there was no taxpayer ID number and other information was also missing, it was nearly impossible
2 for the IRS to positively identify the relevant taxpayer.” Id.
3 D. Procedural Background
4 On March 30, 2021, the United States filed an ex parte petition seeking the Court’s
5 permission to serve an administrative summons (“original summons”) upon Kraken to obtain
6 information about “John Does[,]” defined as “United States persons who, directly or indirectly had
7 authority over any combination of accounts held with Payward Ventures, Inc., d/b/a Kraken or
8 Kraken.com, or its predecessors, subsidiaries, divisions, or affiliates (collectively, ‘Kraken’) with
9 at least the equivalent of $20,000 in value of transactions (regardless of type) in cryptocurrency in
10 any one year, for the period January 1, 2016 through December 31, 2020.” Kraken I, dkt. no. 1
11 (March 30, 2021 ex parte petition) & 1-3 (original summons). 6
12
United States District Court
6
13 The original summons requested the following information:
14 User Identity Information
15 1. Account registration records for each account owned or controlled by the User
Northern District of California
including, but not limited to, complete user profile, account application, records
16 permitting third-party access, history of changes to user profile from account
inception, complete user preferences, complete user history (including confirmed
17 devices, internet protocol addresses, and account activity), complete user
payment methods, and any other information related to the funding sources for
18 the account, regardless of date. This request does not include passwords, pins,
private keys, security settings, and account recovery information.
19
2. Any other records of Know-Your-Customer due diligence performed with respect
20 to the User not included in paragraph 1, above, regardless of date.
21 3. All correspondence between Kraken and the User or any third party with access
to the account pertaining to the account, including but not limited to e-mails, chat
22 support logs, telephone logs or recordings, letters, or other memoranda of
communication.
23
4. All exception reports produced by your anti-money laundering (“AML”) system,
24 and all records of investigation of such exceptions. This request does not include
any suspicious activity reports (“SAR”) that were ultimately generated as a
25 consequence of an AML alert or any other information that would reveal the
existence of a SAR.
26
Transaction Activity
27
5. All records of activity in the User’s account including, but not limited to:
28
a. Records identifying the date and time, amount, and U.S. dollar value of
11
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 12 of 51
1 In response to the Government’s ex parte petition in Kraken I, the Court issued an order to
2 show cause why the petition should not be denied on the basis that the summons was overbroad.
3 Id., dkt. no. 6. In the order to show cause, the Court observed that “[i]n addition to basic
4 registration, identification, and transaction information, the proposed summons [sought] broad
5 categories of information such as ‘complete user preferences,’ ‘[a]ny other records of Know-Your-
6 Customer due diligence,’ and ‘[a]ll correspondence between Kraken and the User or any third
7 party with access to the account pertaining to the account,’ among other similarly expansive
8 requests.” Id. (quoting original summons, dkt. no. 1-3 at ECF p. 13). The Court further found that
9 Agent Cincotta’s explanations for some of these categories of information “rest[ed] on conclusory
10 assertions that such information ‘may be relevant in determining, and verifying, the identity of the
11 account user’ or ‘revealing other accounts controlled by the same user.’” Id. (citation omitted).
12 The Court noted in the order to show cause that “the Honorable Jacqueline Scott Corley
United States District Court
13 rejected the IRS’s position that similarly broad categories of information were relevant, and held
14 that the IRS should first review basic user information and transaction histories before determining
15 whether further subpoenas – either to the cryptocurrency exchange or to individual users – were
Northern District of California
16 necessary.” Id. (citing Coinbase, 2017 WL 5890052, at *6-7). The Court ordered the
17
18 any purchase or sale of cryptocurrency for U.S dollar or foreign legal
tender (fiat currencies) or other cryptocurrency;
19
b. Records identifying the date and time, value (or expense) of any lending,
20 borrowing, or margin position entered into in the account;
21 c. Records identifying the date and time, amount, U.S. dollar value,
transaction hash (ID), and blockchain addresses for cryptocurrency units
22 transferred into or out of the User’s account from another Kraken user or
from outside of Kraken.
23
d. Records identifying the date and time, amount, and U.S. dollar value of
24 any units of cryptocurrency received by the User in the account as a result
of a chainsplitting event such as a hard fork or promotional event.
25
6. All records of account funding (deposits, withdrawals, or transfers) in U.S dollar
26 or foreign legal tender, including transactions conducted through ACH transfers,
wire or other electronic transfer, or any other form, and any and all invoices,
27 billing statements, receipts, or other documents memorializing and describing
such transactions.
28
Kraken I, dkt. no. 1-3 at ECF pp. 13-14.
12
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 13 of 51
1 Government to specifically address in its response “why each category of information sought is
2 narrowly tailored to the IRS’s investigative needs, including whether requests for more invasive
3 and all-encompassing categories of information could be deferred until after the IRS has reviewed
4 basic account registration information and transaction histories.” Id.
5 Although the Government argued in its Response that this Court should not take the
6 “phased” approach taken in Coinbase, it narrowed its proposed summons “to assuage potential
7 concerns.” Kraken I, Response at 3. The most significant amendment was the removal of Request
8 3 from the summons, which sought “[a]ll correspondence between Kraken and the User or any
9 third party with access to the account pertaining to the account, including but not limited to e-
10 mails, chat support logs, telephone logs or recordings, letters, or other memoranda of
11 communication.” Kraken I, dkt. no. 1-3 at ECF pp. 13. Otherwise, the narrowed summons seeks
12 largely the same information as the original summons. 7 This Court approved the proposed
United States District Court
13
7
14 The narrowed summons, which is the one the Government seeks to enforce in this action,
requests “information regarding unknown U.S. taxpayers who directly or indirectly held or had
15 control over any combination of user accounts at Payward Ventures, Inc. and Subsidiaries with at
Northern District of California
least the equivalent of $20,000 in value of transactions (regardless of type) in cryptocurrency in
16 any one year during January 1, 2016, through December 31, 2020.” Dkt. no. 1-2 at ECF p. 3. The
requests in the summons are as follows:
17
User Identity Information
18
1. Account user registration records for each account owned or controlled by the User
19 including:
20 a. User profile, User preferences, or account application information, regardless of how
it is labelled or maintained, as follows:
21
i. Name (including full name, any pseudonym, or any user ID);
22 ii. Date of Birth;
iii. Taxpayer Identification Number
23 iv. Physical Address;
v. Telephone Number;
24 vi. Email Address;
25 b. History of all changes to the personal information identified above since the inception
of the account;
26
c. Complete User history for internet protocol addresses used to access the account; and
27
28 d. Complete User payment methods (e.g., linked bank or credit card accounts) regardless
of date.
13
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 14 of 51
1 summons, as narrowed, noting that “[a]ny further disputes as to the scope of the summons would
2 benefit from adversarial briefing.” Kraken I, dkt. no. 9. The summons was served on Kraken on
3 May 11, 2021. Kraken II, Cincotta Petition Decl. ¶ 5. “Despite discussions between the parties,
4 however, Kraken refused to comply with the summons and has not produced the books, records,
5 papers, and other data demanded in the summons.” Id. at ¶ 148. Consequently, the Government
6 brought the instant action to enforce the summons.
7
8
9 This request does not include passwords, pins, private keys, security settings, and account
recovery information.
10
2. With respect to any Know-Your-Customer due diligence questionnaires completed by a
11 User, information relating to the User’s employment, net worth, and source of wealth for
individual Users, and for business Users, to the extent not provided in response to Request
12 1, above, legal name, business address, country, website, contact information, industry,
goods and services, government issued business registration or tax-identification number,
United States District Court
13 and source of funds[.]
14 3. All exception reports produced by your anti-money laundering (‘AML’) system, and all
records of investigation of such exceptions. This request does not include any suspicious
15 activity reports (‘SAR’) that were ultimately generated as a consequence of an AML alert
Northern District of California
or any other information that would reveal the existence of a SAR.
16
Transaction Activity
17
4. All records of activity in the User’s account including, but not limited to:
18
e. Records identifying the date and time, amount, and U.S. dollar value of any purchase
19 or sale of cryptocurrency for U.S dollar or foreign legal tender (fiat currencies) or
other cryptocurrency;
20
f. Records identifying the date and time, value (or expense) of any lending, borrowing,
21 or margin position entered into in the account;
22 g. Records identifying the date and time, amount, U.S. dollar value, transaction hash
(ID), and blockchain addresses for cryptocurrency unit transferred into or out of the
23 User’s account from another Kraken user or from outside of Kraken.
24 h. Records identifying the date and time, amount, and U.S. dollar value of any units of
cryptocurrency received by the User in the account as a result of a chainsplitting event
25 such as a hard fork or promotional event.
26 5. All records of account funding (deposits, withdrawals, or transfers) in U.S dollar or foreign
legal tender, including transactions conducted through ACH transfers, wire or other
27 electronic transfer, or any other form, and any and all invoices, billing statements, receipts,
or other documents memorializing and describing such transactions.
28 Dkt. No. 1-2 (summons) at ECF pp. 7-8.
14
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 15 of 51
1 As discussed further below, Kraken opposes enforcement of the summons, arguing that the
2 Petition should be denied in its entirety because of its overbreadth and the heavy burden that
3 compliance would impose on Kraken. It relies heavily on the fact that the summons in this case is
4 broader than the one that was approved in Coinbase. The Government, in turn, argues that it has
5 demonstrated there is a reasonable basis for enforcement of the summons, which it contends is
6 narrowly tailored. It further contends that the limitations imposed by the court in Coinbase as to
7 the scope of the summons were excessive and that the limitations the Government agreed to,
8 without the involvement of the court, when negotiating with Coinbase have no bearing on whether
9 the summons in this case is proper.
10 III. ANALYSIS
11 A. The Motions to Seal
12 Certain information about Kraken’s “internal technological capabilities surrounding the
United States District Court
13 organization, query and analysis of information on its systems” is the subject of motions to seal
14 brought by Kraken (dkt. no. 19) and the Government (dkt. no. 26). Both motions are based on
15 Kraken’s assertion that this information is “confidential and proprietary business information.”
Northern District of California
16 Dkt. no. 19 at 2. However, the only support Kraken has offered for this assertion is a declaration
17 of counsel that it is his “understanding” that disclosure of this information will create an
18 “increased security risk.” Fondo Decl. (dkt. no. 19-1) ¶ 5. Fondo states, “This increased risk could
19 jeopardize users’ digital assets, as well as Kraken’s goodwill and competitive standing with its
20 clients in light of that threat. Revelation of this information could also put it at a significant
21 competitive disadvantage if Kraken’s competitors were to understand the precise capabilities of its
22 systems—not to mention affect the trade secret nature of those systems.” Id.
23 These conclusory statements do not satisfy the heavy burden that must be met to justify
24 sealing material in dispositive motion papers and attachments, which requires that the proponent
25 of sealing such material articulate compelling reasons supported by specific factual findings. See
26 Kamakana v. City & Cnty. of Honolulu, 447 F.3d 1172, 1178 (9th Cir. 2006). Moreover, although
27 the Court invited Kraken to supply a supplemental declaration addressing its sealing requests,
28 Kraken declined to do so. Accordingly, both sealing motions (dkt. nos. 19 and 26) are DENIED.
15
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 16 of 51
1 The Court also denies as moot dkt. nos. 17 and 24, both of which were superseded by amended
2 motions.
3 B. Legal Standards Governing Enforcement of IRS Summonses
4 Under 26 U.S.C. § 7602(a), the IRS may issue a summons for “ascertaining the correctness
5 of any return, making a return where none has been made, determining the liability of any person
6 for any internal revenue tax or . . . collecting any such liability. . . .” 26 U.S.C. § 7602(a). Where
7 the summons is issued to a third party, notice must be given to the person named in the summons
8 to allow them to intervene and bring a motion to quash if they oppose the summons. 26 U.S.C. §
9 7609(a) & (b).
10 To obtain a court order enforcing an IRS summons, the IRS must establish “good faith” by
11 showing that the summons: (1) is issued for a legitimate purpose; (2) seeks information relevant to
12 that purpose; (3) seeks information that is not already in the IRS’s possession; and (4) satisfies all
United States District Court
13 of the administrative steps set forth in the Internal Revenue Code.” United States v. Powell, 379
14 U.S. 48, 57–58 (1964)). “[T]his showing need only be minimal . . . because the statute must be
15 read broadly in order to ensure that the enforcement powers of the IRS are not unduly restricted.”
Northern District of California
16 Liberty Fin. Servs. v. United States, 778 F.2d 1390, 1392 (9th Cir. 1985) (citing United States v.
17 Balanced Financial Management, Inc., 769 F.2d 1440, 1443 (10th Cir.1985)).
18 Once the IRS makes a prima facie case that the Powell factors are met, the taxpayer bears a
19 “heavy” burden to show an abuse of process or lack of good faith on the part of the IRS. United
20 States v. LaSalle Nat’l Bank, 437 U.S. 298, 316 (1978). “‘The taxpayer must allege specific facts
21 and evidence to support [their] allegations of bad faith or improper purpose.’” Id. (quoting United
22 States v. Jose, 131 F.3d 1325, 1328 (9th Cir. 1997)). Where such evidence is presented, the court
23 must then “scrutinize[]” the summons “to determine whether it seeks information relevant to a
24 legitimate investigative purpose, and the court may choose either to refuse enforcement or narrow
25 the scope of the summons.” United States v. Goldman, 637 F.2d 664, 668 (9th Cir. 1980) (citing
26 United States v. Bisceglia, 420 U.S. 141, 146 (1975)).
27 Where an IRS summons is issued to a third party as a “John Doe” summons, that is, “does
28 not identify the person with respect to whose liability the summons is issued[,]” such a summons
16
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 17 of 51
1 “may be served only after a court proceeding in which the Secretary establishes that--
2 (1) the summons relates to the investigation of a particular person or
ascertainable group or class of persons,
3
4 (2) there is a reasonable basis for believing that such person or group
or class of persons may fail or may have failed to comply with any
5 provision of any internal revenue law, and
6
(3) the information sought to be obtained from the examination of the
7 records or testimony (and the identity of the person or persons
with respect to whose liability the summons is issued) is not
8 readily available from other sources.
9 26 U.S.C. § 7609(f); see also 26 U.S.C. § 7609(h)(2) (providing that “[t]he determinations
10 required to be made under subsections (f) and (g) shall be made ex parte and shall be made solely
11 on the petition and supporting affidavits.”). Section 7609(f) further provides that the IRS may not
12 issue a John Doe summons “unless the information sought to be obtained is narrowly tailored to
United States District Court
13 information that pertains to the failure (or potential failure) of the person or group or class of
14 persons referred to in paragraph (2) to comply with one or more provisions of the internal revenue
15 law which have been identified for purposes of such paragraph.” Id.
Northern District of California
16 “Section 7609(f)’s criteria . . . constitute a procedural safeguard which Congress created to
17 provide extra protection to unknown target taxpayers to whom the IRS cannot give notice.” United
18 States v. Samuels, Kramer & Co., 712 F.2d 1342, 1346 (9th Cir. 1983). However, “Section
19 7609(f) neither enlarges nor contracts the substantive rights against enforcement granted to all
20 taxpayers under Powell.” Id. (citing In re Tax Liabilities of John Does, 688 F.2d 144,149 (2d Cir.
21 1982); United States v. Pittsburgh Trade Exchange, Inc., 644 F.2d 302, 305 (3d Cir.1981)). Thus,
22 “[n]otwithstanding the added protection sections 7609(f) and (h) provide against improper
23 issuance of John Doe summonses . . . the sections do not expand beyond the Powell criteria the
24 substantive grounds on which a record-keeping taxpayer can resist enforcement of a summons
25 once it has been served.” Id.
26 C. The Significance of Coinbase
27 As a preliminary matter, the Court notes that both sides have made statements that border
28 on mischaracterizing the holding and legal significance of Coinbase. To the extent that Kraken
17
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 18 of 51
1 implies that Coinbase establishes some set numerical limit on the number of cryptocurrency
2 accounts that can be the subject of an IRS Doe summons, or more broadly, certain set parameters
3 as to the types of information that can be the subject of an IRS summons issued to a
4 cryptocurrency company, that is clearly not the case. As the Government points out, “John Doe
5 summons class definitions take many different forms, depending on the legitimate needs of the
6 investigation.” Kraken II, dkt. no. 26-3 (United States’ Response to Payward Ventures Inc.’s
7 Opposition to Petition to Enforce Internal Revenue Service Summons) (“Kraken II, Reply”) at 2
8 (citing Kraken II, Cincotta Reply Decl. ¶¶ 5-59). Thus, the Court recognizes that the limitations
9 placed on the summons in Coinbase, while instructive, are not binding in this case.
10 On the flip side, the Court rejects the Government’s assertion that “the phased, limited-
11 information-review approach imposed in Coinbase is [not] what Powell or the statute requires.”
12 Kraken II, Reply at 3. Rather, the Court finds that the limitations on the summons approved in
United States District Court
13 Coinbase are consistent with Powell and the statutory provisions that govern Doe summonses,
14 requiring that such summonses be narrowly tailored. The fact that the Government might need to
15 issue a second summons in order to make that showing as to some users and information does not
Northern District of California
16 mean that Coinbase established a “two-step investigative approach” that is inconsistent with
17 Powell. It is simply a reflection of the reality that the more speculative the relevance of particular
18 types of information, the more likely it will be that a summons that requires the production of such
19 information will not be narrowly tailored. Indeed, the Government acknowledges that as it
20 conducts investigations, “each summons differ[s] in class definition and requests depending on the
21 needs of the investigation and to reflect what the IRS ha[s] learned from each previous summons
22 and production of information.” Kraken II, Reply at 2 (emphasis added).
23 And while the Government goes to great lengths to persuade the Court that the limitations
24 in Coinbase hampered its investigation, it ultimately determined the identities of all but 750 Does,
25 out of approximately 13,000 accounts. See Kraken II, Cincotta Petition Decl. ¶¶ 43-50. While
26 those remaining Does account for a significant dollar amount in gross proceeds from the sale of
27 cryptocurrency during the years covered ($100 million), the Government offers no explanation for
28 its failure to seek approval of a targeted summons directed at that much smaller group using the
18
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 19 of 51
1 information obtained in the course of its investigation to meet the “narrowly tailored” requirement.
2 At the hearing, the Government was unable to explain why it did not seek approval of a narrowly
3 tailored follow-up summons in Coinbase. And notably, it did not contend that it was barred from
4 seeking such a summons because of any statute of limitations. Because the Government did not
5 issue a summons aimed at the remaining 750 Coinbase Does using the information obtained from
6 the earlier summons to meet the narrowly tailored requirement, even though it could have done so,
7 the Court finds its professions of the harm it has suffered from the Coinbase court’s ruling to be
8 unconvincing.
9 In sum, the Court finds the reasoning of Coinbase to be persuasive but must make its own
10 determination as to whether the Doe summons in this case is narrowly tailored based on the record
11 before it.
12 D. Powell Factors
United States District Court
13 As in Coinbase, there is no dispute in this case that the third and fourth Powell factors are
14 satisfied. The Court therefore addresses whether the summons (1) serves a legitimate purpose and
15 (3) seeks relevant information.
Northern District of California
16 1. Legitimate Purpose
17 The Government has a legitimate purpose for seeking the materials described in the
18 summon. As discussed above, the summons was issued in connection with an investigation by the
19 IRS to determine the identity and correct federal income tax liability of U.S. persons who
20 conducted transactions in cryptocurrency during the period 2016-2020. Kraken II, Cincotta
21 Petition Decl. ¶ 2. Further, an IRS investigator involved in the investigation, Agent Cincotta,
22 attests that “[t]he information sought in the summons may be relevant to the IRS’s investigation
23 into the identities and federal tax liabilities of cryptocurrency users who have failed or may be
24 failing to comply with their federal tax obligations.” Id. ¶¶ 87-88.
25 This conclusion finds support in the fact that the number of taxpayers filing tax returns
26 with a property description related to bitcoin between 2016 and 2020 (4,164 taxpayers in 2016,
27 88,040 for 2017, 93,848 in 2018, 102,278 in 2019, and 253,265 in 2020), while above pre-
28 Coinbase levels, is still dwarfed by the amount of trading activity that occurs on Kraken. Id. ¶ 37.
19
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 20 of 51
1 According to Agent Cincotta, Kraken has over 4 million clients, has conducted over $140 billion
2 in trading activity since 2011 and was registering up to 50,000 new users a day as of the end of
3 2017. Id. ¶ 58. Agent Cincotta has also pointed to evidence that under-reporting of income is
4 substantially higher where there is no third-party information reporting, as is the case with Kraken.
5 Id. ¶ 33. Finally, Agent Cincotta has pointed to five concrete examples of Kraken users who have
6 committed various types of tax code violations involving cryptocurrency. Kraken I, First Cincotta
7 Decl. ¶¶ 70-74.
8 The Court therefore finds that the Government has demonstrated that its summons to
9 Kraken is for a legitimate purpose under Section 7602(a).
10 2. Relevance
11 a. Legal Standard
12 The Supreme Court has made clear that under Section 7602, “an IRS summons is not to be
United States District Court
13 judged by the relevance standards used in deciding whether to admit evidence in federal court.”
14 United States v. Arthur Young & Co., 465 U.S. 805, 814 (1984) (citing Fed.R.Evid. 401). This is
15 apparent from the language of Section 7602, authorizing the IRS to issue a summons “[t]o
Northern District of California
16 examine any books, papers, records, or other data which may be relevant or material to such
17 inquiry.” 26 U.S.C. § 7602(a)(1) (emphasis added). Thus, the IRS is authorized under this section
18 “to obtain items of even potential relevance to an ongoing investigation, without reference to its
19 admissibility.” United States v. Arthur Young & Co., 465 U.S. at 814 (emphasis in original).
20 Likewise, “[t]he required standard that the IRS must meet is clearly less than probable
21 cause.” United States v. Goldman, 637 F.2d 664, 667 (9th Cir. 1980). Instead, the relevance
22 standard is defined as “whether the inspection sought might [throw] light on the correctness of the
23 taxpayer’s return.” Id. (citing Foster v. United States, 265 F.2d 183 (2d Cir. 1959), cert. denied,
24 360 U.S. 912 (1960); United States v. Ryan, 455 F.2d 728, 733 (9th Cir. 1972)). In explaining this
25 standard, the court in Goldman cited with approval the following passage:
26 The question, and it is not always one that lends itself easily to
solution, is whether from what the Government already knows there
27 exists the requisite nexus between taxpayer and records of another’s
affairs to make the investigation reasonable -- in short, whether the
28 “might” in the articulated standard “might throw light upon the
20
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 21 of 51
correctness of the return,” is in the particular circumstances an
1 indication of a realistic expectation rather than an idle hope that
something may be discovered.
2
Id. (quoting United States v. Harrington, 388 F.2d 520, 524 (2d Cir. 1969)). The court continued,
3
“The Government’s burden, while not great, is also not non-existent.” Id. Further, “the summons
4
should be ‘no broader than necessary to achieve its purpose.’” Coinbase, 2017 WL 5890052, at *6
5
(quoting United States v. Bisceglia, 420 U.S. 141, 151 (1975)).
6
7 b. Is definition of “User” too broad
8 i. Background
Kraken’s Contentions
9
Kraken objects to the definition of “User” in the summons on the basis that it is overbroad,
10
making the following arguments. First, it points out that the definition here sets a lower threshold
11
than was approved in Coinbase by covering account holders with an aggregate of at least $20,000
12
United States District Court
in cryptocurrency transactions “regardless of type” for any one year between 2016 and 2020.
13
Kraken II, dkt. no. 19-3 (Respondent Payward Ventures, Inc.’s Opposition to Petition to Enforce
14
Internal Revenue Service Summons (“Kraken II, Opposition”)) at 8. In contrast, in Coinbase, the
15
Northern District of California
summons applied only to accounts with at least the equivalent of $20,000 in any one transaction
16
type (buy, sell, send, or receive) in any one year. 2017 WL 5890052, at *2. According to Kraken,
17
this broader definition would cover 59,331 unique Kraken accounts. Siemers Decl. ¶ 10. By way
18
of comparison, Kraken estimates that if the narrower Coinbase threshold were used, the summons
19
would cover 42,017 Kraken accounts. Kraken II, Opposition at 8 (citing Siemers Decl. ¶ 12).
20
Kraken contends the definition of “user” in Coinbase already pushed the limit and that this
21
broader definition “far exceeds the breaking point[,]” threatening to sweep in many users who
22
transact only in small amounts and have no taxable gain. Id.
23
Kraken also points out that in Coinbase, the Government narrowed the scope of the
24
summons to exclude users who only bought and held bitcoin during the period covered by the
25
summons, arguing that the summons here should be similarly limited. Id. at 8-9. According to
26
Kraken, where users only make deposits or purchases (“buy-hold crypto”) or withdrawals during
27
the period covered by the summons, there is no taxable event and “Coinbase makes clear that the
28
21
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 22 of 51
1 documents the IRS may obtain are only ones that might help discern a potentially unreported
2 taxable gain[.]” Id. at 9. It is not enough, Kraken contends, that the information the Government
3 seeks might help to establish the purchase price of a user’s cryptocurrency, which might then be
4 used to calculate a taxable gain. Id. (citing Kraken II, Cincotta Petition Decl. ¶ 138).
5 Similarly, Kraken asserts, “[a] deposit alone shows nothing and would encompass all the
6 people who buy and simply hold cryptocurrency.” Id. According to Kraken, “[t]he IRS vaguely
7 asserts that deposits and withdrawals are a ‘clear indicator that the user is holding cryptocurrency
8 in other places,’ and thus ‘needs’ this information ‘so it can gather as much information as
9 possible’ to determine a user’s tax compliance[,] . . . . [b]ut that is no different than the type of
10 fishing expeditions that are not allowed under § 7609(f).” Id. (quoting Kraken II, Cincotta
11 Petition Decl. ¶ 142) (and citing In re Tax Liabilities of John Does, 688 F.2d 144, 149 (2d Cir.
12 1982) for the principal that “Sections 7609(f) and (h) provide a prior restraint on the IRS’s power
United States District Court
13 to serve John Doe summonses, mainly ‘to preclude the IRS from using such summonses to engage
14 in possible “fishing expeditions.”’”). Moreover, Kraken contends, Agent Cincotta’s statements
15 that deposits or withdrawals “may be taxable transactions themselves” are insufficient. Id. (citing
Northern District of California
16 Kraken II, Cincotta Petition Decl. ¶ 143). According to Kraken, Agent Cincotta “speculates that a
17 deposit could reflect compensation or a similar taxable income payment, such as for goods and
18 services, and that a withdrawal could represent a ‘taxable disposition’ if sent to a third party . . .
19 [b]ut this is yet another example of a ‘conclusory’ assertion that cannot justify enforcement of this
20 more expansive Summons[.]” Id.
21 Next, Kraken argues that the broad definition of “user” “leads to the potential collection of
22 data for users with no nexus to the U.S. – whom the IRS has no interest in auditing – and creates a
23 significant concern about Kraken’s ability to comply with foreign privacy laws.” Id. at 9-10.
24 Kraken asserts that “it is possible that certain non-U.S. citizens who at some point during the five
25 year timeframe either lived in the U.S., had a U.S. phone number, or simply used a computer in
26 the U.S. would get swept up in the search[,]” and that therefore, the summons is not narrowly
27 tailored. Id. at 10. In addition, as to EU users, Kraken contends its compliance with the summons
28 is likely prohibited under the EU General Data Protection Regulation (“GDPR”), which “generally
22
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 23 of 51
1 prohibits the disclosure of personal data to non-EU countries unless formally recognized by the
2 European Commission as having adequate levels of data protection, which the U.S. currently is
3 not.” Id. (citing Regulation (EU) 2016/679, Article 3 at 45-49).
4 Finally, Kraken argues that the summons is overly burdensome, given that it covers the
5 accounts of 59,331 users, and improperly invades the privacy of Kraken users. Kraken asserts that
6 “[t]ransferring troves of sensitive personal and financial data (the vast majority of which will be
7 irrelevant) to the IRS increases the risk of loss or theft” and points to a Treasury Inspector General
8 Report finding that “the IRS did not meet all of the security requirements for its cloud-based
9 systems and failed to timely implement mitigation and corrective actions to mitigate security
10 risks.” Id. at 11 (citing The Enterprise Case Management System Did Not Consistently Meet
11 Cloud Security Requirements TREASURY INSPECTOR GEN. FOR TAX ADMIN.
12 (Mar. 27, 2023), https://www.oversight.gov/sites/default/files/oig-reports/TIGTA/202320018fr.pdf
United States District Court
13 (attached as Ex. B to Kraken II, dkt. no. 16-1 (Declaration of Grant P. Fondo in Support of
14 Payward Ventures, Inc.’s Opposition to Petition to Enforce Internal Revenue Service Summons)
15 (“Kraken II, Fondo Decl.”)).
Northern District of California
16 The Government’s Response
17 The Government rejects Kraken’s argument that the definition of “user” is overbroad.
18 First, the Government challenges Kraken’s assertion that the Doe definition in this case must be
19 narrowed to match the one in Coinbase. Kraken II, Reply at 5. As to the threshold transaction
20 amount required to be a “user” under the summons, the Government explains that in Coinbase it
21 narrowed its John Doe class definition to users with $20,000 in transactions in any one category
22 (buy, send, sell, receive) in any one year during the 2013-2015 period after learning from
23 Coinbase that most of its users engaged in low volume, low dollar transactions. Id. (citing
24 Coinbase, dkt. no. 65-3 (Declaration of David Utzke) ¶¶ 13-14). According to the Government, it
25 broadened the definition in its summons to Kraken after “consider[ing] the needs of its
26 investigation, what it learned from the summons response in Coinbase, the change in the
27 cryptocurrency market over time, and how Kraken differs from Coinbase even though both are
28 cryptocurrency exchanges.” Id. (citing Kraken II, Cincotta Reply Decl. ¶¶ 72-94). The
23
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 24 of 51
1 Government argues that “[a]side from these practical reasons [for defining ‘user’ more broadly in
2 the summons to Kraken] . . . , there is no legal reason why the IRS should be made to use the same
3 John Doe class definition for every cryptocurrency John Doe summons it issues.” Id. at 5-6. In
4 addition, the Government rejects Kraken’s argument that the lower threshold would sweep in
5 account holders who engage only in low amount transactions involving no taxable gains, noting
6 that “there is no de minimis exception in the law when reporting gains or losses from
7 cryptocurrency transactions.” Id. at 6 n. 9.
8 The Government also rejects Kraken’s argument that the definition of “user” in the Doe
9 summons is overbroad because it encompasses users whose accounts reflect no “taxable event.”
10 The Government argues that “the payment of wages in cryptocurrency, a hard-fork, and a
11 chainsplit” are all taxable events and “would appear like a ‘buy and hold’ in a user’s account[.]”
12 Reply at 6 (citing Kraken II, Cincotta Petition Decl. ¶¶ 88-91). It further asserts that as to gains
United States District Court
13 and losses, “to determine basis, the IRS needs ‘buy’ information even if cryptocurrency isn’t sold
14 within the same year.” Id. (citing Kraken II, Cincotta Reply Decl. ¶¶ 92-94; Kraken II, Cincotta
15 Petition Decl. ¶ 23).
Northern District of California
16 In her Reply declaration, Agent Cincotta explains why the IRS agreed to carve out buy-
17 hold information in Coinbase but is seeking that information here:
18 88. In Coinbase, the IRS agreed to a carve out from the user class for
users that had “bought and held.” What this reflected was the IRS’s
19 understanding at the time that users that bought cryptocurrency during
the period and held it wouldn’t experience a taxable event.
20
89. The IRS has learned, however, that because of the way certain
21 cryptocurrency events are reflected in a user’s transaction history, its
carve out for those that “bought and held” was flawed.
22
90. Receipt of cryptocurrency, without a corresponding sale, can be
23 taxable. For example, a taxpayer’s receipt of new cryptocurrency in
connection with a “hard fork” is taxable. See generally Rev. Rul.
24 2019-24. A hard fork occurs when the distributed ledger technology
used by a cryptocurrency undergoes a protocol change that results in
25 a permanent diversion from the existing distributed ledger. A hard
fork may create a new cryptocurrency, which is then recorded on a
26 new distributed ledger, while transactions involving the legacy
cryptocurrency remain recorded on the legacy distributed ledger. This
27 type of hard fork is known as a “chain-split.” Sometimes, a hard fork
coincides with a distribution of the new cryptocurrency, known as an
28 “air drop,” to holders of the legacy cryptocurrency. Receipt of the new
24
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 25 of 51
cryptocurrency via an air drop following a hard fork results in taxable
1 income to the recipient.
2 91. Cryptocurrency can be used in lending transactions that generate
taxable interest income. Users can deposit their cryptocurrency into a
3 pool of assets, known as a lending pool. Borrowers take loans from
the pool by posting cryptocurrency collateral, drawing
4 cryptocurrency from the lending pool, and paying taxable interest to
the lenders. A carve out for users that “bought and held” would fail to
5 capture these users.
6 92. Also, a taxpayer’s gain or loss upon the disposition of virtual
currency will generally be the difference between adjusted basis in
7 the virtual currency and the amount received in exchange for the
virtual currency, which should be reported on the tax return. See 26
8 U.S.C. § 1001; IRS Frequently Asked Questions on Virtual Currency
Transactions, supra, Q7. Basis, for virtual currency purposes, is
9 generally determined by the cost or amount spent to acquire
cryptocurrency, adjusted for fees, commissions, and other
10 acquisitions costs. See 26 U.S.C. § 1012; IRS Frequently Asked
Questions on Virtual Currency Transactions, supra, Q8. When
11 reporting gains and losses from the sale of virtual currency, a taxpayer
may use different methods for calculating that gain or loss. A taxpayer
12 may use the specific identification method (which pairs the sale of a
United States District Court
specific unit of virtual currency against a specific acquisition) or the
13 so-called “first-in-first-out” (FIFO) accounting method (which
simply pairs the sale of a unit of virtual currency against the oldest-
14 acquired unit chronologically). IRS Frequently Asked Questions on
Virtual Currency Transactions, supra, Q39 – Q41. Although these
15 approaches provide taxpayers with flexibility in how they calculate
Northern District of California
gains or losses on the sale of virtual currency units, they do not allow
16 the IRS to make a “taxable gain” determination by simply reviewing
an account holder’s transaction information in isolation. Instead, the
17 IRS must first positively identify an account holder and then
determine whether that individual filed a tax return for the relevant
18 tax year, whether that return reported virtual currency transactions,
and, if so, whether what was reported, or the approach taken in
19 reporting the information, complies with the internal revenue laws.
20 93. To determine whether a taxpayer’s reporting of virtual currency
complies with internal revenue laws, the IRS must know the correct
21 adjusted basis for the units of virtual currency. This requires historical
account information. If a taxpayer uses the FIFO accounting method,
22 to determine which units of virtual currency were sold in a given year,
the IRS must review a record of when prior units by a taxpayer were
23 sold and match that information against records of when all units
owned by the taxpayer were acquired. Likewise, if a taxpayer uses the
24 specific identification method, the IRS must review historical records
to determine whether the taxpayer has identified a specific virtual
25 currency unit as sold to avoid the double counting of basis.
26 94. What this means is that if a taxpayer bought $20,000 of
cryptocurrency in 2016 and held it until 2017 (when the
27 cryptocurrency market experienced a downturn), at which point it was
sold or exchanged, the IRS needs the transaction information from
28 2016 in addition to the transaction information for 2017 to determine
25
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 26 of 51
whether the taxpayer has properly determined any potential gain or
1 more likely loss. If the taxpayer sold that cryptocurrency in 2017 for
less than $20,000, he would have experienced a loss. Under the
2 Coinbase class definition the IRS would not receive this user’s
information because in 2016 he bought and held and in 2017 he
3 transacted below the dollar threshold. Yet, a complete understanding
of this taxpayer’s transaction reveals that he experienced a taxable
4 event, and his information should be captured in the summons
response.
5
6 Kraken II, Cincotta Reply Decl. ¶¶ 87-94.
7 In addition, the Government rejects Kraken’s assertion that the IRS’s stated “need” to
8 “gather as much information as possible about taxpayer compliance” amounts to a “fishing
9 expedition” under § 7609 and In re Tax Liabilities of John Does, 688 F.2d 144, 149 (2d Cir.
10 1982). Kraken II, Reply at 6. According to the Government, In re Tax Liabilities of John Does
11 merely held that a summoned party cannot challenge the factual determinations that a district court
12 must make under section 7609(f) before the court issues its ex parte authorization of a John Doe
United States District Court
13 summons – a conclusion the Ninth Circuit has also reached. Id. (citing 688 F.2d at 145-46; United
14 States v. Samuels, Kramer and Co., 712 F.2d 1342, 1346 (9th Cir. 1983)). Further, the
15 Government contends, the “fishing expedition” language in In re Tax Liabilities of John Does
Northern District of California
16 highlighted by Kraken referred to the court’s ex parte determination. Id. According to the
17 Government, “[n]ot only can that determination not be challenged here, but in granting leave to
18 serve the summons to Kraken in the first place, this Court has already prevented a fishing
19 expedition.” Id. at 6-7.
20 Finally, the Government rejects Kraken’s assertion that the summons is overbroad because
21 it may infringe the privacy of non-U.S. account holders. Id. at 7. It again argues that “whether
22 the request is narrowly tailored cannot be challenged on enforcement.” Id. Further, it asserts, “the
23 IRS defined the user class and requested the information it did precisely so it could best determine
24 whether users are U.S. persons for tax purposes.” Id. According to the Government, Kraken has
25 no way to determine which users are U.S. persons because it does not ask, so the Government has
26 identified information that will allow it to make that determination. Id. In particular, it asserts,
27 while it may be true that a U.S. based address may not be perfectly
indicative of a U.S. person for tax purposes, it is one indication and a
28 starting point. The same can be said for telephone numbers and
26
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 27 of 51
banking information. Although not exclusive, some email internet
1 domains may refer to a foreign country. In those cases, it could alert
the IRS that they may need to investigate further whether that user is
2 a U.S. person for tax purposes. The same can be said for IP address.
3 Id.
4 In a footnote, the Government also rejects Kraken’s assertion that the summons violates
5 the privacy rights of Kraken users generally, pointing to the privacy notice it contends is posted on
6 Kraken’s website, stating: “We may need to use your personal information to comply with
7 any applicable laws and regulations, subpoenas, court orders or other judicial processes, or
8 requirements of any applicable regulatory authority. We do this not only to comply with our legal
9 obligations but because it may also be in our legitimate interest to do so.” Id. n. 10. The
10 Government does not respond to Kraken’s assertion that disclosure of information about foreign
11 persons may violate some countries’ privacy laws or the EU General Data Protection Regulation.
12 ii. Discussion
United States District Court
13 Whether “Narrowly Tailored” Requirement Can be Challenged on Enforcement
14 The Government asserts that by granting leave to serve the summons on Kraken in the first
15 place, the Court already made the determination that the Powell factors were met and that that
Northern District of California
16 determination cannot be challenged in this enforcement action. Kraken II, Reply at 6-7. The
17 Government is incorrect. The Ninth Circuit rejected a similar argument in United States v.
18 Goldman, 637 F.2d 664, 668 (9th Cir. 1980). There, the government argued it had met its burden
19 as to the relevance of the information it sought based on an affidavit from an IRS agent and
20 therefore, that the burden had shifted to the summoned party to disprove relevance. 637 F.2d at
21 668. The court disagreed, explaining:
22 The Government appears to argue that, in issuing a show cause order,
the district court implicitly found that the Government had met its
23 Powell burden, thereby shifting to Goldman the burden of showing
defects in the summons. This is a misperception of the function of the
24 show cause order. In this context, the district court properly accepted
Agent Rouleau’s allegations of relevance as a prima facie showing
25 adequate to call for the hearing demanded in the show cause order.
Goldman’s challenge marked the first point at which the Government
26 was put to its true burden of establishing relevance. . . . Until there is
such a challenge, the district court has no reason to place such a
27 burden on the Government. It follows that the mere issuance of an
order to show cause does not constitute a finding that Powell criteria
28 have been satisfied.
27
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 28 of 51
1 637 F.2d at 668.
2 Here, the Government appears to go even further, arguing that once the show cause order
3 has been issued, whether the request is narrowly tailored cannot be challenged. See Kraken II,
4 Reply at 7. As the Government itself highlights, under Ninth Circuit case law a summoned party
5 cannot challenge the factual determinations that a district court must make under section 7609(f)
6 before the court issues its ex parte authorization of a John Doe summons. United States v.
7 Samuels, Kramer and Co., 712 F.2d 1342, 1346 (9th Cir. 1983)). Thus, were the Court to adopt
8 the approach espoused by the Government, a summoned party would never have the opportunity
9 to challenge the relevance of the information covered by a summons. Nothing in the case
10 authority or legislative history suggests, however, that Congress intended to deprive a party that is
11 the subject of a Doe summons of this opportunity.
12 Furthermore, in this case, the Court made it particularly clear when it approved the
United States District Court
13 summons in Kraken I that it did so “without prejudice to any argument that Kraken or its users
14 might raise in a motion to quash” and that “[a]ny further disputes as to the scope of the summons
15 would benefit from adversarial briefing.” Kraken I, dkt. no. 9. Therefore, the Court rejects the
Northern District of California
16 Government’s argument that the question of whether its summons is narrowly tailored has already
17 been decided and cannot be challenged in this proceeding.
18 Implications of Coinbase
19 As discussed above, Kraken argues that Coinbase illustrates the overbreadth of the
20 definition of “user” both as to the threshold amount of transactions required to fall within the
21 definition and the failure to carve out accounts where the holders only made deposits or purchases
22 and did not sell cryptocurrency. The Court concludes that the Government has made a sufficient
23 showing to justify the broader definition in the Kraken summons.
24 As to the threshold amount of transactions, the Government has offered evidence that its
25 decision to voluntarily limit the definition of user in Coinbase was based on specific facts that it
26 learned in its negotiations with Coinbase; there is nothing in the court’s decision that required that
27 the same threshold be applied as to other summonses involving cryptocurrency. Moreover, as the
28 Government points out, the tax code does not contain a de minimis exception for reporting taxable
28
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 29 of 51
1 gains and losses and thus, Kraken’s concern that account holders who transact in low amounts will
2 be improperly swept into the definition of “user” is misplaced. Further, as to the Government’s
3 inclusion of buy-hold only accounts in the definition of “user” in the Kraken summons, the Court
4 finds the detailed explanation of the types of taxable events that may involve even the buy-hold
5 accounts is sufficient to justify including them in the definition of “user” in the Kraken summons.
6 Foreign Privacy Rights
7 Although Kraken asserts that some non-U.S. users’ information may be disclosed under
8 the proposed summons, it does not point to any authority suggesting the summons should be
9 limited on this basis; nor does it explain, as a practical matter, how any summons issued to it could
10 avoid this result as it apparently does not collect this information. Moreover, Kraken does not
11 appear to dispute that the privacy notice on its website informs users that it “may need to use [the
12 user’s] personal information to comply with any applicable laws and regulations, subpoenas, court
United States District Court
13 orders or other judicial processes, or requirements of any applicable regulatory authority.” Kraken
14 II, Reply at 7 n. 10 (quoting Privacy Notice (kraken.com) [https://perma.cc/WL8E-H8WU]). The
15 Court also finds that Kraken’s vague suggestion that disclosure might violate the EU’s GDPR is
Northern District of California
16 not sufficient to establish that the summons needs to be narrowed on this basis as it did not offer
17 any meaningful briefing in support of this argument.
18 Finally, while Kraken has questioned the Government’s ability to protect the private
19 information it obtains from Kraken based on a report about problems with the Enterprise Case
20 Management System, Agent Cincotta states in her Reply Declaration that the IRS does not use that
21 system for storage of John Doe summons information. Kraken II, Cincotta Reply Decl. ¶ 71.
22 Therefore, the Court concludes that the concerns Kraken raises about the privacy interests of non-
23 U.S. users do not warrant limiting or quashing the proposed summons.
24 Burden
25 Kraken challenges the definition of “user” in the summons on the basis that “full
26 compliance could take months or even years” given the large number of accounts at issue and the
27 extensive information requested. Kraken II, Opposition at 10 (citing Siemers Decl. ¶ 10). Because
28 the burden of disclosure varies depending on the specific type of information sought by the
29
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 30 of 51
1 Government, the Court addresses this issue in its discussions of the specific requests in the
2 summons.
3 c. Requests One through Three (User Identity Information)
4 i. Background
5 Kraken’s Contentions
6 Kraken argues that the information sought in the Government’s first three requests is
7 overbroad, going far beyond the “basic user information” that the court in Coinbase ordered
8 produced. Kraken II, Opposition at 11-16. It also contends that because of the way much of the
9 requested identity information is stored in its internal systems, responding to these requests will be
10 extremely burdensome. Id.
11 As to Request One, Kraken notes that the summons in Coinbase was similarly broad,
12 asking for “[a]ccount/wallet/vault registration records for each account/ wallet/vault owned or
United States District Court
13 controlled by the user . . . limited to name, address, tax identification number, date of birth,
14 account opening records, copies of passport or driver’s license, all wallet addresses, and all public
15 keys for all accounts/wallets/vaults.” Id. at 11-12 (quoting Coinbase, 2017 WL 5890052, at *2).
Northern District of California
16 According to Kraken, the court in Coinbase rejected the IRS’s “argument that it ‘need[ed] these
17 records to verify an account holder’s identity’ and to determine if the holder had others make
18 transactions on their behalf[,]” instead finding that the Government could only obtain personal
19 information “necessary to determine if a taxable gain was reported: ‘name, date of birth, taxpayer
20 identification and address.’” Id. at 12 (quoting Coinbase, 2017 WL 5890052, at *2).
21 Similarly, Kraken contends, the user pseudonyms or IDs, historical personal information
22 changes, IP addresses, and user payment methods sought by the Government here constitute
23 “extraneous identity information” that the Government does not have a legitimate need for at this
24 stage of its investigation. Id. 8 Kraken argues that “[p]roduction of such information at this point
25 would serve only to provide unfettered access to the private financial and personal information of
26
8
27 Kraken stipulated at the hearing, however, that it does not object to providing the information
sought in Request 1(a) of the proposed summons, that is, name (including full name, any
28 pseudonym, or any user ID); date of birth; taxpayer identification number; physical address;
telephone number; and email address.
30
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 31 of 51
1 thousands of otherwise law-abiding users that the IRS has no interest in auditing.” Id. Kraken
2 contends the same approach should be taken here as was taken in Coinbase, and that the
3 Government will only be able to establish that further identity information is necessary to its
4 investigation when it has determined there was a potential taxable gain and it still has doubt as to a
5 taxpayer’s identity. Id.
6 Kraken also argues that the Government’s requests for “historical user information in
7 Request No. 1(b)-(d) are unreasonable and unenforceable as they are overbroad and
8 disproportionate to the end sought here.” Id. First, it contends these requests are overbroad
9 because they are “indefinite as to time and unbounded by the purported time and value limitations
10 set forth in the definition of ‘User.’” Id. (citing as examples, Request No. 1(b) (seeking the history
11 of all changes to personal information “since the inception of the account”); Request No. 1(c),
12 (seeking “[c]omplete User history” for IP addresses); and Request No. 1(d) (seeking User payment
United States District Court
13 methods “regardless of date.”)). According to Kraken, “[o]ther courts have held similar requests
14 that were unlimited in time and not directly related to the tax years in dispute to be
15 irrelevant and overbroad.” Id. at 13 (citing Zietzke v. U.S., No. 19-CV-03761-HSG(SK), 2020
Northern District of California
16 WL 264394, at *9 (N.D. Cal. Jan. 17, 2020), report and recommendation adopted, 2020 WL
17 6585882 (N.D. Cal. Nov. 10, 2020); United States v. Monumental Life Ins. Co., 440 F.3d 729, 736
18 (6th Cir. 2006)).
19 Kraken further contends the Government’s assertion that it needs information beyond basic
20 identity information, which it labels as merely “nice to haves[,]” should be rejected to the extent
21 the Government relies on a conclusory statement by Agent Cincotta that “[i]t is not uncommon for
22 taxpayers to use aliases, false addresses or post office boxes, fictitious entity names, or other
23 means to disguise their true identities.” Id. at 13 (quoting Kraken II, Cincotta Petition Decl. ¶ 42;
24 and citing id., ¶¶ 92-95). According to Kraken, this statement is insufficient because the
25 Government has offered no evidence that suggest “Kraken’s users have supplied false information
26 or how expanding the request solves that problem.” Id. (emphasis in original). Kraken notes that
27 “for Intermediate and Pro level accounts, users are required to provide verification information to
28 confirm identity and address. So, the fear that those users are somehow falsifying information to
31
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 32 of 51
1 disguise account ownership is baseless.” Id. Furthermore, Kraken contends, “[e]ven if some small
2 subset of users provided fictious information, that does not justify the production of all this
3 additional information, as to all 59,331 users.” Id. at 13-14.
4 Likewise, Kraken rejects Agent Cincotta’s “speculat[ion] that an issue may arise with
5 missing user data, solely based on the IRS’s experience with Coinbase.” Id. at 14 (citing Kraken
6 II, Cincotta Petition Decl. ¶¶ 43-51). The assumption that the data obtained from Kraken will
7 suffer from the same defects as the information produced in Coinbase is not reasonable, Kraken
8 contends, given that Coinbase informed the IRS “that certain account information for its oldest
9 accounts may be missing because it did not necessarily collect all of that information at that time.”
10 Id. (citing Kraken II, Cincotta Petition Decl. ¶ 46). In contrast, Kraken asserts, it “required the
11 same information for each user at its different account levels during the relevant timeframe: name,
12 date of birth, address, email address, and phone number [and] [t]axpayer ID numbers were also
United States District Court
13 collected for all Intermediate and Pro level accounts.” Id. Even as to Kraken accounts where a
14 taxpayer ID was not collected, Kraken asserts, the situation is not analogous to Coinbase; in
15 particular, it points to Agent Cincotta’s statement that lack of taxpayer IDs presented a problem as
Northern District of California
16 to Coinbase primarily when other information was also missing. Id. at 14 n. 9 (citing Kraken II,
17 Cincotta Petition Decl. ¶ 47).
18 In addition, Kraken argues, the Government does not “come close to providing a sufficient
19 explanation as to how the other requested identity information (historical user profile changes, IP
20 address, or user payment methods) would even assist the IRS in identifying taxpayers when
21 certain information is missing.” Id. at 14-15. For example, if “the IRS had a user’s name,
22 address, and birthdate, but was missing a taxpayer ID—being able to track an IP address to a
23 general geographic area will not enhance its ability to identify a user[,]” Kraken contends. Id. at
24 15. Similarly, Kraken asserts, where users have provided “false identifying information[,]” there
25 is nothing to suggest that such users are likely to be identified through the IRS’s additional
26 information requests.” Id.
27 Kraken also rejects a number of other justifications offered by the Government for needing
28 this information. First, to the extent the Government suggests that “IP address information is a
32
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 33 of 51
1 good way to search data from other exchanges and link transactional records from foreign
2 exchanges to determine compliance,[,]” that justification fails because “[t]his is far beyond the
3 basic identity information the Court in Coinbase determined was needed for the sole purpose of
4 identifying taxpayers” and moreover, “it is unreasonable to insinuate that the IRS plans to go
5 through IP address histories for almost 60,000 users and cross compare those with IP addresses
6 used in transaction records from other exchanges.” Id. at 15 (citing Kraken II, Cincotta Petition
7 Decl. ¶¶ 108, 112, 118).
8 Second, Kraken argues, “the only asserted basis for changes to user information is that
9 Kraken’s data may not match IRS’s data for taxpayers . . . [b]ut this only speculates there may be
10 some discrepancy and does not account for the existence of multiple user data points that could be
11 used for identification.” Id. (citing Kraken II, Cincotta Petition Decl. ¶ 110).
12 Kraken also challenges the Government’s assertion that account funding sources can shed
United States District Court
13 light on tax compliance by permitting identification of cross-linked bank accounts. Id. (citing
14 Kraken II, Cincotta Petition Decl. ¶¶ 121-122). This assertion, Kraken contends, is based on the
15 unsupported assumption that “a user with lots of linked accounts and no tax reporting is somehow
Northern District of California
16 unlikely to be compliant.” Id. Moreover, Kraken argues, this information “is unnecessary to
17 determine identity or a potentially taxable gain in the first instance” and also exceeds the scope of
18 the IRS’s investigative purpose to the extent that it is aimed at discovering “alternative taxpayers
19 associated with the accounts.” Id.
20 Finally, Kraken argues that it would be overly burdensome for it to produce some of the
21 requested user information in Request No. 1(b)-(d). Id. at 16-17. For example, because user
22 records are not stored in manner that allows historical user information to be easily accessed,
23 Kraken would have to manually pull account logs to determine whether any changes have been
24 made, a process it estimates would take approximately 5,000 hours. Id. at 16 (citing Siemers Decl.
25 ¶¶ 13-19). Similarly, it asserts, its storage of payment methods is not designed for a global query
26 of historical payment information, meaning that compliance with that aspect of the summons
27 would “require at least several weeks of work by a large[ ] team of data engineers, analysts, and
28 core back-end engineers” to design a new search query. Id. (citing Siemers Decl. ¶¶ 20-22). The
33
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 34 of 51
1 same is true of historical IP addresses, according to Kraken. Id. at 16-17 (citing Siemers Decl. ¶¶
2 23-24).
3 Kraken also objects to Request No. 2, seeking information from Know-Your Customer
4 (“KYC”) questionnaires relating to “employment, net worth, and source of wealth for individual
5 Users” and “for business Users, . . . legal name, business address, country, website, contact
6 information, industry, goods and services, government‐issued business registration or tax
7 identification number, and source of funds[.]” Id. at 17. Kraken points out that the court in
8 Coinbase rejected the argument that such data was relevant at this stage, finding that KYC records
9 were “broader than necessary” to determine identity and unreported taxable gains. Id. (citing
10 Coinbase, 2017 WL 5890052, at *7.) Kraken emphasizes that “the IRS had little issue identifying
11 90% of taxpayers in Coinbase without this information, and with less identifying data than Kraken
12 maintains. If the IRS ‘later determines that it needs more detailed records on a taxpayer,’ it may
United States District Court
13 issue a second summons to the taxpayer or Kraken with notice – an approach Coinbase
14 acknowledged was preferrable to a John Doe Summons in any event.” Id. at 17-18 (citing
15 Coinbase, 2017 WL 5890052, at *7).
Northern District of California
16 Furthermore, Kraken contends, the KYC information the Government seeks beyond basic
17 user profile information “is not necessary to its purposes and is premature at this stage.” Id. at 18.
18 According to Kraken, “[t]his highly personal information will not reveal potential tax liabilities for
19 the IRS to go after.” Id. Pointing to the Government’s request for “employment, net worth and
20 source of wealth” data for individual KYC questionnaires, Kraken argues that “[t]his has no
21 bearing on potential tax liabilities from cryptocurrency transactions. Nor would net worth and
22 source of wealth shed light on any particular tax year in dispute.” Id. Instead, it asserts, “the only
23 potential use of this information would be to help confirm already known data or once there are
24 doubts as to who exactly is responsible for a potential tax liability.” Id. To the extent that the
25 Government “merely hopes to discover details about these users that may help its investigation[,]”
26 Kraken contends, “[t]his is not the ‘narrowly tailored’ request 26 U.S.C. § 7609(f) requires.” Id.
27 at 19 (emphasis in original).
28 Kraken also argues that producing the information sought in Request No. 2 would be
34
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 35 of 51
1 excessively burdensome, because “[u]nlike basic personal information and transactional ledgers,
2 this KYC data must be pulled on an account-by-account basis for all Users for which that
3 information exists” and “Kraken’s systems are not natively designed to handle such a global query
4 into or retrieval of this account-supporting documentation.” Id. at 19 (citing Siemers Decl. ¶ 25).
5 Kraken also opposes in its entirety Request No. 3, seeking “[a]ll exception reports
6 produced by your anti-money laundering (‘AML’) system, and all records of investigation of such
7 exceptions.” Id. at 19-21. Kraken notes that the Government requested the same information in
8 Coinbase before narrowing its summons to exclude that information, “tacitly acknowledg[ing] that
9 AML records were not needed for its investigative purpose.” Id. at 19 (citing Coinbase, 2017 WL
10 5890052, at *1). The same is true here, Kraken asserts. Id. Kraken argues that the Government
11 cannot seek such information until it determines that “a user has a potentially reportable taxable
12 gain.” Id. at 20.
United States District Court
13 Kraken rejects the justifications offered by Agent Cincotta for needing the information
14 covered by Request No. 3 as “nebulous[ ]” and “conclusory rhetoric.” Id. According to Kraken,
15 Agent Cincotta claims “that exception reports would ‘allow[] the IRS to leverage the industry
Northern District of California
16 expertise’ of Kraken as to what activities are ‘abnormal or suspicious’– which she asserts can be
17 combined with (unspecified) ‘other information available to the IRS’ to determine taxpayer
18 compliance.” Id. (citing Kraken II, Cincotta Petition Decl. ¶¶ 132-135). Kraken argues that the
19 IRS “simply assume[s] . . . that users associated with AML records may not be paying their taxes”
20 but that “there could be any number of reasons that a user’s account may get flagged under
21 Kraken’s AML system[,]” including “if a user makes too many log-in attempts, due to receipt of
22 legal process, when there is a change in account verification levels, or for confirmation of OFAC-
23 related checks.” Id. (citing Siemers Decl. ¶ 27). 9
24
9
25 With respect to the AML reports, Siemers states:
26 27. I understand that the IRS is also requesting production of Kraken’s AML “exception reports”
and “records of investigation of such exceptions.” Kraken does not have documents called AML
27 “exception reports” and so cannot produce any such records. As previously stated, Kraken does
maintain an AML log for each account. However, there are numerous reasons, including minor or
28 technical issues, that entries are generated in these logs. For example, these logs track security-
related actions, Suspicious Activity Report (“SAR”) filings, actions taken in response to receipt of
35
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 36 of 51
1 Kraken also rejects as “speculative and premature” the Government’s reliance on Agent
2 Cincotta’s statement that “AML investigative information typically ‘contains information
3 provided by the user explaining the nature of the questionable activity.’” Id. at 21 (quoting
4 Kraken II, Cincotta Petition Decl. ¶ 134). Kraken contends such information would only be
5 relevant when the IRS “has already identified a user and potentially taxable gains.” Id.
6 In addition, Kraken argues that this request, like Request No. 2, is “manifestly overbroad
7 and far reaching because it is not confined to any relevant time period and is unbounded by any
8 transaction type or amount[.]” Id. And like Request No. 2, Kraken contends, Request No. 3 would
9 impose an excessive burden on it because “Kraken’s AML records are not maintained in a way to
10 allow for global search or retrieval across identified ‘Users.’” Id. (citing Siemers Decl. ¶ 28). 10
11 Kraken represents that in order to pull this information, it would have to “go into each of the
12 59,331 accounts to manually analyze and collect this information[]” which would include
United States District Court
13 decrypting the data – a process that would require “several thousand hours of work.” Id. (citing
14 Siemers Decl. ¶¶ 19, 33). 11
15
Northern District of California
16 legal process, changes in account verification levels, rejected or recalled deposits, and
confirmation of OFAC-related checks.
17
Siemers Decl. ¶ 27.
10
18 Siemers states in his declaration:
19 28. To the extent the IRS’s request seeks Kraken records associated with events that
trigger its AML system, and any associated investigation into material issues, determining
20 whether accounts have associated AML records and retrieving those documents would be very
time consuming and burdensome. As stated above, AML records are not kept in a manner that
21 allows for global inquiry or retrieval across any identified users. This would require a manual,
account-by-account review of the AML logs for each of the 59,331 accounts covered by the
22 Summons. This AML data is also encrypted and would require decryption on an account-by
account basis similar to the process described in Paragraph 19. This process would cause
23 significant interruption to Kraken’s business and direct valuable engineering time away from
operational priorities.
24
Siemers Decl. ¶ 28.
25 11
Siemers states in his declaration:
26
19. Even if Kraken were required to analyze the AML logs only for the 59,331
27 accounts that meet the IRS’s definition of User to determine (i) whether any changes were made
to the account holder’s personal information, and (ii) if so, what those substantive changes were,
28 it would be extremely time consuming. Based on my experience, it is reasonable to assume it
would take approximately five minutes per log for a Kraken employee to decrypt the log, review
36
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 37 of 51
1 The Government’s Response
2 The Government rejects Kraken’s argument that Request No. 1 is overbroad, arguing that
3 the identifying information sought in this request, such as whether a user has changed their name
4 on an account or IP address information, can be used to identify a taxpayer, which “might throw
5 light upon the correctness of a return.” Kraken II, Reply at 7-8 (citing Kraken II, Cincotta Petition
6 Decl. ¶¶ 111-119). 12 Likewise, the Government asserts, “[t]he IRS uses information about how a
7
8 it for historical residency information, and collect that information. Thus, for 59,331 logs, it
would require approximately 5,000 hours of work. In addition, historical changes to personal data
9 have not been stored by Kraken in its AML logs for the entire period covered by the Summons, so
the data collected would be incomplete. Since this is not data that Kraken formally maintains, I do
10 not know how accurate the information retrieved would be or if we would successfully be able to
collect historical personal information for all accounts.
11 ...
12 33. I understand that the IRS also requests any invoices, billing statements, receipts, or
other similar documents relating to account funding transactions. It is unclear the full extent of
United States District Court
13 what documents the IRS is seeking based on these descriptions. Based on my knowledge and
experience at Kraken, Kraken does not send invoices, billing statements, or receipts to its users.
14 Any documents that may be captured by this request are individual records and not globally
searchable data. Collection of these documents, to extent they exist, would be a very time
15 consuming and likely require a manual review of each of the 59,331 accounts covered by the IRS
Northern District of California
summons. It is difficult to estimate the burden of this request since it is unclear the universe of
16 documents being sought. But as previously stated, even if only a few minutes were required per
account to conduct a manual review, this would lead to thousands of hours of work.
17
Siemers Decl. ¶¶ 19, 33.
12
18 Agent Cincotta explains how identifying information covered by Request No. 1 can be helpful
in uncovering tax non-compliance as follows:
19
111. The summons request for complete user history is directed at identifying internet protocol
20 (“IP”) addresses used to access the account. This information is helpful when initially confirming
a user’s identity and making an initial determination regarding whether the identified user is in tax
21 compliance.
22 112. In situations where the IRS has had difficulty adequately confirming a taxpayer’s
identity, it has been able to employ IP address information as an additional data point to confirm
23 that the IRS has connected information to the proper taxpayer. IP address information indicates the
geographical location where a device accesses the internet (generally through an internet service
24 provider). The geographical location of an IP address is publicly available so the IRS can use IP
address information to search publicly available records to determine a location.
25
113. For example, a taxpayer accessing his Kraken account from San Francisco, California
26 will have an IP address indicating that the access was made from San Francisco, California.
27 114. Based on my review of Kraken’s account verification requirements, it is my understanding
that IP address information is actively being collected and monitored by cryptocurrency exchanges
28 such as Kraken.
37
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 38 of 51
1 user funds their account, or what payment methods they use, to uncover related taxpayers or
2 nominee situations, along with determining whether that user is in tax compliance.” Id. at 8. The
3 Government offers the following example: “if bank accounts of one taxpayer are linked to another
4 taxpayer’s cryptocurrency exchange account and vice versa, or a taxpayer with minimal reported
5 income has many linked funding sources, or a taxpayer has funding sources that are not in his own
6 name, that taxpayer is more likely to not be complying with the internal revenue laws.” Id. (citing
7 Kraken II, Cincotta Petition Decl. ¶¶ 120-25). The Government argues that “[h]aving this
8 information certainly might throw light upon the correctness of a return.” Id.
9 The Government rejects Kraken’s assertion that Agent Cincotta’s statements about the use
10
11
115. Cryptocurrency exchanges use IP address information internally to determine from where
12 an individual is attempting to access their platform so they can block access from jurisdictions
where they do not operate. It is my understanding that Kraken employs this same process to
United States District Court
13 monitor and block users from jurisdictions where it does not operate such as Washington State and
New York.
14
116. Using this information, the IRS will be able to confirm a user’s identity in situations
15 where the user’s identity is not certain based on the other personal information by confirming that
Northern District of California
the account was accessed from IP address locations that coincide with the taxpayer’s known
16 physical address.
17 117. Conversely, where the IP address information does not match, the IRS will be able to
conduct additional due diligence to determine the proper account owner or whether there was an
18 incidence of identity theft.
19 118. Aside from its utility in confirming an individual’s identity, the IRS will be able to use
this information to make a determination regarding a user’s tax compliance. The IRS is in
20 possession of data relating to foreign cryptocurrency exchanges. That data lacks a taxpayer ID
number, but does include information such as telephone number, email address, and IP address.
21 Being able to match the IP address information of a Kraken user to IP address information (and
other data points contained in the IRS’s information) will permit the IRS to link substantive
22 transactional information from multiple sources for a single individual taxpayer and make a more
accurate initial determination regarding that individual’s tax compliance.
23
119. In my experience as a Revenue Agent, it is important for the IRS to receive this
24 information at the same time it receives the other identity information because it helps identify
users and can be searched against existing data in the IRS’s possession to determine whether a
25 user is in tax compliance.
26 Kraken II, Cincotta Petition Decl. ¶¶ 111-119.
27
28
38
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 39 of 51
1 of aliases, false addresses or post office boxes, fictitious entity names, or other means to disguise
2 account holders’ true identities are insufficient because she does not address whether these
3 practices are common among Kraken users specifically. Id. 8-9. According to the Government,
4 given that Agent Cincotta has worked as a revenue agent since 2005, “particularly working in the
5 offshore and electronic payments systems area and on other John Doe summonses[,]” these
6 statements are persuasive evidence. Id. (citing Kraken II, Cincotta Petition Decl. ¶ 42; Kraken II,
7 Cincotta Reply Decl. ¶ 1). Furthermore, the Government argues, “although Kraken is correct that
8 the IRS doesn’t know if Kraken’s users have supplied false information, Kraken doesn’t know
9 either – at least not for the user accounts that are at its Starter or Express levels[,] [as] Kraken
10 admits it only requires users at the Intermediate and Pro levels to provide identity verification
11 information.” Id. at 9.
12 The Government dismisses Kraken’s argument that the basic identity information that was
United States District Court
13 produced in Coinbase is sufficient because “the IRS was able to identify most of the Coinbase
14 users from the basic identifying information it received.” Id. at 9. It asserts, “what a
15 summoned party believes is necessary for an IRS examination is not the standard under Powell
Northern District of California
16 and its progeny.” Id. (citing Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 323 (1985)).
17 In a footnote, the Government rejects Kraken’s assertion that Request No. 1 is overbroad
18 because of the lack of a date restriction for the historical information it seeks. Kraken II, Reply at
19 8 n. 11 It asserts, that these requests are proper because “the summons requests that are unlimited
20 in time are tied to the years under investigation, even though the IRS cannot more specifically
21 identify the year in which the users may have submitted identity confirming information to
22 Kraken.” Id. It notes that in Zietzke, cited by Kraken in support of its argument on this issue, the
23 court “found that the IRS could modify its summons request to tie the information requested in
24 prior years to the year under exam.” Id.
25 With respect to Request No. 2, the Government rejects Kraken’s argument that
26 “employment, net worth, and source of wealth data for individual user accounts [ ] is irrelevant to
27 potential tax liabilities[,]” asserting that Agent Cincotta “explains in detail just how the IRS would
28 use that information and why it may be relevant to the IRS’s investigation.” Id. at 9 (citing
39
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 40 of 51
1 Kraken II, Cincotta Petition Decl. ¶¶ 126-31). 13 As to Kraken’s objection that this request isn’t
2 limited in time, the Government responds that this does not render the request overbroad because
3 “the IRS can’t possibly know when in time Kraken collected this information from each user.” Id.
4 at 10 n. 14.
5 As to Request No. 3, the Government argues that its withdrawal of the same request to
6 Coinbase has no bearing on whether it is permissible here. Id. at 10. Moreover, it asserts, Agent
7 Cincotta’s declaration is sufficient to establish that Kraken’s AML-triggered investigation records
8 may be relevant to the IRS’s investigation. Id. (citing Kraken II, Cincotta Petition Decl. ¶ 133). 14
9
13
10 Agent Cincotta describes the Government’s need for this information as follows:
11 127. With respect to the individual KYC questionnaire, the summons only requests the
responses to the employment, net worth, and source of wealth questions.
12
128. Given that the KYC questionnaire is only required for pro level accounts, I expect that
United States District Court
13 these responses will only be provided for a limited number of account holders. However, pro level
account holders are permitted the largest movement of funds as well as access to Kraken’s “dark
14 pool”—a discrete market where the order books are secret, making it easier to buy or sell larger
unit volumes without influencing the market.
15
Northern District of California
129. Given the likely larger movement of funds and higher dollar values, and the overall
16 increase in fair market value of bitcoin during the summoned period, it is almost certain that these
pro level account individuals will have experienced a taxable gain. Having additional information
17 such as employment, net worth, and source of wealth will help the IRS determine whether they are
in tax compliance.
18
130. Employment information can be matched against Forms W-2 issued by the identified
19 employer to both confirm the user’s identity and identify the user’s income level. Net worth and
source of wealth questions can help the IRS understand whether the identified taxpayer has a level
20 of wealth commensurate with his earnings or possibly unreported income.
21 131. With respect to the business KYC questionnaire, all the information obtained by the
questionnaire is the same basic information requested for individual users. Each of the pieces of
22 information identified in the questionnaire, if not already provided as part of the user profile
information identified in summons request number 1, is necessary to properly identify the business
23 taxpayer that controls the account as well as the actual individuals (contacts) that have access to
the account.
24
Kraken II, Cincotta Petition Decl. ¶¶ 127-131.
25 14
Agent Cincotta states in her declaration:
26
133. Exception reports identify questionable transactions engaged in by a user that warranted
27 additional research and investigation by the money services business. Based on my experience,
reviewing these reports allows the IRS to leverage the industry expertise of the business involved
28 (here, a cryptocurrency exchange) regarding what type of activity is abnormal or suspicious and
allows the IRS to combine that expertise with other information available to the IRS to determine
40
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 41 of 51
1 On the question of burden, the Government argues generally that “[t]he production of 160
2 million transaction records is not out of line with what the IRS receives, or expects to receive,
3 when it issues a John Doe summons” and that “[t]he same can be said for the production of
4 59,351 user accounts.” Id. at 13 (citing Kraken II, Cincotta Reply Decl. ¶ 63). It responds further
5 that “Kraken’s costs can be offset by reimbursement or other IRS assistance.” Id. (citing 26
6 U.S.C. § 7610 15; 26 C.F.R. 301.7610-1 16). It also notes that “under the FinCEN regulations,
7 Kraken is required to obtain and retain many of the summoned records.” Id. at 12 n. 16 (citing 31
8 C.F.R. § 1010.4100(e)(1)(i) and § 1022.400; Kraken II, Cincotta Petition Decl. ¶¶ 62-67).
9 According to the Government, “under the FinCEN regulations, Kraken must be able to retrieve the
10 records it is required to keep (‘have the information readily available’). Id. (quoting FIN-2016-
11 G001 (Mar. 11, 2016)).
12 ii. Discussion
United States District Court
13 As discussed above, the Court must determine whether the Government’s summons is
14 narrowly tailored, that is, whether it is “no broader than necessary to achieve its purpose.” United
15 States v. Bisceglia, 420 U.S. 141, 151 (1975). The Court finds that to the extent the first three
Northern District of California
16 requests are aimed at establishing the identities of the Kraken account holders who fall within the
17 Doe definition, the information sought in these requests is much broader than what is necessary to
18 achieve that purpose for the vast majority of Doe users.
19 First, the record reflects that for Intermediate and Pro level accounts, at least, Kraken will
20 be able to provide significant identifying information, including taxpayer IDs for some users,
21 rendering superfluous the requests for the additional (and more intrusive) information sought in
22
23 whether the subject taxpayer is complying with the internal revenue laws.
24 Kraken II, Cincotta Petition Decl. ¶ 133.
15
Under 26 U.S.C. § 7610, “The Secretary shall by regulations establish the rates and conditions
25 under which payment may be made of . . . reimbursement for such costs that are reasonably
necessary which have been directly incurred in searching for, reproducing, or transporting books,
26 papers, records, or other data required to be produced by summons[,]” except that no payment may
be made “if . . . the person with respect to whose liability the summons is issued has a proprietary
27 interest in the books, papers, records or other data required to be produced, or . . . the person
summoned is the person with respect to whose liability the summons is issued.”
16
28 This regulation addresses the types of costs that may be reimbursed in connection with
compliance with an IRS summons and applicable rates.
41
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 42 of 51
1 these requests aimed at uncovering the identity of the account holders. While it is unclear how
2 many Kraken accounts are at the Pro and Intermediate levels as compared to starter level accounts,
3 the Government’s requests that go beyond the basic information sought under Request 1(a), that
4 is, the requests for historical information about changes to users’ personal information, IP
5 addresses and payment methods (Request Nos. 1(b)(-(d)), are clearly broader than necessary as to
6 these users. Furthermore, to the extent it appears to be undisputed that Kraken verifies the
7 identities of users at these account levels, Agent Cincotta’s statement that taxpayers sometimes
8 use aliases and fictitious entity names, see Kraken II, Cincotta Petition Decl. ¶ 42, does not
9 establish that this additional information is required to determine these users’ identities.
10 Second, even taking into consideration the more limited (and perhaps less reliable)
11 information collected by Kraken from users with starter level accounts, the historical information
12 sought in Request Nos. 1(b)(-(d) is broader than necessary. Kraken has provided evidence that
United States District Court
13 during the relevant period it collected first and last name, date of birth, address, email address, and
14 phone number for all users. Siemers Decl. ¶ 5. Although Agent Cincotta has stated that taxpayers
15 sometimes provide false information as to their identity, this evidence at most suggests that the
Northern District of California
16 basic identity information collected by Kraken might not be sufficient to establish the identities of
17 some users. On the other hand, the Government does not appear to dispute that as to the vast
18 majority of Does, this information will allow it to identify these account holders. Indeed, in
19 Coinbase, where the information collected by Coinbase appears to have been less complete than
20 the information collected by Kraken, approximately 90% of the Does were identified using
21 taxpayer IDs and after further efforts to obtain missing basic information (e.g., no name or use of a
22 pseudonym, missing birth date or physical address) the Government was able to reduce the
23 number of accounts that could not be identified to 750 (approximately 5% of the Does covered by
24 the summons). Kraken II, Cincotta Petition Decl. ¶¶ 43-48. As to the remaining accounts that the
25 Government has not been able to identify, the Government could have issued another Doe
26 summons or summonses with notice to the account holders, but it apparently chose not to do so.
27 Therefore, as to Request No. 1, the Court concludes that the Government has not established that it
28 needs information beyond that covered by Request 1(a) to identify the Does.
42
Case 3:23-mc-80029-JCS Document 34 Filed 06/30/23 Page 43 of 51
1 The Court further finds that the information sought in Request Nos. 2 and 3 goes beyond
2 what is reasonably necessary to achieve the purpose of these requests. This includes the
3 Government’s request for KYC due diligence questionnaire information, including individual
4 User’s employment, net worth, and source of wealth (Request No. 2), and AML Logs and records
5 of investigations related to AML monitored actions (Request No. 3). While this information might
6 shed light on a tax violation by an account holder, at this stage of the Government’s investigation,
7 it is only speculating on that point. To move beyond speculation, it must first address whether
8 there is anything in the user’s transaction history – whether considered on its own or in
9 combination with other information the IRS has collected on that user after it has identified the
10 account holder – that makes it reasonable to conclude that the information it seeks in these
11 requests will actually yield information relevant to that user’s tax compliance. At that point, the
12 Government can issue another Doe summons or follow the preferable path of issuing a summons
United States District Court