According to the United States Court of Appeals for the Fifth Circuit, law enforcement officials do not need a search warrant to get account records from a cryptocurrency exchange or from the public blockchain. On June 20, 2020 the court ruled that cryptocurrency exchange account holders do not have a constitutionally cognizable privacy interest in their transaction history and therefore do not enjoy the search and seizure protections ensured by the Fourth Amendment. U.S. v. Gratkowski, 2020 WL 3530575 (5th Cir. June 20, 2020).

Background

The Supreme Court has long held that a person generally “has no legitimate expectation of privacy in information he voluntarily turns over to third parties.” Smith v. Maryland, 442 U.S. 735, 743-44 (1979). The third-party doctrine is a United States legal doctrine that holds that people who voluntarily give information to third parties such as banks, phone companies, internet service providers, and email servers have no reasonable expectation of privacy. A lack of privacy protection allows the United States government to obtain information from third parties without a legal warrant and without otherwise complying with the Fourth Amendment prohibition against search and seizure without probable cause and a judicial search warrant.

However, exceptions have been made to this principle in certain instances. For example, in Carpenter v. United States, 138 S. Ct. 2206 (2018) the court was faced with the question of whether the third party doctrine extends to cell-site records that track location and movement from where calls are made. Based on cell-site evidence obtained from a telecommunication provider, the government charged the defendant with robbery. The court held that expectations of privacy in this age of digital data do not fit neatly into existing precedents, but tracking a person’s movements and location through extensive cell-site records is far more intrusive than past precedents might have anticipated. Thus, the Court held narrowly that the government generally will need a warrant to access cell-site location information.

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https://taxbit.com/blog/court-rules-crypto-traders-don%E2%80%99t-have-privacy-interest-in-transaction-records/

U.S. brokers of capital assets have strict data collection and information reporting requirements to ensure that taxpayers properly comply with their tax reporting obligations. Individuals or entities that are required to file information returns with the IRS must obtain correct taxpayer identification numbers (TIN’s) in order to properly file such returns. Similarly, international cryptocurrency exchanges also have (TIN) collection requirements in order to comply with Common Reporting Standards and FATCA reporting on foreign account holders. Exchanges (which for this purpose includes brokers, lending platforms, interest providers, wallet providers facilitating trades, dividend issuers, etc.) who fail to collect the required information on its users may be subject to mandatory backup withholding.

(i) Information Required to be Collected

Entities who are required to file an information return on a taxpayer are required to collect the necessary information to file the return. All cryptocurrency exchanges must therefore collect the: 1) name; 2) address; and 3) TIN (which is usually the user's social security number) of its users. Cryptocurrency exchanges and other businesses subject to information reporting are required to list this information on a tax form known as a W-9.

The W-9 tax form must be maintained by the filer, but is not required to be filed by the IRS. Rather, the information collected on the W-9 will be filed with the IRS when filing the applicable 1099 tax form (or foreign equivalent). The vast majority of exchanges have properly implemented strict data collection processes upon onboarding to collect W-9 information.

(ii) Mandatory Backup Withholding

If cryptocurrency exchanges fail to collect TIN’s (typically social security numbers) then they may be subject to mandatory backup withholding on its users. The business facilitating brokering transactions doesn’t generally withhold taxes from these transactions, as it is assumed the taxpayer will report and pay taxes when filing their federal income tax return. Certain information, such as TIN’s, are required fields in order to furnish an information reporting return to the IRS. In addition to the harsh penalties on exchanges for failing to file an informational return, exchanges that don’t have a valid TIN are required to withhold 24% of the gross proceeds on the taxpayer’s transactions for the year.

Details and more: https://taxbit.com/blog/crypto-exchanges-responsibilities-taxpayer-identification-numbers-and-backup-withholding/

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