US Court Backs IRS in Part Against Kraken Over Tax Rules

The United States District Court, Northern District of California, has partially upheld a summons issued by the Internal Revenue Service (IRS) to Payward Ventures, Inc. and its subsidiaries, collectively known as “Kraken“. Kraken, a prominent online crypto exchange, has been under scrutiny for its compliance with tax regulations.

The court order comes after Kraken failed to comply with an IRS summons, leading to the United States initiating legal action to enforce it. The court’s decision to grant the petition in part and deny it in part marks a crucial juncture in this ongoing case.

Kraken, known for its global reach, offers its digital currency exchange services to users in over 190 countries. The platform provides a variety of account levels, including Starter, Express, Intermediate, and Pro, each requiring different levels of user verification. While the Starter and Express accounts offer limited services and require lower levels of verification, the Intermediate and Pro accounts offer a wider variety of transaction types and higher withdrawal limits, necessitating additional user verification.

The IRS investigation into Kraken was triggered by concerns over tax compliance issues related to cryptocurrency. These concerns were highlighted in reports by the Government Accountability Office (GAO) in 2013 and the Treasury Inspector General for Tax Administration (TIGTA) in 2016. The reports identified several tax compliance risks associated with virtual currencies, including underreporting of income and tax evasion.

In response to these concerns, the IRS expanded its Electronic Payment Systems Initiative (EPSI) to address U.S. taxpayers who use virtual currencies for tax avoidance purposes. As part of this initiative, the IRS established a Virtual Currency Issue Team (VCIT) to study the issue and consider the compliance impact related to virtual currencies. The summons to Kraken is part of the tools being used in this investigation.


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Bittrex Files Motion to Dismiss SEC Charges

A motion to dismiss the case has been filed on behalf of Bittrex and its co-founder, William Hiroaki Shihara. The motion, filed on July 2, 2023, argues that the SEC lacks the authority to regulate crypto assets as securities and that the Commission has failed to provide adequate notice of the alleged securities law violations.

The SEC had previously charged Bittrex, Shihara, and Bittrex’s foreign affiliate, Bittrex Global GmbH, with operating an unregistered national securities exchange, broker, and clearing agency. This followed a six-year investigation into the company’s operations. However, the defendants are now challenging the SEC’s authority to regulate crypto assets as securities, a major question that they argue Congress has not clearly authorized.

Furthermore, the motion to dismiss argues that the SEC has not provided sufficient evidence to support its claims that securities transactions occurred on the Bittrex platform. The defendants contend that the SEC’s allegations require proof of “Investment Contracts” being traded on the platform, a requirement they claim the SEC has failed to meet.

The motion also seeks to dismiss the control person liability claim against Shihara, arguing that the SEC has failed to provide fair notice of the alleged securities law violations. The case, filed in the United States District Court for the Western District of Washington at Seattle, is scheduled for oral argument on September 8, 2023.

This legal development comes after Bittrex filed for bankruptcy protection in May 2023, following the SEC’s charges. The Seattle-based company ceased operations in the United States on April 30, 2023, but assured that the bankruptcy filing would not impact Bittrex Global, which serves customers outside the United States.


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Hong Kong Boosts Web3 with New Task Force

On June 30th, 2023, Hong Kong’s government revealed the creation of a pivotal initiative – the Task Force on Promoting Web3 Development. This significant step, led by Financial Secretary Paul Chan, includes fifteen non-official members selected from relevant market sectors, plus key government and financial regulatory officials. The tenure of these non-official members commences on July 1, 2023, and is slated to run for two years.

This Task Force’s inception follows the government’s Policy Statement on Development of Virtual Assets (VAs) in Hong Kong, issued in October 2022. The market has warmly welcomed this policy, reflecting Hong Kong’s forward-thinking approach to this vital sector. As VAs play an essential role in the vibrant Web3 ecosystem, the government’s move to establish the Task Force signals its intent to promote the sustainable and responsible development of Web3.

Chan, underscoring the critical role of blockchain technology powering Web3, highlighted its features such as disintermediation, security, transparency, and cost-effectiveness. He outlined the technology’s potential to alleviate challenges in various sectors, including finance, trade, business operations, and even daily life. As a hub of international finance and innovation, Hong Kong aims to embrace the burgeoning trend of Web3 development.

“Hong Kong seeks to lead and drive innovative exploration and development, create new application models, and strives to draw together top-notch companies and talent in the arena to build a thriving ecosystem,” said Chan. He expressed optimism that the Task Force, a collective of sector leaders and professionals, will offer valuable advice to help transform Hong Kong into a bustling Web3 hub.

The Task Force includes both official and non-official members. The official members comprise several key government figures and executives from notable financial and technological organizations.

The establishment of the Task Force on Promoting Web3 Development is not the only sign of Hong Kong’s active engagement with Web3. In April, the Hong Kong Web 3.0 Association was set up, with the former head of the Hong Kong Monetary Authority (HKMA) at its helm. Then in June, the Hong Kong government published a report titled ‘Development of Web 3.0 technologies in selected places’, further cementing its position in the forefront of the Web3 wave.


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