The U.S. Internal Revenue Service (IRS) is being sued by New Hampshire resident James Harper for collecting his private financial data from at least one crypto trading platform.
Mr. Harper is one of more than 10,000 cryptocurrency holders who received a letter from the IRS accusing them of improper reporting of their transactions.
According to the complaint filed earlier this month with the U.S. Court of Appeals for the First Circuit, the IRS took Mr. Harper’s data “without reasonable suspicion and without a judicial warrant,” thus violating his constitutional rights protected by the Fourth and Fifth Amendments.
The appeal follows a March 2021 decision by the U.S. District Court for the District of New Hampshire to dismiss a legal action against the IRS, where Mr. Harper sought damages and an injunction requiring the tax agency to erase the private financial data it had obtained.
Data and privacy
Pointing to the contracts he signed with crypto exchanges, Mr. Harper claims that each of these companies has agreed to provide “robust privacy protections” to his financial records and “supplied him with a reasonable expectation of privacy in his personal information.”
He further argues that the contracts recognized that his data is his property, making it clear that he did not voluntarily surrender his Fourth Amendment rights by doing business with the companies.
According to the court documents, Mr. Harper had accounts with , Abra, and Uphold. Since Uphold confirmed that it did not provide the litigant’s private financial information to the IRS, he therefore alleges that the authorities most likely obtained it from either Abra or Coinbase, or both.
Mr. Harper opened an account with Coinbase in 2013, with the California-based exchange providing terms of agreement stating that it would “take reasonable precautions… to protect [the account owner’s] personal information from loss, misuse, unauthorized access, disclosure, alteration, and destruction."
In 2013 and 2014, Mr Harper deposited Bitcoin he received as income from his consulting work into his Coinbase account. The litigant alleges that he declared both the transactions on his 2013 and 2014 tax returns and all "appropriate income frompayments," including capital gains tax.
Mr. Harper, who liquidated his holdings in the Coinbase account in 2015 and by 2016 no longer held any cryptocurrency with the exchange, also claims that he paid "appropriate capital gains on any Bitcoin income for tax years 2015 and 2016."
In the period between 2016 and August 2020, Mr. Harper closed his accounts with Abra and Uphold.
Prior to the March 2021 district court’s ruling, in August 2019, Mr. Harper received a letter from the IRS, with the agency claiming that he hasn’t “properly reported” his “transactions involving virtual currency.” In the following press release, the IRS urged taxpayers to “take these letters very seriously” and “correct past errors.”
Such accusations led Mr. Harper to the conclusion that the IRS violated his contracts with at least one of the exchanges. However, the district court decided that the U.S. government's sovereign immunity bars this type of lawsuit.
“Earlier this year, the Supreme Court held that the IRS cannot block lawsuits challenging the constitutionality of its behavior by hiding behind the Anti-Injunction Act,” said Caleb Kruckenberg, a lawyer with New Civil Liberties Alliance representing Mr. Harper. “Unfortunately, that decision came out after the district court allowed the IRS to abuse the law in just that way.”
Nevertheless, the lawyer is confident that since the case, in the Supreme Court’s terms, is a “cinch,” the First Circuit “should swiftly reinstate this lawsuit.”
Moreover, as indicated in the original suit in July 2020, the “case presents the opportunity to correct the course of constitutional law“ and prevent the IRS from demanding access to personal financial records “even when a person has entered into a contract with a third party that promises to protect his private information from such intrusion.”