Individuals who regularly engage in cryptocurrency trading may want to tune in to the implications of Harper v. Werfel, a case currently before the US Court of Appeals for the First Circuit. This case may dictate whether there’s a constitutional privacy right in cryptocurrency exchange records.
The IRS has increasingly flexed its use of a ‘John Doe’ summons—an information request relevant to tax liability served without judicial approval—obtaining financial data from crypto exchanges. While traditionally this tool has aided in accurately determining taxable income from investments, it now faces a challenge with the rise of cryptocurrencies.
In 2016, the IRS issued a John Doe summons to a widely-used coin exchange, seeking financial records for thousands of account holders over two years, James Harper among them. Harper took this act as a violation of his constitutional Fourth Amendment right, prompting a lawsuit against the IRS.
Initially, the district court agreed with the IRS arguing that the Anti-Injunction Act barred the suit, which is designed to prevent disruption of the tax assessment or collection process. However, the First Circuit countered this move, observing that Harper’s complaint was specifically aimed at restraining an informational gathering technique, rather than the direct collection of tax. It decided that Harper’s suit could proceed.
At the next stage, Harper’s Fourth Amendment argument was defeated in district court, based on the ‘third-party doctrine’, asserting that Harper had no privacy expectations or Fourth Amendment rights to his records given that he had freely entrusted them to a third party. Harper, however, disagreed, stating that he had entered into a contractual agreement with the exchange to keep his personal data confidential, therefore retaining an element of privacy.
Additionally, Harper argues that his account details held by exchanges creates a private view into his life deserving of Fourth Amendment protection.
Whether Harper will be successful remains to be seen. His case rests on persuasive arguments that crypto records—due to advancing technology and information gathering practices—are fundamentally different to traditional bank records. Differences in know-your-customer requirements and e-data collection may play to his advantage, given that crypto exchanges are typically more stringent and gather wider ranges of personal information.
While this case plays out, cryptocurrency traders must remain aware that the IRS continues to issue John Doe summonses to exchanges. In the near future, the First Circuit may enlighten us if their efforts infringe upon traders’ constitutional rights.