A California federal court has affirmed the validity of the United States Internal Revenue Service’s (IRS) request for data from crypto exchange Bitstamp in connection with an individual tax reporting case.

Per a Nov. 25 filing, the court has found that five of the six arguments presented against the IRS “lack merit,” but has conceded on one point that the tax agency’s summons was indeed overbroad, as the Petitioner contended. 

The filing relates to court proceedings initiated by William Zietzke, who has argued that the IRS is overstepping its remit in conducting an audit of his tax returns.

Petitioner alleges privacy infringement, ‘bad faith’ and irrelevance

As the filing outlines, Zietke had initially informed the IRS of his own mistake in a tax return that had allegedly overestimated his long-term capital gains in 2016. 

In seeking a refund from the IRS to correct his error, the agency set out to investigate Zietke’s case, requiring him to provide extensive data on his history of Bitcoin holdings and transactions.

Zietke is alleged to have failed to inform the IRS of his use of crypto exchange Bitstamp, prompting the agency to summon data from the exchange about his holdings, as well as public keys and blockchain addresses associated with his transactions.

As the court outlines, Zietzke has questioned the IRS’ actions on six grounds; firstly, that it issued the summons to Bitstamp “in bad faith”; secondly, that it seeks data that is irrelevant to its audit of the Petitioner’s reporting; thirdly, that it already possesses the information that it seeks from Bitstamp. 

Zietzke’s three subsequent arguments claim that the IRS allegedly made administrative missteps and — more crucially — has violated his reasonable expectation of privacy in Bitstamp’s records. He has also argued that the U.S. government cannot guarantee the security of any records it receives from the crypto exchange.

Court concedes one of six arguments against the IRS

The California court has conceded only one of Zietke’s arguments, noting that he is “correct that the summons is overbroad because it seeks both relevant and irrelevant material.” 

The court states that the IRS’ summons would require Bitstamp to produce data that is without due temporal limitation:

“Relating to Petitioner’s Bitcoin sales prior to 2016—even though such sales could not impact the gain or loss Petitioner realized if he sold Bitcoins in 2016. In this way, the summons requests information that is irrelevant to the IRS’s stated purpose of auditing Petitioner’s 2016 amended return.”

The court has however refuted all other arguments, finding that the validity of the IRS’ summons fulfills legal precedents and supports the agency’s role in enforcing the tax consequences of crypto transactions. 

As reported, Zietke has made a similar attempt previously to quash an IRS summons issued to Coinbase, which was strongly contested by the IRS.