Crypto Users’ Case Challenging IRS Crypto Reporting Gains Ground in 6th Circuit Ruling

On Friday, August 9, 2024, the United States Court of Appeals for the Sixth Circuit issued a ruling in the case Carman v. Yellen, which challenged the constitutionality of recent amendments to 26 U.S.C. § 6050I requiring reporting of certain cryptocurrency transactions.

The plaintiffs, which included an individual named Dan Carman, a non-profit called Coin Center, and two individuals involved with a bitcoin mining company, claimed to regularly use cryptocurrency for both personal and business purposes. They argued that the anonymity typically associated with cryptocurrency transactions is important to them. However, recent changes to Section 6050I, which mandates reporting of cash transactions over $10,000 to the IRS, expanded the definition of “cash” to include digital currencies like bitcoin.

Under the new requirements, anyone receiving more than $10,000 worth of digital assets like bitcoin in a trade or business would have to report details of the transaction to the IRS, including personal information from the sender. Failure to comply could result in civil penalties and felony criminal charges. The plaintiffs expressed concern that providing this level of detail to the government would compromise their anonymity when transacting with cryptocurrencies, since transaction records are publicly viewable on blockchains.

The plaintiffs raised five constitutional challenges to the new reporting rules. They claimed violations of the Fourth Amendment privacy protections, First Amendment freedom of association, unconstitutional vagueness under the Fifth Amendment, that Congress exceeded its enumerated powers, and a Fifth Amendment self-incrimination claim. However, the district court dismissed the case, finding that the plaintiffs lacked standing to bring the claims or that the issues were not ripe for review.

In its ruling, the Sixth Circuit affirmed the dismissal of the Fifth Amendment self-incrimination claim, agreeing it was not ripe since no privilege against self-incrimination had actually been invoked yet. However, the appeals court found that the district court erred in finding the other constitutional claims were not ripe. Because the plaintiffs provided facts demonstrating they would likely be subject to the reporting requirements through their cryptocurrency activities and businesses, and would face compliance costs, the Sixth Circuit ruled those claims should proceed to consideration on the merits. It remanded the case back to district court for further proceedings.

The order provided clarity that when plaintiffs are direct objects of challenged government action and can show likely personal harm, their constitutional claims are ripe for review even if the new laws have not taken full effect. It means the plaintiffs’ challenges to Section 6050I on First Amendment, Fourth Amendment, vagueness, and enumerated congressional powers grounds can move forward in the legal process.

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