The United States government has urged the Supreme Court not to take up a constitutional challenge brought by a Coinbase user seeking to prevent the Internal Revenue Service (IRS) from accessing his cryptocurrency transaction data. In a filing dated 30 May, Solicitor General D. John Sauer argued that James Harper, the petitioner, has no Fourth Amendment right to shield financial records stored by a third-party exchange.

The case, which hinges on the broader question of digital privacy in the cryptocurrency space, could have far-reaching implications for millions of crypto users in the United States and beyond. Harper’s petition seeks to challenge the legitimacy of a 2016 IRS investigation that compelled Coinbase to hand over data on users with high-volume trading activity.

The IRS’s Hunt for Crypto Tax Dodgers

In 2016, the IRS launched a probe into suspected tax underreporting by cryptocurrency traders, prompted by a stark mismatch between reported gains and the surging activity on platforms like Coinbase. To address this, the agency obtained a judicially approved “John Doe” summons, a legal tool that allows the IRS to request data without identifying specific taxpayers in advance.

An excerpt of the filing. Source: Supreme Court

This summons required Coinbase to provide details on users who had conducted transactions exceeding $20,000 in a single year between 2013 and 2015. Harper, who traded Bitcoin during that period, became one of the individuals whose data was turned over.

Harper’s Legal Challenge: Claiming a Constitutional Breach

Harper subsequently sued the IRS, arguing that the agency’s actions constituted an unlawful search in violation of the Fourth Amendment, which protects against unreasonable searches and seizures. He asserted that his financial data, stored by Coinbase, amounted to personal records that should not be accessed without a warrant or direct notification.

Lower courts, however, dismissed Harper’s claims, siding with the government’s view that the records in question are business documents, not personal papers. Both the District Court and the First Circuit Court of Appeals ruled that there was no reasonable expectation of privacy for data shared voluntarily with a third party.

US Government’s Argument: Privacy Ends at the Exchange

In its Supreme Court filing, the government reinforced this stance by citing established legal precedents, most notably United States v. Miller, which ruled that individuals lack privacy protections over financial records held by third parties. The brief also referenced Coinbase’s own privacy policy, which explicitly states that customer information may be disclosed to law enforcement when required by law.

“To the extent petitioner made those arguments below, the court of appeals correctly rejected them as both foreclosed by this Court’s precedent and meritless,” the government asserted.

The Solicitor General’s brief concluded that there was no compelling reason for the Supreme Court to revisit settled law on third-party data disclosures.

Data Breach Adds New Layer of Concern

The privacy debate has taken on added urgency following a recent data breach at Coinbase. On 15 May, the company disclosed that malicious actors had bribed customer service staff in India to access sensitive user data. The breach reportedly impacted around 1% of monthly transacting users, exposing names, balances, and transaction histories.

Among those affected was Sequoia Capital’s managing partner, Roelof Botha, underscoring the potential risks associated with centralised exchanges holding large troves of personal financial data.

Supreme Court Decision Still Pending

As of now, the Supreme Court has not announced whether it will hear Harper’s case. If the court declines to take up the matter, the First Circuit’s ruling in favour of the IRS will remain in place, further solidifying the government’s authority to obtain crypto records without the need for a traditional warrant.

For now, the Harper case serves as a cautionary tale for crypto users relying on third-party platforms: when it comes to financial privacy, the law may still lag behind the decentralised ideals of blockchain.