Cryptocurrency brokers must now track and report transactions to the IRS, putting the onus on them rather than investigators trying to look back at records after the fact. This payment of course is paid in addition to the tax that should have been paid in the first place, resulting in the tax payable almost doubling.
However, that bar is not actually as high to meet as it sounds. When cryptocurrency was first taking off, the IRS did take a fairly lenient approach. Criminal Penalties In addition to the sometimes huge expense of a civil fine, failing to be completely honest and transparent on a tax return is also a criminal offense. Again, prosecutors must show that the individual was aware of their dishonesty and had the intent to deceive authorities U.
Genuine mistakes, such as making incorrect calculations or completing the wrong form do not meet the criminal threshold. It is also not a criminal offense not to be able to pay tax if you can show that you are genuinely down on your luck. It goes without saying that if you are investigated, though, that an expert attorney must be consulted as soon as possible to build a defense.
If found guilty of tax fraud, the sentences range from yet another expensive fine to up to five years in prison. Two recent cases highlight how seriously the IRS and federal prosecutors are taking these crimes, and the mess that trying to outsmart the law can land you in. Cryptocurrency Tax Evasion — Case Study 1 In August , two founders of a cryptocurrency company were charged with tax evasion. They both eventually plead guilty and are awaiting their sentences, which will probably involve jail time.
The company in question was Bitqyck. Based in Dallas, they offered two digital assets - Bitqy and BitqyM. The owners, Mr. Bise and Mr. Instead, Mr. Mendez used the money to fund very lavish lifestyles. This misrepresentation is illegal. The owners were also prosecuted for tax evasion because they did not declare their cryptocurrency income to the IRS, believing that the transactions on their exchange were anonymous, private and could not be traced.
For two consecutive years, Mr. There is also inadequate disclosure and reporting because anonymity reduces the type of information crypto-intermediaries may themselves have. Further, there are no mandatory disclosure and reporting requirements for reporting income from crypto-transactions. Mechanisms Enabling Evasion Peer-to-Peer Transfers Peer-to-peer transfers are crypto-transactions undertaken between two users through their wallets, outside exchanges, and platforms. Strategically, this is the best option for evaders because it does not involve any intermediaries, creating almost no traceability.
Conversion into Fiat Currency All convertible non-centralized virtual currencies are tradeable or purchasable with fiat currency, represented by traditional options like cash. This is facilitated through confidential transactions with online vendors, or through cryptocurrency ATMs. Using Third-Party Agents Under these confidential schemes , an investor subscribes to the stock of a company by paying the buying agent through cryptocurrency. Thereafter, the agent remits any dividends on stock of the company to the investor.
This involves either splitting large volumes of the cryptocurrency into multiple small accounts owned by the same investor or purchasing the cryptocurrency in smaller lots using multiple wallets. Tumblers sever the link between the buyer and seller entirely. Proposing a Multi-Stage and Multi-Levered Toolkit The anonymity, decentralization, non-uniformity, and inadequate information concerns must be addressed at all three stages of the tax regulation process: information gathering, investigation, and enforcement.
Given the complexity of the discussed evasion mechanisms, regulators must use architectural and market tools in addition to legal tools. So far, most regulators have restricted their action to merely legal tools. Architectural tools are the instructions embedded in software and hardware, as well as the institutional design of the blockchain.
Market tools are the forces of demand, supply, and quality, as well as the acceptable market practices and institutions. Information Gathering Disclosure and Reporting Requirements As a legal solution, regulators must mandate disclosure and reporting of crypto-transactions when they exceed a predetermined de minimis threshold. The requirement must extend to all crypto-exchanges, payment settlement entities, and custodian wallet providers.
The Financial Action Task Force proposed the travel rule, which requires all crypto firms to securely transmit originator and beneficiary information between themselves while transacting. Regulators must mandate this domestically. Importantly, there is a need for architectural intervention because, unlike SWIFT, there is no communication network to reliably transfer identification data along with crypto-transactions.
However, it is imperative that countries reach global consensus on one of these networks to avoid fragmentation and ensure interoperability. At the investor level, regulators can design voluntary self-disclosure forms for person-to-person transactions. However, the complexity of the present system has enabled the emergence of market players , like Koinly or CoinTracker, that charge exorbitantly.
Regulators can decrease the leverage of these players by simplifying the compliance process or by imposing ceilings on their fees. By providing appropriate incentives and adequate safeguards, regulators can establish effective whistleblower programs. This will provide exposure to reports from those inside the business, who are best placed to expose any wrongdoing.
Through these interventions, regulators can establish an effective feedback loop within each market participant. John Doe Summons While disclosure and reporting requirements are useful, they are limited when the entities are recalcitrant or when their adoption is delayed due to structural issues. This information can then be combined with data from publicly available databases to examine compliance.
International Cooperation Global consensus on crypto-asset taxation is vital. More importantly, there is a need for timely and comprehensive exchange of information across borders, which would enable regulators to perform risk analysis. The ineffectiveness of bilateral taxation treaties , due to complexity, time, and opportunity cost, necessitates the adoption of multilateral treaties to ensure an extensive network of tax information. Given concerns of ceding sovereignty, this solution can be administered through an international body like OECD.
Traceability Requirements Traceability of taxpayer information is required for both individuals and entities. To collect information about individual investors, regulators must legally mandate that all crypto-exchanges adopt Know Your Customer KYC procedures. KYC is the initial stage in customer due diligence by the service-provider to verify that customers are who they claim to be.
This requires the collection of personal data like full name, date of birth, and address. This information is then verified against official government databases. KYC enables the service provider to also assign a risk value to the customer based on their propensity and background. There is also a need to recognize that the architecture of certain technologies precludes or obfuscates any traceability.
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