U.S. marshals in recent months having confiscated over 2,000 bitcoin in conjunction with federal prosecutions has announced the sale of this bitcoin to commence March 19th.
Feds Don’t Mine – They Confiscate.
When the Federal Government shuts down any illegal operation including cannabis enterprises (which despite State law legalizing cannabis, it is still illegal under Federal law), the Federal Government is allowed to confiscate all assets of the illegal operation which includes the plants, equipment, property, cash and bitcoin. Handling and custody of these assets are managed by the U.S. Marshals Service. It’s not a well-known fact that because of these seizures in shutting down illegal operations, the Federal Government is the biggest auctioneer of bitcoin and manages one of the world’s biggest wallets with as much as $120 million worth of BTC. In 2013, the FBI seized 144,336 bitcoins, valued at just over $48 million, connected to Silk Road which was a notorious online drug market that the FBI shut down.
Next On-line Auction Of Bitcoin By the Feds.
The Federal Government announced that it has 2,170 bitcoins set to be auctioned off this month. The coins were seized from a variety of sources: criminal, civil, administrative. Details according to the government’s press release state to be eligible for the March 19th auction, potential bidders must complete all registration requirements by noon EDT March 14. Registered bidders only will get a chance to make offers via email. A $200,000 deposit is required to participate. Deposits will be returned to non-winning bidders. The Bitcoin will be served up in chunks or blocks: “two blocks of 500 bitcoins, 11 blocks of 100 bitcoins and one block of approximately 70 bitcoins,” for a total of 14 blocks. The winner will be contacted on the 19th. The government believes that in total it should get $25 million from the auction. About a month ago the Federal Government auctioned 3,600 bitcoin for which it collected close to $30 million.
War On Drugs Includes Bitcoiners
The U.S. Marshals’ auction site lists all upcoming auctions, with about 75% of those cases coming from illegal activity shut down by the Drug Enforcement Administration (DEA). The DEA is the most dreaded federal agency of the cannabis industry putting state-law abiding cannabis businesses in the same category as narcotics traffickers. Bitcoin has been hot on the DEA’s radar and as recently as late last year the agency released a report, National Drug Threat Assessment, which contends that bitcoin is used an illicit means of finance.
Charges Include Tax Crimes
For individuals nabbed by the Federal Government, it is not surprising that the IRS gets involved and they are also charged with tax crimes.
Failure to report all the money you make is a main reason folks end up facing an IRS auditor. Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.
Criminal Fraud – The law defines that any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).
The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).
And even if the IRS is not looking to put you in jail, they will be looking to hit you with a big tax bill with hefty penalties.
Civil Fraud – Normally the IRS will impose a negligence penalty of 20% of the underpayment of tax (Code Sec. 6662(b)(1) and 6662(b)(2)) but violations of the Internal Revenue Code with the intent to evade income taxes may result in a civil fraud penalty. In lieu of the 20% negligence penalty, the civil fraud penalty is 75% of the underpayment of tax (Code Sec. 6663). The imposition of the Civil Fraud Penalty essentially doubles your liability to the IRS!
What Should You Do?
It is risky enough to be involved in cannabis or crypto-currency, so imagine how much riskier it is combining both. It is important to control this risk which you can do by engaging the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Inland Empire (Ontario) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to mitigate criminal prosecution, seek abatement of penalties, and minimize your tax liability.