Do not think that just because digital exchanges are not broker-regulated by the IRS and digital exchanges are not obligated to issue a 1099 form reporting transactions, that your crypto currency transactions will always be a secret. The Federal government is cracking down on non-compliant traders and just last week Thomas Costanzo of Mesa, Arizona was convicted for money laundering tied to over $164,000 worth of crypto currency trades.
Conviction Culminates A Two-Year Long Investigation
In a press release issued on March 28, 2018 by the U.S. Attorneys’ Office from the District of Arizona, Thomas Mario Costanzo, a.k.a. Morpheus Titania was found guilty of five counts of money laundering by a federal jury in Phoenix. The case (United States v. Thomas Mario Costanzo, United States District Court (D. AZ) CR-17-00585) was tried before U.S. District Judge G. Murray Snow. Sentencing is set before Judge Snow on June 11, 2018.
The evidence at trial showed that federal agents initiated an investigation of Mr. Costanzo in 2014, after identifying an advertisement he posted on a peer-to-peer bitcoin exchange website. In the advertisement, Mr. Costanzo advertised that he was willing to engage in cash transactions up to $50,000. When undercover federal agents approached Mr. Costanzo and told him that they were drug dealers, Mr. Costanzo provided them with bitcoin and told them it was a great way to limit their exposure to law enforcement. The jury found that over a two-year period, Mr. Costanzo took $164,700 in cash from the agents (whom he believed to be heroin and cocaine traffickers) and exchanged it for bitcoin in order to conceal and disguise the nature, location, source, ownership, and control of the drug proceeds. The evidence at trial also showed that Mr. Costanzo used bitcoin to purchase drugs from others and that he provided bitcoin to individuals who were buying drugs via the internet.
The Court acknowledged that Bitcoin is a decentralized form of electronic currency which may be used for legitimate purposes and that anyone can obtain bitcoin from a commercial on-line exchange by paying about 1.5% as a commission and providing identity information to the exchange. In contrast, Mr. Costanzo charged between 7% and 10% in his peer-to-peer transactions and did not disclose his customers’ identities.
18 U.S.C. §1956 – Laundering Of Monetary Instruments
18 U.S.C. § 1956(a) defines three types of criminal conduct: domestic money laundering transactions (§ 1956(a)(1)); international money laundering transactions (§ 1956(a)(2)); and undercover “sting” money laundering transactions (§ 1956(a)(3)). Marijuana-related businesses need to be aware of domestic money laundering transactions (§ 1956(a)(1)).
To be criminally culpable under 18 U.S.C. § 1956(a)(1), a defendant must conduct or attempt to conduct a financial transaction, knowing that the property involved in the financial transaction represents the proceeds of some unlawful activity, and the property must in fact be derived from a specified unlawful activity.
Violations of § 1956 have a maximum potential 20-year prison sentence and a $500,000 fine or twice the amount involved in the transaction, whichever is greater. There is also a civil penalty provision in § 1956(b) which may be pursued as a civil cause of action. Under this provision, persons who engage in violations of any of the subsections of 1956(a) are liable to the United States for a civil penalty of not more than the greater of $10,000 or the value of the funds involved in the transaction.
For Mr. Costanzo EACH OF THE FIVE convictions for money laundering carries a maximum penalty of 20 years in prison, a $250,000 fine, or both. The bitcoin involved in the final transaction is also subject to forfeiture by the United States.
What Should You Do?
The investigation of Mr. Costanzo was jointly conducted by Internal Revenue Service Criminal Investigation, the Drug Enforcement Administration, and the U.S. Immigration and Customs Enforcement Homeland Security Investigations, and the Scottsdale Police Department, with assistance from the Maricopa County Sheriff’s Office and the United States Postal Inspection Service.
The IRS is always interested in teaming up with other Federal agencies in their investigations of non-compliance with the laws and with only several hundred people reporting their crypto gains each year, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns. Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and offices elsewhere in California get you set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability.