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10,000 Cryptocurrency Owners Will Receive Warning Letters From The IRS

10,000 Cryptocurrency Owners Will Receive Warning Letters From The IRS

After years of analyzing data from third parties involved in the cryptocurrency exchanges, the IRS announced in a press release on July 26, 2019 that it has started sending letters to cryptocurrency owners advising them to report their cryptocurrency transactions and pay their taxes. More than 10,000 taxpayers have been identified by IRS as being involved in cryptocurrency transactions but who the IRS believes may not have been compliant in reporting these transactions on their tax returns.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

Notices Being Sent To Taxpayers Are The First Step In IRS Enforcement Action

The IRS is using three types of notices to send to more than 10,000 taxpayers by the end of August 2019 – notices 6173, 6174 or 6174-A. Of all the notices, Letter 6173 requires a signature from the recipient under perjury that they are compliant with the U.S. tax code.

If you receive Letter 6173, you should consult with a tax attorney as the submission of a statement signed under penalties of perjury that is false can result in serious consequences including criminal prosecution.

Virtual currency is an ongoing focus area for IRS Criminal Investigation.

Last year the IRS announced a Virtual Currency Compliance Campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers. The IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.

Taxation Of Cryptocurrency

Cryptocurrency transactions are apparently wildly taxable – far more so than investors may think. Although the IRS has not issued much formal guidance, the position of IRS is that any transaction involving virtual currency can trigger a taxable event including air drops and fork transaction as well as conversions or trades from one virtual currency to another virtual currency.

The IRS in 2014 issued Notice 2014-21 stating that it treats crypto currency as property for tax purposes. Therefore, selling, spending and even exchanging crypto for other tokens all likely have capital gain implications. Likewise, receiving it as compensation or by other means will be ordinary income.

Some would think that if bitcoin is property, trades should be tax deferred under the like-kind changes rues of I.R.C. §1031. Under that theory someone who owned Bitcoin could diversify their holdings into Ethereum or Litecoin, and plausibly tell the IRS it created no tax obligations. Unfortunately, the new Tax Cuts & Jobs Act of 2017 does away with that loophole making it clear that “like kind exchanges” which lets people swap an asset for a similar one without triggering a tax obligation are not available for non-real estate assets.

While Bitcoin receives most of the attention these days, it is only one of hundreds of crypto currencies. Everything discussed with regard to bitcoin taxation applies to all crypto currencies.

Here are the basic tax rules followed by IRS on specific crypto currency transactions:

  • Trading crypto currencies produces capital gains or losses, with the latter being able to offset gains and reduce tax.
  • Exchanging one crypto currency for another — for example, using Ethereum to purchase an altcoin — creates a taxable event. The token is treated as being sold, thus generating capital gains or losses.
  • Receiving payments in crypto currency in exchange for products or services or as salary is treated as ordinary income at the fair market value of the coin at the time of receipt.
  • Spending crypto currency is a tax event and may generate capital gains or losses, which can be short-term or long-term. For example, say you bought one coin for $500. If that coin was then worth $700 and you bought a $700 gift card, there is a $200 taxable gain. Depending on the holding period, it could be a short- or long-term capital gain subject to different rates.
  • Converting a crypto currency to U.S. dollars or another currency at a gain is a taxable event, as it is treated as being sold, thus generating capital gains.
  • Air drops are considered ordinary income on the day of the air drop. That value will become the basis of the coin. When it’s sold, exchanged, etc., there will be a capital gain.
  • Mining crypto currency is considered ordinary income equal to the fair market value of the coin the day it was successfully mined.
  • Initial coin offerings including certain forks do not fall under the IRS’s tax-free treatment for raising capital. Thus, they produce ordinary income to individuals and businesses alike.

Given the limited guidance by IRS, there are still tax positions that can be advocated or structured so that taxpayers dealing with crypto currency can defer gains and minimize taxes. That is why it is essential you seek qualified tax counsel.

Penalties For Filing A False Income Tax Return Or Under-reporting Income

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?

The IRS has not yet announced a specific tax amnesty for people who failed to report their gains and income from Bitcoin and other virtual currencies but under the existing Voluntary Disclosure Program, non-compliant taxpayers can come forward to avoid criminal prosecution and negotiate lower penalties.

With only several hundred people reporting their crypto gains each year since Bitcoin’s launch, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns. 

And now that likeexchange treatment is prohibited on non-real estate transactions that occur after 2017, now is the ideal time to be proactive and come forward with voluntary disclosure to lock in your deferred gains through 2017, eliminate your risk for criminal prosecution, and minimize your civil penalties.  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 qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.

failing to pay taxes could land you in jail

Beware: Failing To Pay The IRS Could Land You In Jail

Beware: Failing To Pay The IRS Could Land You In Jail

The IRS is notorious for taking aggressive collection action including filing tax liens, issuing wage garnishments, seizing assets and levying bank accounts in order to collect outstanding IRS debt. In some cases the IRS is also looking to make an example of what happens to taxpayers who do not cooperate in paying their taxes or even worse not filing tax returns.

Owner Of Colorado Business Sentenced To Prison For Tax Crimes.

In a press release issued by the U.S. Attorney’s Office in Colorado, Douglas A. Wieland, a Colorado paving company owner, was sentenced to prison for failure to pay income taxes. Mr. Wieland was sentenced to 12 months and one day in prison by U.S. District Judge R. Brooke Jackson in Denver, Colorado. In September 2018, Mr. Wieland pleaded guilty to two counts of failure to pay income taxes, in violation of 26 U.S.C. § 7203.

According to court documents, Mr. Wieland owned and operated Performance Paving, a company that performed asphalt and concrete work. Mr. Wieland admitted that, from April 1999 through December 2017, he did not make any payments toward his income taxes. He also admitted that he took steps to conceal his income and assets to prevent the IRS from seizing his assets. He deposited over $1.8 million into a “warehouse bank” account and then used that account to pay for his personal expenses. The purpose of a “warehouse bank” is to maintain the financial privacy of all “account holders” by commingling the funds of numerous account holders in a single bank account, usually at a domestic bank in the United States. Mr. Wieland also cashed checks his customers gave him for his services, and admitted at a court proceeding held in Adams County, Colorado, that he “cashed a check somewhere outside the box so the IRS doesn’t steal it from my bank”.

In addition to the term of imprisonment imposed, Mr. Wieland was ordered to pay restitution in the amount of $166,658.

Mr. Wieland should also expect that after serving his sentence he will be dealing with the Civil Division of the IRS who will be interested in conducting a full scale civil audit.

Penalties For Failure To File A Tax Return or Filing A False Income Tax Return or Under-reporting Income.

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).

Willful Failure To File – The law defines that any person who willfully fails to file a tax return as required by the Internal Revenue Code is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7203).

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?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Metropolitan Los Angeles (Long Beach and Ontario) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what our cannabis tax attorneys can do for you.

San Diego Crypto Currency Trader Indicted And Held Without Bond In The U.S. For Money Laundering

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.

Charges Filed Following Investigation By Federal Authorities

The U.S. Attorney’s Office for the Southern District Of California (which serves San Diego) announced on August 17, 2018 in a press release that a bitcoin dealer, Jacob Burrell a/k/a Jacob Burrell Campos, was indicted for international money laundering and is being held without bond. Mr. Burrell was arrested on August 13, 2018 as he tried to enter the United States from Mexico at the Otay Mesa Port of Entry.

According to statements made in court by Assistant U.S. Attorney Robert Ciaffa in the August 17th bond hearing, Mr. Burrell was a prolific Bitcoin dealer who sold approximately $750,000 worth of Bitcoin to hundreds of buyers throughout the United States. He conducted 971 separate transactions with over 900 individual customers, and accepted cash in person, through his bank accounts, and through MoneyGram.  AUSA Ciaffa told the court that Mr. Burrell operated as a Bitcoin “exchanger” and his activities constituted a “money transmitting business”.  As such, he was required to register with the Department of Treasury, and comply with all anti-money laundering requirements, including reporting suspicious cash transactions.  In this case, Mr. Burrell accepted cash “with no questions asked” and in return for a 5% fee, supplied hundreds of individuals with an easy outlet to avoid the anti-money laundering laws applicable to all financial institutions, including licensed and registered Bitcoin exchanges.  According to AUSA Ciaffa, Mr. Burrell’s activities “blew a giant hole” through the legal framework of U.S. anti-money laundering laws by soliciting and introducing into the U.S. banking system close to $1 million in unregulated cash.    

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)). Crypto currency traders and 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.

Mr. Burrell is being charged with 28 counts of money laundering. Each conviction for money laundering carries a maximum penalty of 20 years in prison and/or a $500,000 fine or twice the amount involved in the transaction, whichever is greater.

Other charges and possible punishment in the indictment include:

  • Conducting an unlicensed money transmitting business, in violation of 18 USC 1960. Statutory maximum:  Five years in prison, $250,000 fine.
  • Failing to maintain an anti-money laundering program, in violation of 18 USC 5318(h), 5322(b). Statutory maximum: Ten years in prison, $500,000 fine.
  • Conspiracy to structure international instrument transactions, in violation of 18 USC 371 and 31 USC 5324(c)(3). Statutory maximum: Five years in prison, $250,000 fine.

Indictment Culminated Investigation By Multiple Federal Agencies

The Department Of Homeland Security (Homeland Security Investigation Unit), Postal Inspection Service and the Internal Revenue Service investigated this case.

U.S. Magistrate Judge Karen S. Crawford found that Mr. Burrell had significant ties to Mexico, citizenship in three countries, no steady employment in the United States, the ability to access large sums of cash, and a disdain and unwillingness to comply with U.S. laws. She concluded at the August 17th bond hearing that Mr. Burrell posed a substantial risk of flight, and ordered him held without bail.    

Keep in mind that the charges and allegations by U.S. Attorneys’ Office are merely accusations and the defendant is considered innocent unless and until proven guilty. However, regardless of the outcome of this indictment you can bet that Mr. Burrell will likely have to face the Civil Division of the Internal Revenue Service.

What Should You Do?

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.

IRS Now Targeting Taxpayers With Unreported Foreign Income And Undisclosed Foreign Bank Accounts

IRS Targeting Taxpayers With Unreported Foreign Income And Undisclosed Foreign Bank Accounts

IRS offshore cannabis bitcoin investigation

IRS Establishes New Criminal Investigation Group Using Big Data Analytics to Crack Down on Offshore, Bitcoin and Cannabis Tax Evasion