Cryptocurrency and other virtual currencies have presented multiple issues for the U.S. Department of Justice (DOJ) that seeks to regulate the use of these currencies. Some of the main concerns of the DOJ is that if left largely unregulated, cryptocurrencies have the potential to impact public safety or national security. This has led to a recent DOJ publication entitled “Cryptocurrency: An Enforcement Framework,” which outlines how the agency will handle tax payments and other related issues. If you need information about how this DOJ publication could affect your shares in cryptocurrencies, consider consulting with our dually licensed California Cryptocurrency Tax Attorneys and CPAs today. Cryptocurrency regulations are quickly changing in the United States, and you should have knowledge of how these new laws may impact your tax reporting obligations. The Tax Law Offices of David W. Klasing is here to present you with information about how the DOJ will enforce tax payments on cryptocurrencies.
Outline of DOJ Cryptocurrency Tax Enforcement Plan
On October 8, 2020, the DOJ published “Cryptocurrency: An Enforcement Framework” (Framework) to address enforcement issues with cryptocurrencies. The DOJ believes that cryptocurrencies could have a plethora of uses, such as decreasing the costs of financial transactions. However, they have also stated that there is plenty of potential for abuse of cryptocurrencies by using them to fund illegal activities.
The DOJ has outlined three distinctive parts to their Framework publication:
- A threat overview discussing the legitimate and illegal uses of cryptocurrencies.
- A section that deals with laws and regulations that will pertain to cryptocurrencies.
- Current and future challenges and strategies needed to address possible criminal activity involving cryptocurrencies.
Illegal Uses of Cryptocurrencies
As you likely know, cryptocurrencies allow owners of the virtual currency to cut out financial institutions to make direct transactions with other people or organizations. As cryptocurrency is not controlled or centralized by a financial institution, there is a high level of anonymity that could be afforded to financial transactions. For many, this is simply another benefit of trading cryptocurrency, while for others, this may be a way to conceal criminal activity.
The DOJ publication has identified three common categories of illegal uses of cryptocurrencies that they want to regulate.
The first category is the use of cryptocurrency-related to the commission of crimes. For example, a person could trade cryptocurrency to commit the following crimes:
- Funding terrorist activities
- Purchasing or selling narcotics and other drugs
- Buying unregistered weapons from dark web sellers
- Securing servers to commit cybercrimes
- Sales and purchases of child pornography material
The next illegal cryptocurrency use identified by the DOJ is using virtual currency to launder money or avoid tax reporting requirements. For instance, a person could take advantage of the anonymity of cryptocurrency transactions to underreport their tax liability.
Finally, the DOJ also wants to tackle crimes that attack the cryptocurrency marketplace. Hacking online platforms that exchange cryptocurrencies or lying to potential cryptocurrency investors are some examples of crimes that target the cryptocurrency marketplace.
DOJ Enforcement Options for Cryptocurrency Tax Reporting
The DOJ has a broad range of laws available to them that could be used to enforce tax reporting on cryptocurrencies. A taxpayer who does not properly report their activities regarding the ownership and trading of cryptocurrencies could end up facing severe fines and possibly multiple years in prison.
The Bank Secrecy Act (BSA) is one way that the DOJ will enforce tax payments on cryptocurrencies. Under new rules proposed by the Financial Crimes Enforcement Network (FinCEN), banks and money service businesses (MSBs) would be required to keep records regarding cryptocurrency transactions and the identities of people engaging in those transactions. This regulation would eliminate many of the concerns that would surround the anonymity of cryptocurrency transactions.
However, the BSA is not the only enforcement tool at the disposal of the DOJ. The DOJ could use the following federal regulations to impose monetary and criminal penalties upon those who avoid tax payments on cryptocurrencies:
- Wire fraud
- Securities fraud
- Mail fraud
- Identity theft and fraud
- Possession and distribution of counterfeit items
- Civil forfeiture of assets
- Operation of an unlicensed money transmitting business
- Child exploitation activities
This is not a complete list. If you believe that you could be subject to tax and criminal penalties for failing to make tax payments for cryptocurrencies, it would be prudent to seek legal representation from a California tax lawyer.
As mentioned, there are other strategies that the DOJ plans to employ to decrease the instances of illegal cryptocurrency use. As the technology surrounding the use of cryptocurrencies continues to change, the DOJ has vowed to continue to adapt to new illicit practices. This also means that the DOJ will be more vigilant when it comes to prosecuting taxpayers and criminals that use cryptocurrencies for illegal purposes.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on domestic or offshore income involving cryptocurrency) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!
Contact Our California Tax Law Attorneys to Discuss DOJ Tax Payment Enforcement Policies for Cryptocurrencies
There is a lot of information to unpack from the DOJ’s publication regarding the enforcement of cryptocurrency taxes, and our Tax Law Attorneys could help guide you through these changes. The Tax Law Offices of David W. Klasing employs tax professionals who intricately understand how cryptocurrency regulations could alter a taxpayer’s reporting requirements. To learn about your options for a confidential consultation to confer about cryptocurrency tax regulations, you could call us at (800) 681-1295. Our website offers more information about consultation options.
Questions and Answers About Bitcoin
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- What Happens if the IRS Thinks I’m Using Bitcoin to Commit Tax Evasion?
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