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IRS Launches Operation Hidden Treasure, An Effort to Track Down Cryptocurrency Tax Evasion

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    First reported by Forbes, the IRS announced at a meeting of the Federal Bar Association that they have launched Operation Hidden Treasure with the intention of weeding out those taxpayers who have earned income through the trading of virtual currencies, but have not reported their income on their federal income tax return. This new revelation should cause concern for those individuals or businesses that have earned a profit by trading in bitcoin or other types of cryptocurrency. If you have earned a profit from the sale of virtual currency and have not reported it on your tax return, you should consult with a cryptocurrency tax attorney to determine the best way to come into compliance before being targeted by Operation Hidden Treasure.

    Note: Cryptocurrency trades of non like coins are currently taxable in the calendar year they occur even if no fiat changed hands. I.E., trade of 5 bitcoin purchased for $20 in total for 3 alt valued at $40 in total results in a $20 capital gain. If held for less than a year this ordinary income, if held for over a year, long term capital gain. Code section 1031 does not apply!

    Working with the Fraud Enforcement Office, IRS Criminal Investigations will aim at getting ahead of those taxpayers who have engaged in tactics to avoid reporting income earned from the trading of virtual cryptocurrency. A representative from the IRS announced that specially trained agents will look for “badges of fraud” as a part of Operation Hidden Treasure.

    Although details about the operation were relatively broad, the IRS indicated that they would be looking at common tax evasion techniques such as structured cash transactions (dealing in amounts of cash less than $10,000 to avoid reporting requirements) and the use of nominee or shell entities to avoid reporting on an individual basis. Operation Hidden Treasure could land a lot of cryptocurrency investors in the hot seat.

    Taxpayers Are Already Confused Over Cryptocurrency Disclosure Requirements

    The recent announcement from the IRS comes at a time when some taxpayers have found themselves confused about their obligation to report virtual currency transactions on their tax return. The first page of the Form 1040 for 2020 specifically asks taxpayers to indicate whether they had received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency. This question left most cryptocurrency investors believing that they needed to answer in the affirmative. But in a recently released FAQ, the IRS indicated that if a taxpayer’s only activity was buying virtual currency with real currency, the above question did not need to be answered “Yes”.

    Virtual currency has long been an item of confusion for the IRS and for taxpayers looking to comply with U.S. tax laws. In 2014, the IRS released Notice 2014-21 clarifying that for federal income tax purposes, cryptocurrency was not money, but instead, property. Thus, when a taxpayer purchases virtual currency, they take a cost basis in the asset. When the asset is sold or otherwise disposed of, any amount received more than their basis (what was paid to acquire the crypto) is treated as capital gain. Nonetheless, there have been various questions about how the intricacies of virtual currencies should be treated for tax purposes, such as hard forks.

    Coming into Virtual Currency Compliance

    Without a doubt, the current state of the taxation of cryptocurrency is confusing, at best. If you have engaged in cryptocurrency transactions and are unsure about how your activity should be reported for tax purposes, it would be wise to seek the assistance from a cryptocurrency tax attorney. Likewise, if you have earned substantial income from the sale of virtual currency but did not report it on your annual tax filings, it is in your best interest to contact an experienced tax defense attorney to ensure that you are in full tax compliance before Operation Hidden Treasure catches up to you.

    Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-reported gains in cryptocurrency) coupled with affirmative evasion of U.S. income tax on domestic or offshore income) 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!

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