Cryptocurrency is a relatively new way of investing that the legal field and taxing authorities have been slow to catch up to. As more and more people are using, buying, and exchanging cryptocurrency, certain risk factors are coming to light that you should be aware of.
Recently, in May of 2024, the Joint Chiefs of Global Tax Enforcement, known as J5, released information about risk factors regarding cryptocurrency that financial and banking institutions should be aware of. There is shockingly little oversight, and many people use crypto for shady dealings and criminal activity. Money laundering, tax evasion, and various cybercrimes are frequently connected with crypto. These risk factors identified by J5 include asset layering, geographic locations, high-risk counterparties, unknown transaction recipients, and certain online behaviors that should raise suspicions. If you invest in crypto, you can talk to our team about how to avoid getting mixed up in someone’s shady financial dealings.
Call our Dual Licensed Tax Attorneys and CPAs at Tax Law Offices of David W. Klasing at (800) 681-1295 for assistance.
What is Cryptocurrency and What Makes it So Risky?
Cryptocurrency, or “crypto” as it is often called, is a virtual or digital currency that exists in decentralized networks using blockchain technology. Because cryptocurrency is secured by cryptography, it is almost impossible to counterfeit. Crypto is not issued by some centralized authority, and it is largely free from government oversight or interference. If all this sounds very confusing, you are not alone. The fact that cryptocurrency is so new and complex is part of what makes it somewhat risky.
There are various pros and cons when it comes to crypto. Many in the financial field believe crypto is the next frontier of economics. Others are more wary and advise against getting tangled up in something that is hard to wrap your head around and basically unregulated. There are also criminal tax implications where willful noncompliance is an issue.
Because there is very little regulation when it comes to buying and exchanging crypto, many people use it for nefarious endeavors. If you are not careful, you might be swindled by someone in the crypto market. Worse still, they might use you to commit financial and cybercrimes. You should speak to our Dual Licensed Tax Attorneys and CPAs before buying or investing in cryptocurrency.
Potential Criminal Activity Tied to Cryptocurrency Assets
As more and more people use cryptocurrency, governments, financial institutions, and economic experts are weighing in. J5 has identified several risk factors that you should be on the lookout for when dealing with cryptocurrency.
Money laundering is becoming an increasingly serious concern among cryptocurrency users and the government. Money laundering essentially involves illegal activities that make it hard to trace illegally obtained funds back to their criminal origins. It is common in the world of organized crime. People sometimes use cryptocurrency to hide illegally obtained money from the authorities.
Tax evasion is another big problem. Since there is very little governmental oversight of cryptocurrency, it is easy for people to hide money from the government to avoid paying taxes. It might be possible to tie up money and assets in crypto, making it difficult or seemingly impossible for the IRS to tax it.
Finally, crypto can be used to commit all sorts of cybercrimes. Crypto allows investors, buyers, and traders to remain somewhat anonymous, and there is a high level of privacy in many crypto transactions. This makes it all too easy for people to engage in fraud. Some people are simply scammed out of money, while others have their identities stolen and used to mine more cryptocurrency.
Risk Factors of Cryptocurrency Assets as Identified by J5
How can we avoid the dark side of cryptocurrency? If you are keen on investing but do not fully understand how cryptocurrency works, you should consider the following risk factors identified by J5.
Cryptocurrency Asset Layering
Cryptocurrency is often used in money laundering schemes. One way that would-be criminals engage in money laundering is by asset layering. This is a tactic where assets and transactions are made purposefully intricate and difficult to follow. This means that tracing illicit funds back to their criminal origin may be extremely difficult. If you are engaging in some way with cryptocurrency and notice unnecessarily convoluted transactions, this should be a red flag.
Geographic Locations
Certain places tend to experience higher levels of fraud, cybercrimes, and other offenses involving crypto. This is often because these jurisdictions have especially weak regulatory systems or higher levels of corruption. You should be careful if you notice crypto coming from IP addresses tied to high-risk geographic locations or jurisdictions. If you are unsure whether a geographic location is high risk, speak to our team.
High-Risk Counterparties
The other person involved in a crypto transaction or exchange is referred to as the counterparty. If you notice the counterparty in a particular transaction or set of transactions is known to be high-risk or untrustworthy, you should be on high alert. Avoid doing crypto transactions with them if possible. A high-risk counterparty might be vague about their identity or conceal details about their cryptocurrency assets.
Unknown or Obscured Transaction Recipients
One way you might be able to tell that something shady is going on in your crypto dealings is that transaction recipients are unknown or obscured. Be careful if you are unsure who is on the other end of a transaction. People often conceal their true identity or plans when their plans are not exactly on the up-and-up.
J5 recommends enforcing strict “know your customer” (KYC) techniques to avoid getting involved with crypto criminals. If you try to get to know the transaction recipient and they seem to dodge questions or refuse to provide details, you should avoid them and secure your finances and sensitive information.
Certain Online Behaviors
How other parties dealing in crypto behave on the internet might be a major indicator of whether they engage in illicit cryptocurrency dealings. For example, if you know that a transaction recipient or counterparty is connected with dark web activities, you might want to avoid engaging with them. Perhaps you notice that crypto is added or withdrawn from digital addresses or wallets with links to dark web markets or suspicious gambling websites. If something seems off or suspicious, exercise caution.
Speak to Our Tax Attorneys and CPAs for Help Now
Call our Dual Licensed Tax Attorneys and CPAs at Tax Law Offices of David W. Klasing at (800) 681-1295 for assistance.
If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-reported taxable crypto transactions coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before 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, Kovel CPAs 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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