The US Attorney General’s Cyber Digital Task Force recently issued a comprehensive report outlining the United States’ framework for enforcement against cryptocurrency-related crimes. This report explains emerging threats, enforcement challenges, and case studies. According to the task force report, tax evasion is one of the three major ways bad actors use cryptocurrency. This report adds to other reports issued in 2020 by regulators such as GAO, TIGTA, OECD where cryptocurrency taxes have been the main theme.
According to the IRS Tax Crimes Handbook, there are two kinds of tax evasion: evasion of assessment and evasion of payment.
Evasion of assessment is the more common of the two and occurs when someone willfully attempts to omit income from taxes, significantly underreports income, or overstates deductions. The Cyber Digital Task Force report points out: “not reporting capital gains from the sale or other disposition of the cryptocurrency, not reporting business income received in cryptocurrency, not reporting wages paid in cryptocurrency, or using cryptocurrency to facilitate false invoice schemes designed to fraudulently reduce business income are examples of evasion of assessments”
The report further states that these are frequently seen evasion of assessment scenarios in the cryptocurrency world. Evasion of payment occurs after the tax assessment is made and the taxpayer conceals funds or other assets that could be used to pay off the tax liability.
John McAfee indictment
The recent indictment of John McAfee exemplifies both of these scenarios. According to the Department of Justice (DOJ), McAfee “earned millions in income from promoting cryptocurrencies, consulting work, speaking engagements, and selling the rights to his life story for a documentary. From 2014 to 2018, McAfee allegedly failed to file tax returns, despite receiving considerable income from these sources” (evasion of assessment). Further, “McAfee attempted to evade the IRS by concealing assets, including real property, a vehicle, and a yacht, in the names of others” (evasion of payment).
Tax evasion is a serious offense. Upon conviction, wrongdoers can be fined up to $100,000 ($500,000 for corporations) or imprisoned up to five years plus the cost of prosecution.
More focus on crypto taxes than ever before
Local and global regulators have paid a tremendous amount of attention to the cryptocurrency world in 2020, specifically with a focus on taxes. This is a notable difference compared to previous years where regulators primarily focused on security fraud concerns related to Initial Coin Offerings (ICOs). At the beginning of the year, the Government Accountability Office (GAO) issued a report suggesting the IRS improve cryptocurrency tax enforcement efforts. This was reinforced again by the TIGTA report issued in October. And just this week, the OECD recommended tax authorities all over the world to form a uniform effective tax policy for cryptocurrencies. Governments everywhere are waking up to cryptocurrency taxes, so make sure that your filings are up to date.
Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.