November 2018 JD Supra
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Government Agencies are spending money to track down Virtual Currency was published by JD Supra on 11/27/18.

Government agencies apparently believe that expertise from blockchain analytic firms is required to assist with investigating illicit activities such as tax evasion, money laundering, terrorist financing, and drug markets. 

According to a Report released by Diar – a company that analyzes virtual currency and blockchain and considered to be a prominent, independent and unbiased virtual currency publication, US government agencies like the IRS, FBI and ICE and have entered into agreements with blockchain analysis companies to the tune of $5.7Million to date

Virtual Currency (VC) Users leave a trail

VC transactions are called “Pseudo-anonymous” because although a person’s name, physical address, or email are not be found in an actual transaction, a person’s identity can be “traced” using public address info and IPs (Internet Protocol Addresses).   VC transactions operate with a secure identifier that uses a unique string of characters enabling payments to an individual or entity via Blockchain transactions.

According to IRS, understanding Blockchain technology is critically important to revealing the real identity of a VC holder.   

The Diar Report states: “The pseudo anonymity of cryptocurrencies provides intelligence agencies with a trail, which can very often be decrypted by blockchain analysis companies. That information can be used as actionable intelligence with the possibility of leading to criminal prosecution. And, the rapid rise in cumulative spending of intelligence agencies indicates that they are paying very close attention”.

The IRS is on to Crypto   

The IRS Chief of Criminal Investigation, Don Fort, has stated: “It’s possible to use Bitcoin and other cryptocurrencies in the same fashion as foreign bank accounts to facilitate tax evasion.”  IRS was clear in its Issue Number IR-2018-71 that Taxpayers are required to report their reportable VC transactions on their income tax return; that VC transactions are taxable just like transactions with other property.  It is evident that IRS continues to view VC as a potential conduit for tax evasion: “Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest.  In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return. Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000”.  IRS sentiment is that the pseudo-anonymous nature of VC transactions lend themselves to potential Taxpayer temptation to hide taxable income from IRS. 

Don’t be a victim of your own making

Taxpayers ought to understand how the IRS and other Government agencies view VC transactions.  Absent simply buying and holding VC, all VC transactions are taxable.  VC investors ought to consult with and obtain guidance from a specialized tax professional for the tax treatment of VC transactions.    Taxpayers engaged in VC transactions are required to keep adequate VC books and records.  If you are a Taxpayer with reportable gains or withholding taxes, consult with your tax specialist, even if you have not received a Form 1099.  The burden is on the Taxpayer to report voluntarily and pay taxes on gains earned.