Bitcoin Tax Evasion Program Deployed at IRS

A CPA who specializes in crypto taxation released a slide presentation last week. It was allegedly part of a training session for agents in the IRS’s Criminal Investigation Division. Put together by James Daniels, IRS-CI Cyber Crimes Program Manager, the slide show was largely about helping agents better understand cryptocurrency technology so they could deal with bitcoin tax evasion. However, the content also spells out an uneasy future for legitimate bitcoin and crypto users in the US.

Laura Walters, also known as @cryptotaxgirl, shared the slideshow on Twitter recently. Along with her many comments on the topic, she wrote:

“…what you need to know is that the IRS is working HARD to identify criminal tax cases involving cryptocurrency.”

Director of Communications for the IRS Criminal Investigation Unit, Justin Cole, said they presented the slideshow to Agency staff members during a World Bank event held in Washington D.C. a few weeks ago 

Let’s start out with a summary of the slideshow’s contents:

What’s in the IRS Bitcoin Tax Evasion Presentation?

The slideshow is 188 pages long at first glance. This would make most readers balk at the time required for reading it. But the presentation is full of multiple page-long duplicate and blank pages, so it’s more like 100 pages, if that. Furthermore, a major portion of the slides are simply teaching about blockchain technology. They included detailed descriptions of:

  • Everything about bitcoin, including how to buy, mine, mix, trade, fork, etc.
  • An extensive lesson on blockchain technology.
  • Details about Litecoin, Monero, Bitcoin Cash and Stellar, but no Ethereum.
  • A big section devoted to Ripple.
  • Keys, wallets, off-chain transactions, exchanges, and ICOs.
  • Oddly, a detailed history of bitcoin forks.
  • A long section about the Dark Web and Tor.

After all of this, in a surprising twist, we find a summary of the benefits of bitcoin: (p. 85)

IRS Lists the Benefits of Bitcoin

  • Private key ownership
  • Ability to create your own money by mining it
  • Available worldwide with no currency conversion rates
  • Completely mobile
  • Fast – can be instantaneous if there are zero‐confirmation transactions or about 10 minutes otherwise
  • Cheap transactions for consumers and merchants
  • No chargebacks
  • Bitcoin isn’t inflationary – it’s deflationary
  • Anonymity

Before the presentation went into how IRS Crimes Agents would detect bitcoin tax evaders and other crypto users, Daniels gave a summary of cryptocurrency tax implications:

  • Receiving virtual currency as payment for goods and services is considered income at its fair market value on the day of receipt.
  • Virtual currencies paid to independent contractors and employees is income.
  • Miners realize gross income at receipt of their coin.
  • When mining is part of a trade or business, and the taxpayer is not an employee, the taxpayer will be subject to self‐employment tax on the mining income.

What is the IRS planning for bitcoin tax evaders?

Now let’s get to the nitty-gritty. What the IRS seems to be planning for monitoring bitcoin is not directed at just tax evaders. The slide presentation had a focus on “determining” which users were evading taxes in the first place.

It’s important to understand that government officials are feeding the press with the idea that crypto is mostly for criminal use. Furthermore, it’s almost as though the IRS considers bitcoin users essentially bitcoin tax evaders

What this has led to is a developing policy of “determination.” Really, the gist of this slideshow is to show how to flex the power of the IRS in finding out who exactly is participating in cryptocurrency. To ‘determine’ who is evading bitcoin taxes, the presentation suggests Agents use the following methods:

  • Interviews
  • Open source searches
  • Surveillance
  • Grand Jury Subpoenas Issued to companies like Microsoft, Apple, and Google for a “complete application download history.”
  • Evaluating apps as to whether they can transmit or otherwise allow bitcoin transactions.
  • Interviewing those who know the financial habits of the subject, “including, but not limited to, bank tellers, family, and friends” as well as establishments they frequent that accept bitcoin.
  • The agents can monitor Facebook, Twitter, and other social media outlets.
  • A Grand Jury Subpoena can also be directed at all of the subject’s financial accounts.
  • Tracking bitcoin transactions and triangulating data.

The final bullet point deserves its own paragraph: 

“Notification of the Subject about the obtainment of information regarding their use of bitcoin may be detrimental to the seizure of any bitcoin balance.” So before the ball is rolling with a bitcoin tax evader investigation, the bitcoin user must learn that the IRS can seize their crypto.

Ending Notes

It was heartening for US bitcoin fans to see the understanding of bitcoin’s benefits laid out by the IRS. But the government’s slant of criminality towards all crypto users is misinformed and unnecessary. Most American crypto users pay their taxes just like anyone else. Yet, will they still be part of the intense “determination” process that criminals face? We hope that run of the mill US crypto owners will not be a target of bitcoin evasion investigations.

Moreover, taxing crypto purchases as though virtual currencies are assets is severely outdated and overly cumbersome to report for taxpayers. As more and more cryptos become mainstream and additional merchants accept them, it would be helpful to remove that designation.

The Need for Update Tax Guidance

Furthermore, having updated crypto tax guidance in the US would go a long way in making the tracking of crypto transactions easier for users. The last guidances on the topic were in 2014 and then one in 2019 that really only talked about forks. As you can imagine, with the sheer mass of innovation happening in the crypto realm, Americans need a new and relevant framework. The IRS could have less bitcoin evasion problems with clear guidelines.

Timely Quotes

With all that to sink in, let’s leave off with a few quotes from the extensive slideshow, as well as some independent experts:

“If it becomes clear that the subject of an investigation owns bitcoin, all wallet addresses and balances should be identified.” – IRS Crimes Unit Presentation

“The reliability of this approach has yet to be extensively tested. As such, it may not be advised to send a Subpoena for records if not critical.”  – IRS Crimes Unit Presentation

“A grand jury subpoena in a criminal tax investigation is similar to an IRS summons, only worse.” 

And finally, parting words for US crypto hounds on how to stay away from bitcoin tax evasion from Twitter’s @cryptotaxgirl:

  • Buying crypto is not a taxable event.
  • Selling crypto for fiat is a taxable event.
  • Trading one coin for another is a taxable event.
  • Buying goods or services with crypto is a taxable event.
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