Penalties For Cryptocurrency Tax Evasion

When it comes to the legal repercussions of tax evasion, there are no special exemptions just because cryptocurrency is involved, as opposed to physical assets.

Tax evasion has always been, and will continue to be, a very serious offense – involving both criminal and civil penalties.

In March 2021, it was announced that the IRS’ Civil Office of Fraud Enforcement and Criminal Investigation unit would be working closely together to investigate cryptocurrency tax fraud.

Later in the year, Congress also agreed to provide the IRS with more powers, allowing them to investigate cryptocurrency transactions. Cryptocurrency brokers must now track and report transactions to the IRS, putting the onus on them rather than investigators trying to look back at records after the fact.

It is clear that complete transparency is now on the agenda.

To give these decisions some context, the IRS’ yearly report into their criminal investigations included some very stark figures.

The report from 2021 stated that of all the assets seized by the IRS throughout the year, a massive 93% was cryptocurrency.

CIVIL PENALTIES

We have already discussed the IRS’ abilities to carry out audits and trace transactions involving cryptocurrency which haven’t been declared.

If they come across income or profits which have not been declared, a penalty of 75% will be levied. This payment of course is paid in addition to the tax that should have been paid in the first place, resulting in the tax payable almost doubling.

To levy this fine, the IRS must show deliberate fraud ­– that is to say the individual knew what they were doing and had the intent to deceive.

However, that bar is not actually as high to meet as it sounds. When cryptocurrency was first taking off, the IRS did take a fairly lenient approach. They sent letters to individuals to remind them of the tax laws and explain what was necessary in layman’s terms.

Now, though, it’s clear that they believe enough time has passed for those who deal in cryptocurrency to be up to date with the law, and their responsibilities and lack of knowledge is no longer a valid excuse for not paying.

Criminal Penalties

In addition to the sometimes huge expense of a civil fine, failing to be completely honest and transparent on a tax return is also a criminal offense. Again, prosecutors must show that the individual was aware of their dishonesty and had the intent to deceive authorities (U.S.C. §§ 7201 (tax evasion), 7207 (fraudulent return).

Genuine mistakes, such as making incorrect calculations or completing the wrong form do not meet the criminal threshold.

It is also not a criminal offense not to be able to pay tax if you can show that you are genuinely down on your luck. It goes without saying that if you are investigated, though, an expert attorney must be consulted as soon as possible to build a defense.

If found guilty of tax fraud, the sentences range from yet another expensive fine to up to five years in prison.

Two recent cases highlight how seriously the IRS and federal prosecutors are taking these crimes, and the mess that trying to outsmart the law can land you in.

Cryptocurrency Tax Evasion – Case Study 1

In August 2021, two founders of a cryptocurrency company were charged with tax evasion. They both eventually plead guilty and are awaiting their sentences, which will probably involve jail time.

The company in question was Bitqyck. Based in Dallas, they offered two digital assets – Bitqy and BitqyM. Bitqy was specifically marketed as being a perfect option for “those who missed out on Bitcoin”.

The owners, Mr. Bise and Mr. Mendez, raised a huge amount of money from investors – over $20 million to be precise — selling Bitqy tokens which allegedly offered buyers an investment in the mining of future tokens. It goes without saying that this was not the case.

Instead, Mr. Bise and Mr. Mendez used the money to fund very lavish lifestyles. This misrepresentation is illegal.

The owners were also prosecuted for tax evasion because they did not declare their cryptocurrency income to the IRS, believing that the transactions on their exchange were anonymous, private, and could not be traced.

For two consecutive years, Mr. Bise underreported his income. He claimed that he had a tax loss of $371,278. In the same two years, Mr. Mendez also underreported his income claiming a tax loss of $311,155.

The following year, Bitqyck did not file corporate tax returns, even though the company had collected more than $3.5 million in sales.

IRS investigators have several courses of action to audit those who own and trade in cryptocurrency and are making a huge effort these days to ensure nobody slips through the net.

The Acting US Attorney General Chad Meacham was quoted saying, “Transacting in virtual currencies does not exempt businesspeople from paying income taxes. These crypto-savvy defendants exploited an emerging technology, lying to their investors, pocketing the proceeds, and concealing the income from the IRS.”

Once again this reinforces the point that tax evasion involving virtual currency is not different from “plain old tax evasion” and that the IRS is putting on the pressure.

So what happened to the owners of Bitqyck? First, there was a civil case. They had to pay a penalty to the Securities & Exchange Commission (SEC) for their misrepresentation to investors and the fact that their digital asset exchange had not been officially registered.

The sum of that penalty was $8.3 million. The criminal case is still ongoing, but each of the founders faces up to five years in prison.