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Hey, Crypto Tax Pros!

Welcome to another edition of Chain Reactions, where we break down only the most relevant happenings in the world of cryptocurrency taxation and regulation.

This week's roundup is all about navigating the ever-evolving regulatory landscape:

🌡️ The Ponzi Scheme Loss Deduction Applied to Celsius: Delve into how the IRS's Ponzi scheme loss deduction could be a lifeline for investors affected by the Celsius collapse.
⚖️ Ethereum Foundation Under Investigation: Understand the implications of the Ethereum Foundation's investigation and what it might mean for the future of Ethereum and blockchain governance.
🏛️ Wyoming's Legal Innovations for DAOs: Exploring the introduction of a new legal structure for DAOs in Wyoming and its implications.

IRS Investigation Chief Sees Uptick in “Pure Crypto Tax Crimes”

Crypto tax cheats should be worried.

One of the most common myths in this space is that the IRS can’t track crypto, so the agency is unlikely to catch you if you don’t pay taxes. Crypto investors make this mistake because they believe blockchain transactions are entirely anonymous. Well, they’re wrong.

The IRS’s Criminal Investigation Chief Guy Ficco told CNBC at this week’s Chainalysis Links event that his agency is preparing for an uptick in crypto tax fraud:

“There’s going to be a lot more charged Title 26 crypto cases this year and moving forward.”

Ficco also said he’s seen a significant increase in “pure crypto tax crimes.”

Previously, crypto’s illicit use was primarily related to more significant financial crimes like fraud, scams, and money laundering; however, it appears the agency is cracking down on crypto tax fraud that’s separate from other illegal activities.

“This could be purely not reporting income generated from crypto sales; it could be hiding the true basis of crypto, and that’s an area I anticipate an increase in,” Ficco said.

And if you think the IRS is all talk, think again because they’re already taking action.

The IRS’s First Crypto Tax Charge

According to the DOJ, a federal grand jury indicted Richard Ahlgren III in February of this year for “filing false tax returns and structuring cash deposits to avoid currency transaction reporting requirements.”

From 2017 to 2019, this Texas man reportedly made $4 million in bitcoin sales with significant gains, which he either underreported or didn’t report at all. After selling about $3.7 million in bitcoin, Ahlgren used the proceeds to buy a house. But there’s a twist—he allegedly reported a higher original purchase price for the bitcoin on his tax return, effectively reducing the capital gains he showed. Then, in the next two years, he reportedly made over $650,000 from selling bitcoin but didn’t include these sales in his tax returns for 2018 and 2019.

This indictment was the first time someone was charged “solely for failing to report or underreporting cryptocurrency earnings and gains on their tax return,” the IRS said by email.

Debunking the ‘Crypto isn’t Traceable’ Myth

Remember how we mentioned that the IRS Investigation Chief was at the Chainalysis event?

Chainalysis is a blockchain analysis company that provides software and services to detect and prevent fraud, money laundering, and other illicit activities on blockchain networks. Since 2015, the IRS has invested over $10 million in Chainalysis’s services to enhance its ability to monitor and investigate cryptocurrency transactions. The Reactor software from Chainalysis allows the IRS to effectively map and scrutinize these transactions.

Guy Ficco even mentioned this relationship when speaking with CNBC:

“My IRS special agents are phenomenal at tracing and following money, but some of the tools and applications that are needed in the crypto world — that’s where the experts at Chainalysis come in.”

The bottom line?

As the IRS continues to ramp up its capabilities with the help of advanced tools from Chainalysis, it’s clear that the push for transparency in cryptocurrency transactions is only going to intensify.

So, pay your crypto taxes.

And if you’re a tax professional, encourage your clients to pay them.

Treasury Trove of Resources

Hand-picked resources to help you dive deeper into our main story, learn crypto without confusion, and master crypto tax:

The Chainalysis 2024 Crypto Crime Report: Everything you need to know about cryptocurrency and crime (to go along with this week’s topic).
DIY Crypto Tax Course for Tax Pros: Did you struggle to prepare your clients’ crypto taxes again this year? Good news! We’re sharing everything you need to know to master crypto taxes and 3x your fees in the process—now for 40% off!
Crypto Tax Outsourcing: We constantly get calls from other CPA firms that don’t have the capacity or desire to prepare their clients’ crypto taxes but still want to help by sending them to an experienced professional. If this sounds like you, we’re announcing something big in the next issue. Stay tuned!

Crypto Tax Pro Tip Of The Week

Since we’re talking about the risk of evading crypto taxes this week, here’s how you can help your clients avoid a sticky situation with the IRS:

Step 1: Full Disclosure of Holdings

Start by ensuring that your clients fully disclose all their cryptocurrency holdings. This includes not just the coins held on exchanges but also those in private wallets, and even tokens staked in various DeFi platforms. Complete transparency is key to accurate reporting.

Step 2: Accurate Record-Keeping

Encourage your clients to maintain meticulous records of all their cryptocurrency transactions. This includes dates of transactions, amounts in crypto and fiat, fees paid, and the purpose of each transaction. Accurate record-keeping is essential for calculating capital gains or losses correctly.

Step 3: Regular Compliance Check-ins

Schedule regular meetings with your clients to review their crypto transactions and ensure compliance with current tax laws. Keeping up with the evolving regulatory landscape can help preempt any issues with the IRS before they arise.

Hope this helps!

Curated Crypto News

Want to stay on the cutting edge?

Here's what else is happening in crypto tax, policy, and markets that you should know about:

Want to stay on the cutting edge?

Here's what else is happening in crypto you should know about:

🦄 Uniswap Gets a Wells Notice: According to CoinDesk, the decentralized exchange Uniswap has received a Wells Notice from the SEC. This is a big deal because it signals increased scrutiny on decentralized finance (DeFi) platforms by regulatory bodies, which could set precedents for how DeFi is treated under US securities law. We think this means we might see tighter regulations and possibly enforcement actions against other DeFi projects in the near future.

👎 Spot ETH ETF Bad News: According to Nate Geraci on Twitter, proposals for a spot Ethereum ETF have faced setbacks. This is a big deal because it delays mainstream investment vehicles for crypto, impacting market maturity and potentially stalling wider adoption. We think this means the road to a fully recognized crypto ETF in the US will be longer and more complex than many hoped.

📜 US Senators Introduce New Stablecoin Bill: According to CoinTelegraph, U.S. Senators have introduced a new bill aimed at regulating stablecoins. This is a big deal because it represents one of the first significant legislative steps toward defining and potentially fostering a safer environment for stablecoin users. We think this means we’re moving towards a more structured and possibly innovative stablecoin market in the US, which could enhance public trust and adoption.