Do not think that just because digital exchanges are not broker-regulated by the IRS and digital exchanges are not obligated to issue a 1099 form reporting transactions, that your crypto currency transactions will always be a secret. The Federal government is cracking down on non-compliant traders and pursuing criminal prosecution when it feels its appropriate.

The IRS issued a “John Doe” summons to Coinbase, perhaps the largest crypto currency exchange, seeking transactions from 2013 to 2015, suggesting the Service will pursue an aggressive enforcement position on crypto currency exchanges. On November 28, 2017, the Federal District Court for the Northern District of California entered an order requiring Coinbase to provide the IRS with data on many of its clients who engaged in transactions exceeding $20,000.

Criminal Charges You Could Be Facing:

18 U.S.C. §1956 – Laundering Of Monetary Instruments

18 U.S.C. § 1956(a) defines three types of criminal conduct: domestic money laundering transactions (§ 1956(a)(1)); international money laundering transactions (§ 1956(a)(2)); and undercover “sting” money laundering transactions (§ 1956(a)(3)). Crypto currency traders and marijuana-related businesses need to be aware of domestic money laundering transactions (§ 1956(a)(1)).

To be criminally culpable under 18 U.S.C. § 1956(a)(1), a defendant must conduct or attempt to conduct a financial transaction, knowing that the property involved in the financial transaction represents the proceeds of some unlawful activity, and the property must in fact be derived from a specified unlawful activity.

Violations of § 1956 have a maximum potential 20-year prison sentence and a $500,000 fine or twice the amount involved in the transaction, whichever is greater. There is also a civil penalty provision in § 1956(b) which may be pursued as a civil cause of action. Under this provision, persons who engage in violations of any of the subsections of 1956(a) are liable to the United States for a civil penalty of not more than the greater of $10,000 or the value of the funds involved in the transaction.

Other criminal charges:

• Conducting an unlicensed money transmitting business, in violation of 18 USC 1960. Statutory maximum:  Five years in prison, $250,000 fine.

• Failing to maintain an anti-money laundering program, in violation of 18 USC 5318(h), 5322(b). Statutory maximum: Ten years in prison, $500,000 fine.

• Conspiracy to structure international instrument transactions, in violation of 18 USC 371 and 31 USC 5324(c)(3). Statutory maximum: Five years in prison, $250,000 fine.

• Willfully attempt in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof, in violation of 26 USC 7201. Five years in prison, $100,000 fine ($500,000 in the case of a corporation).

Recent Convictions By Federal Authorities

Joseph Kim of Illinois convicted for misappropriating in Bitcoin and Litecoin on November 13, 2018.  Sentenced for 15 months in prison for transferring at least $600,000 of the firm’s Bitcoin and Litecoin to his personal accounts to cover his crypto trading losses on foreign exchanges.

Thomas Mario Costanzo of Arizona convicted on five charges of money laundering on March 28, 2018.  Sentenced to 41 months in jail for laundering drug money with bitcoin.

What Should You Do?

The IRS is always interested in teaming up with other Federal agencies in their investigations of non-compliance with the laws and with only several hundred people reporting their crypto gains each year, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns. Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. get you set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability.