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cryptocurrency

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The evolution of cryptocurrency and the blockchains that power it has taken yet another step forward with the creation of NFTs or non-fungible tokens. NFTs have been in the news quite a lot lately, garnering support from some of the biggest names in art, sports, and technology. However, with NFT marketplaces come potential tax liabilities.

NFTs aren’t just for art anymore

On this episode of the Taxgirl podcast, Kelly is joined by Ben Weiss, the CEO of Coinflip — the world’s leading Bitcoin ATM operator — to talk about NFTs. Kelly and Ben discuss NFT meaning, how big brands like Nike are beginning to use NFTs, the anonymity of a blockchain, regulations and tax liabilities users could face, and the future of NFTs.

Listen to Kelly and Ben talk about NFTs:

  • What is an NFT
  • NFT meaning
  • Establishing a value for an NFT
  • Mark Cuban’s role with NFTs
  • Nike using the blockchain to verify authentic sneakers
  • Tennis player Oleksandra Olinynykova selling her arm as an NFT
  • Residual payments on NFTs
  • Automated NFT marketplace tracking for taxes
  • Tax considerations of using an NFT marketplace
  • The anonymity of the blockchain
  • The percentage of cryptocurrency tied to elicit activity
  • Regulations businesses like Coinflip face
  • The future of NFTs

More about Kelly Phillips Erb:

Kelly is the creator and host of the new Taxgirl podcast series. Kelly is a practicing tax attorney with considerable experience and knowledge. She works with taxpayers like you every day. One of the things that she does is help folks out of tax jams, and hopefully, keep others from getting into them.

Kelly’s Website – Taxgirl

Coinflip – Website

Ben Weiss – Instagram

Ben Weiss – Twitter

Cryptocurrency is once again making big waves in the news thanks to Bitcoin and Dogecoin riding high, Tesla accepting payment in the form of Bitcoin, and the IRS asking about it on your tax forms. But without proper guidance from the IRS, there are still plenty of questions surrounding crypto taxes and the specifics of cryptocurrency compliance. 

Crypto taxes are once again a hot-button topic this tax season

On this episode of the Taxgirl podcast, Kelly is joined by Wendy Walker. As the solution principal at Sovos Compliance, Wendy has helped lead the go-to-market strategy focused on growing the tax and regulatory line of business. Kelly and Wendy discuss the latest information on crypto taxes, including the IRS’ recent cryptocurrency FAQ, the Common Reporting Standard, and cryptocurrency compliance. 

Listen to Kelly and Wendy talk about crypto taxes:

  • Where to find the cryptocurrency taxes question on your tax form
  • Cryptocurrency FAQ
  • How many users does a cryptocurrency market like Coinbase have?
  • Coinbase John Doe summons
  • Concerns over what gets reported to the IRS
  • 1099-K and 1099-B
  • The lack of guidance on crypto taxes by the IRS
  • What should taxpayers think about if they have cryptocurrency
  • What records do you need to keep for your cryptocurrency taxes
  • What is the Common Reporting Standard
  • Expanding the Common Reporting Standard for crypto taxes
  • What taxpayers should do about past reporting discrepancies
  • Where to find up-to-date advice on crypto taxes and cryptocurrency compliance

More about Kelly Phillips Erb:

Kelly is the creator and host of the new Taxgirl podcast series. Kelly is a practicing tax attorney with considerable experience and knowledge. She works with taxpayers like you every day. One of the things that she does is help folks out of tax jams, and hopefully, keep others from getting into them.

Kelly’s Website – Taxgirl

Wendy Walker – LinkedIn

Wendy Walker – Email

Sovos – Website

For years, Treasury has advised taxpayers that virtual currency is not required to be reported on the Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts, or what used to be called the FBAR. That appears to be changing. FinCEN has now announced an intention to amend the rules to require FBAR disclosures for virtual currency like Bitcoin.

Currently, United States persons are required to file an FBAR if they hold a financial interest in or signature authority over at least one financial account located outside of the United States if the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year. The reporting obligation may exist even if there’s no associated taxable income. If you fail to file an FBAR, you can be socked with some pretty hefty penalties: up to $10,000 per violation for non-willful violations and up to $100,000 or 50% of the balance in the account for willful violations.

For purposes of the FBAR, a financial account is defined as a bank account, such as a savings, demand, checking, deposit, time deposit, or any other account maintained with a financial institution or other person engaged in the business of a financial institution. It also includes an account set up to secure a credit card account; an insurance policy having a cash surrender value is an example of a financial account; securities, securities derivatives, or other financial instruments account; mutual funds and and similar accounts in which the assets are held in a commingled fund and the account owner holds an equity interest in the fund.

(You can find out more about FBAR requirements – as they stand now – in a recent edition of the Taxgirl podcast here.)

In 2014, the Internal Revenue Service (IRS) was still trying to wrap its head around Bitcoin. That year, it issued guidance to taxpayers on how to treat Bitcoin – and other virtual currency – for federal income tax purposes. Saying that “virtual currency is not treated as currency that could generate foreign currency gain or loss for US federal tax purposes,” the IRS determined that Bitcoin and similar currencies are to be treated as a capital asset. You can read Notice 2014-21 here (downloads as a PDF).

(You can find out more about cryptocurrency – and how it’s taxed – on the Taxgirl podcast here.)

But Notice 2014-21 didn’t specifically mention the FBAR. And the income tax treatment of assets is not the same as the reporting requirements for FBAR purposes.

On June 4, 2014, Rod Lundquist, a senior program analyst for the Small Business/Self-Employed Division, was asked about this issue and confirmed that, for FBAR purposes, Bitcoin was not reportable “…not at this time.” He followed up by saying that “FinCEN has said that virtually currency is not going to be reportable on the FBAR, at least for this filing season.”

The IRS further confirmed that treatment, stating, “The Financial Crimes Enforcement Network, which issues regulatory guidance pertaining to Reports of Foreign Bank and Financial Accounts (FBARs), is not requiring that digital (or virtual) currency accounts be reported on an FBAR at this time but may consider requiring such accounts to be reported in the future. No additional guidance is available at this time.”

Now, FinCEN is taking a different tack. On December 30, 2020, FinCEN published a short notice. That notice, FinCEN Notice 2020-2, reads:

Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. (See 31 CFR 1010.350(c)). For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency). However, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.

(Emphasis is mine.)

You can read the notice here (downloads as a PDF).

It’s clear that the IRS is getting serious about cryptocurrency: a question about use of cryptocurrency now appears on Form 1040.

So far, neither Treasury nor FinCEN has issued further comment about the notice, including any indication about when the timing will kick in.

The FBAR is an annual report, due on the same day as your tax return, which is normally April 15 (plus any extensions). It’s a busy year for the IRS – especially with form changes as a result of the CARES Act and the recent spending/stimulus/extenders bill – so I’m not convinced we’ll see a change that goes into effect retroactively for the tax year 2020 and reportable in 2021. But if we’ve learned anything over the past year, it’s that anything can happen. Stay tuned.

Cryptocurrency is a digital or virtual currency. Essentially, it was created to offer a system to enable peer to peer payments without the need of a third party, offering security and a measure of anonymity. For federal income tax purposes, it’s treated as a capital asset. And what you don’t know could hurt you since recently the IRS has made it a priority to keep up with cryptocurrency transactions. Kelly invites David Kemmerer to help guide taxpayers who are using or may be interested in using cryptocurrency.

Staying Up to Date on Cryptocurrency Regulations

David Kemmerer is the co-founder and CEO of Crypto Trader.Tax, the leading cryptocurrency software. David helps to explain the foundation of cryptocurrency, and where it is headed. David also shares the new and upcoming involvement that the IRS has in store and how to properly track and manage your cryptocurrency to avoid dilemmas. Not only does David inform taxpayers of what is coming, he also discloses the benefits, values, and stigma concerns behind cryptocurrencies. If you are currently a user of cryptocurrency or just have interest, this podcast will give you what you need to know about cryptocurrency and tax.

Listen to Kelly and David Discuss Cryptocurrency and more such as:

  •  What is Cryptocurrency and how it is used?
  • Where does Crypto get its value?
  • Capital Gain transactions with your taxes through Cryptocurrency
  • IRS Involvement, views and how to handle your taxes
  • What to be aware of when utilizing Cryptocurrency
  • Coin Base Confusion
  • How the IRS can detect if you do, or do not comply
  • 1099 reports being implemented
  • Exchange level and blockchain enablement tools
  • Why the IRS has their eyes on Cryptocurrency and the stigma behind it
  • How the benefits outweigh the cons of Cryptocurrency
  • How to Buy and manage Bitcoin or Cryptocurrency
  • How to keep track of your exchanges
  • Does the IRS involvement take away from Cryptocurrency purposes?

About Kelly:

Kelly Phillips Erb created and hosts the Taxgirl podcast, your home for tax news, tax info and tax policy. In each episode, she shares conversations about taxes, money and the choices we make. Kelly is a practicing tax attorney who works with taxpayers like you every day. She helps folks out of tax jams, and hopefully, keep others from getting into them.

You can find out more about Kelly here and you can follow her on Twitter, Facebook, Instagram, and Linkedin.

Kelly’s Website – Taxgirl

David Kemmerer – LinkedIn

David’s Company – CryptoTrader.Tax

David’s Email- David@cryptotrader.tax

Bitcoin

When the Internal Revenue Service (IRS) signaled that it was getting serious about cryptocurrency, the agency wasn’t kidding. The IRS is now offering cash to anyone who can “reliably produce useful results on a variety of real-world CI cryptocurrency investigations involving Monero and/or Lightning.” That’s right: they are looking for code crackers.

The IRS has made no secret that it believes that taxpayers are not correctly reporting cryptocurrency transactions. An IRS dive into the data showed that for the 2013 through 2015 tax years, when IRS matched data collected from forms 8949, Sales and Other Dispositions of Capital Assets, which were filed electronically, they found that just 807 individuals reported a transaction using a property description likely related to bitcoin in 2013; in 2014, that number was only 893; and in 2015, the number fell to 802.

Cryptocurrency Compliance Efforts

A new cryptocurrency compliance measure for taxpayers was introduced in 2019 in the form of a checkbox on the top of Schedule 1, Additional Income and Adjustments to Income (Schedule 1 is used to report income or adjustments to income that can’t be entered directly on the front page of form 1040). And in 2020, the IRS noted that it will post a cryptocurrency question right on the front page of your Form 1040.

In 2019, the IRS also announced that it was sending letters to taxpayers who might have failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.

(For more on some of those efforts – like the Coinbase court saga – click here.)

Pilot IRS Cryptocurrency Tracing

Now, the IRS is offering what some are calling a “bounty” to those who can assist in tracing cryptocurrency transactions. Specifically, the IRS has created a pilot that will pay cash (up to $625,000) to anyone who can trace Monero or other anonymity-enhanced cryptocurrency, or Lightning or other Layer 2 off-chain cryptocurrency protocols.

You can read the official Request for Proposals (RFP) here (you can also find out more about the process).

The deadline for submissions is Wednesday, September 16, 2020, at 08:00 EDT. No late submissions will be accepted or considered or evaluated.

About Privacy Coins

The focus of the proposal is privacy coins. Privacy coins allow users more anonymity when using cryptocurrency. According to the IRS-CI, the use of privacy coins is becoming more popular not only by investors, but also by illicit actors. For example, according to the IRS-CI, in April 2020, a RaaS (Ransomware as a Service) group called Sodinokibi (a former affiliate with the GrandCrab RaaS group) stated that future ransom request payments will be in Monero (XMR) rather than Bitcoin (BTC) due to transaction privacy concerns.

Bitcoin has become increasingly common since it’s easy to use – even for relative crypto newbies. Bitcoin transactions are open ledger (blockchain): that means that the record-keeping system is “public” through a series or chain of blocks even though the exact identities of the participants (as well as their other details, like account balances) may remain private. This kind of open system encourages transparency but also means that, with some effort, hackers and others – like the authorities – can track down the players in a chain of transactions. 

The result has been a push from some crypto-sectors to completely anonymize all pieces of the transaction. Enter privacy coins. Monero is considered the largest privacy coin on the market right now; the technology it uses extends privacy to senders, receivers, and transaction amounts. Other popular privacy coins include Cash (ZEC) and Dash.

IRS-CI Is Looking For Solutions

Now, IRS-CI is looking for solutions which provide “information and technical capabilities for CI Special Agents to trace transaction inputs and outputs to a specific user and differentiate them from mixins/multisig actors for Monero and/or Lightning Layer 2 cryptocurrency transactions with minimal involvement of external vendors” as well as “technology which, given information about specific parties and/or transactions in the Monero and/or Lightning networks, allows Special Agents to predict statistical likelihoods of other transaction inputs, outputs, metadata, and public identifiers with minimal involvement of external vendors.” In other words, they are looking to crack privacy coins.

If this sounds out of the ordinary, you’re not wrong. And the IRS acknowledges as much, stating, “For those who are familiar with traditional government procurements, Pilot IRS will appear substantively different from how the government normally buys technology. To be fair, it is… This type of approach is more often used in research and development environments, but there are existing regulations that allow federal agencies to buy commercial items in a manner similar with how the private sector would. Pilot IRS will aggressively pursue a streamlined and cost-effective approach to testing and deploying technology solutions that will have an immediate impact on the government’s mission.” 

IRS-CI has noted an uptick in criminal syndicates using privacy coins. And authorities have to be able to keep up. An IRS-CI spokesperson stated that, “IRS-CI is responsible for investigating potential criminal violations of the U.S. Internal Revenue Code and related financial crimes. We are also a global leader in cyber-criminal investigations involving cryptocurrency and have played a lead or key role in the takedown of numerous major Darknet Marketplaces and other transnational criminal organizations facilitating identify theft, narcotics trafficking, money laundering, terrorist financing, sex trafficking, and child prostitution.”

As a result, he explained, “The IRS Cryptocurrency pilot was developed to create and promote innovation in response to ongoing challenges within IRS-CI in hopes of quickly testing, piloting and/or deploying solutions. Privacy coins continue to be a challenge to law enforcement due to their increased anonymity and specific technological enhancements. Currently, there are limited investigative resources for tracing transactions involving privacy cryptocurrency coins such as Monero, Layer 2 network protocol transactions such as Lightning Labs, or other off-chain transactions that provide privacy to illicit actors. The pilot will look to leverage the knowledge of public/private sector and academia to address these specific challenges.”

The Justice Department has announced action against two hacks of virtual currency exchanges by North Korean actors.

According to court documents, the actors stole millions of dollars’ worth of cryptocurrency and laundered the funds through Chinese over-the-counter (OTC) cryptocurrency traders. Now, the Justice Department is seeking to recover those funds through the filing of a civil forfeiture complaint.

(You can test your knowledge of civil forfeiture here.)

The complaint follows criminal and civil actions announced earlier this year related to the theft of cryptocurrency through other exchange hacks by North Korean actors. Those thefts initially occurred in 2018; afterward, the Internal Revenue Service-Criminal Investigation (IRS-CI) Cyber Crimes Unit learned that a South Korea-based virtual currency exchange had been hacked. The North Korean cyber actors responsible for the hack stole nearly $250 million worth of virtual currencies, which eventually landed in about 146 virtual currency accounts. In March of 2020, the United States filed a forfeiture complaint against those accounts.

The theft was not particularly surprising. Last year, a panel of experts established by the United Nations Security Council to investigate compliance with sanctions against North Korea found that the North Korean government has “used cyberspace to launch increasingly sophisticated attacks to steal funds from financial institutions and cryptocurrency exchanges to generate income.” Why? According to the panel, these activities allow North Korea “to generate income in ways that are harder to trace and subject to less government oversight and regulation than the traditional banking sector.” So far, these activities have raised money for the country’s weapons programs, with total proceeds to date estimated at up to $2 billion.

How does it happen? Money laundering through multiple accounts. Stolen funds can be transferred through accounts in a series of separate transactions and then routed to various countries before being converted to fiat currency. That makes it highly challenging to track the money. And if you change the kind of currency, it makes it even more difficult to trace. This practice of moving between different types of virtual currency is called “chain hopping.”

The most recent complaint detailed a theft that happened on or about July 1, 2019. In that hack, thieves stole approximately 401,981,748 Proton Tokens (PTT) from a virtual currency exchange. About 280,269,180 PTT was contained before it could be liquidated, but the remaining approximately 121,712,568 PTT entered the market. Around the same time, the affected exchange reported thefts of other currencies. Those currencies were transferred to other exchanges through a complicated series of transactions summarized in court documents like this:

According to the complaint, a few months later, in September 2019, a U.S.-based company focused on the Algorand blockchain (which administers ALGO tokens) was hacked in a related incident. The North Korea-associated hacker gained access to the company’s virtual currency wallets, funds held by the company on other platforms, and funds held by its partners. In the hack, the thieves used 15 recovery seeds to recreate wallets owned by the exchange and its partners. A recovery seed – also known as a recovery phrase – is a list of upwards of 12 words that, when entered in a specific order into virtual currency wallet software, allows whoever has the words to recreate access to virtual assets within the wallet. What the hackers were able to do then is direct the transfer of funds out of the wallets into other addresses and wallets. That allowed the hackers to steal nearly $2.5 million and launder it through 106 accounts at other virtual currency exchanges.

Following the transactions allowed law enforcement to identify the property involved in the schemes. The complaint now seeks a judgment declaring that the property be forfeited to the United States government.

“As part of our commitment to safeguarding national security, this office has been at the forefront of targeting North Korea’s criminal attacks on the financial system,” said Acting U.S. Attorney Michael R. Sherwin of the District of Columbia. “This complaint reveals the incredible skill of our Cryptocurrency Strike Force in tracing and seizing virtual currency, which criminals previously thought to be impossible.”

Several different agencies were involved in the investigation, including IRS-CI’s Washington, D.C. Cyber Crimes Unit, the FBI’s Chicago and Atlanta Field Offices, and HSI’s Colorado Springs Office with additional support from the FBI’s San Francisco Field Office. 

Assistant U.S. Attorneys Zia M. Faruqui, Jessi Camille Brooks, and Christopher Brown, with assistance from Supervisory Paralegal Specialist Elizabeth Swienc and Legal Assistant Jessica McCormick, Trial Attorney C. Alden Pelker of the Criminal Division’s Computer Crime and Intellectual Property Section, and Trial Attorney David Recker of the National Security Division’s Counterintelligence and Export Control Section are prosecuting the case. 

“Despite the highly sophisticated laundering techniques used, IRS-CI’s Cybercrimes Unit was able to successfully trace stolen funds directly back to North Korean actors,” said Don Fort, Chief of IRS Criminal Investigation (IRS-CI). “IRS-CI will continue to collaborate with its law enforcement partners to combat foreign and domestic operations that threaten the United States financial system and national security.”

The funds from these hacks, and the earlier hacks, were all allegedly laundered by the same group of Chinese OTC actors. The infrastructure and communication accounts used to further the intrusions and fund transfers were also tied to North Korea.

“At U.S. Cyber Command, we leverage a persistent engagement approach to challenge our adversaries’ actions in cyberspace,” said Brigadier General Joe Hartman, Commander of the Cyber National Mission Force. “This includes disrupting North Korean efforts to illicitly generate revenue. Department of Defense cyber operations do not occur in isolation. Persistent engagement includes acting through cyber-enabled operations as much as it does sharing information with our interagency partners to do the same.”

“Today’s complaint demonstrates that North Korean actors cannot hide their crimes within the anonymity of the internet. International cryptocurrency laundering schemes undermine the integrity of our financial systems at a global level, and we will use every tool in our arsenal to investigate and disrupt these crimes,” said Special Agent in Charge Emmerson Buie Jr. of the FBI’s Chicago Field Office. “The FBI will continue to impose risks and consequences on criminals who seek to undermine our national security interests.”

The Justice Department has announced the dismantling of three terrorist financing cyber-enabled campaigns. These actions represent the government’s largest-ever seizure of cryptocurrency relating to terrorism.

These three terror finance campaigns – involving the al-Qassam Brigades, Hamas’s military wing, al-Qaeda, and the Islamic State of Iraq and the Levant (ISIS) – all relied on sophisticated cyber-tools, including the solicitation of cryptocurrency donations from around the world. Each group used cryptocurrency and social media to garner attention and raise funds for their terror campaigns. Using warrants, federal authorities seized millions of dollars, over 300 cryptocurrency accounts, four websites, and four Facebook pages related to the criminal enterprise. 

“These important cases reflect the resolve of the DC. United States Attorney’s Office to target and dismantle these sophisticated cyber-terrorism and money laundering actors across the globe,” stated Acting United States Attorney Michael R. Sherwin. “While these individuals believe they operate anonymously in the digital space, we have the skill and resolve to find, fix and prosecute these actors under the full extent of the law.”  

The first of the three campaigns involves the al-Qassam Brigades and its online cryptocurrency fundraising efforts. The al-Qassam Brigades are the armed branch of the Islamic Resistance Movement (Hamas). The Brigades work to “evoke the spirit of Jihad (resistance) amongst Palestinians, Arabs and Muslims” and “defend Palestinians and their land against the Zionist occupation and its aggression.” According to an old version of their website, the number of al-Qassam Brigades members is known only to the Brigades’ leadership, which adopts the principle of secrecy in organization and recruitment. Today, the al-Qassam Brigades are considered terrorist organizations by, among others, the European Union (EU) and the United States.

According to the Department of Justice, last year, the al-Qassam Brigades posted a call on its social media page for bitcoin donations to fund its terror campaign. The al-Qassam Brigades then moved this request to its official websites, alqassam.net, alqassam.ps, and qassam.ps. The al-Qassam Brigades boasted to potential donors that bitcoin donations were untraceable and would be used for violent causes. They also offered video instruction on how to anonymously make donations, in part by using unique bitcoin addresses generated for each individual donor.

When an undercover agent reached out to al-Qassam Brigades, an email assured the agent that “your donation will make difference as no jihad will be committed without money for buying weapons and training mujahideen. Moreover, the doors of jihad are many: by word, by money, by fighting, etc.”

As we know from earlier cases, bitcoin transactions are not completely anonymous. It is possible to determine the identity of an individual involved in a bitcoin transaction through several different tools that are available to law enforcement. Agents from the Internal Revenue Service (IRS), Homeland Security Investigations (HSI), and Federal Bureau of Investigations (FBI) tracked and seized 150 cryptocurrency accounts that laundered funds to and from the al-Qassam Brigades’ accounts. Simultaneously, law enforcement executed criminal search warrants relating to United States-based subjects who donated to the terrorist campaign.  

The United States Attorney’s Office for the District of Columbia also unsealed criminal charges for two Turkish individuals, Mehmet Akti and Hüsamettin Karataş, who allegedly acted as related money launderers while operating an unlicensed money transmitting business.  

The second of the three campaigns involves a scheme by al-Qaeda and affiliated terrorist groups, primarily based out of Syria. al-Qaeda is a militant group found in 1988 by Osama bin Laden and others during the Soviet-Afghan war. Bin Laden, considered the mastermind behind the 9/11 attacks in the US, led the group until his death at the hands of US Navy SEALS in 2011. Like the al-Qassam Brigades, al-Qaeda is considered a terrorist organization by, among others, the EU and the US.

According to the complaint, al-Qaeda and its affiliated terrorist groups operated a bitcoin money-laundering network using Telegram channels and other social media platforms to solicit cryptocurrency donations. In some instances, they purported to act as charities when, in fact, they were openly and explicitly soliciting funds for violent terrorist attacks.

Undercover HSI agents communicated with the administrator of Reminder for Syria, a related charity seeking to finance terrorism with bitcoin donations. The administrator stated that he hoped to destroy the United States, discussed the price for funding surface-to-air missiles, and warned about possible criminal consequences from carrying out jihad in the United States. The complaint seeks forfeiture of the 155 virtual currency assets tied to this terrorist campaign.  

The third and final campaign involves a scheme by Murat Cakar, an ISIS facilitator responsible for managing select ISIS hacking operations, and selling fake personal protective equipment (PPE) during the COVID-19 pandemic through a website called FaceMaskCenter.com. The site claimed to sell FDA approved N95 respirator masks. The items, which were targeted to hospitals, nursing homes, and fire departments, were not FDA approved.

The website purported to be “the original online personal protective equipment supplier and was the first of its kind.” It also claimed that “[w]e have come a long way since launching our website in 1996.” According to the complaint, the website was created from an IP address in Turkey on February 26, 2020.

Cakar’s website was seized as well as four related Facebook pages used to facilitate the scheme. 

To date, these are just charges. Charges in a criminal complaint are merely allegations, and the defendants are presumed innocent unless proven guilty beyond a reasonable doubt in a court of law.

The IRS-CI considers the seizures a victory. “IRS-CI’s ability to trace funds used by terrorist groups to their source and dismantle these radical group’s communication and financial networks directly prevents them from wreaking havoc throughout the world,” said Don Fort, Chief, IRS Criminal Investigation. 

(For more on Chief Fort, click here. You can hear him talk more about IRS-CI and his role here.)

He added, “Today the world is a safer place.”

It’s my annual Taxes from A to Z series! If you’re wondering how to figure basis for cryptocurrency or whether you can claim home office expenses during COVID, you won’t want to miss a single letter.

C is for Cryptocurrency reporting.

Last year, the Internal Revenue Service (IRS) announced a new cryptocurrency compliance measure for taxpayers in 2019: a checkbox on form 1040. The checkbox appears on the top of Schedule 1, Additional Income and Adjustments to Income (downloads as a PDF). Schedule 1 is used to report income or adjustments to income that can’t be entered directly on the front page of form 1040.

The new question asks: At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? 

The IRS has made no secret of the fact that it believes that taxpayers are not properly reporting cryptocurrency transactions. An IRS dive into the data showed that for the 2013 through 2015 tax years, the IRS processed, on average, just under 150 million individual returns annually. Of those, approximately 84% were filed electronically. When IRS matched data collected from forms 8949, Sales and Other Dispositions of Capital Assets, which were filed electronically, they found that just 807 individuals reported a transaction using a property description likely related to bitcoin in 2013; in 2014, that number was only 893; and in 2015, the number fell to 802.

Even though the question is new, this kind of question certainly isn’t. Tax professionals have watched taxpayers struggle before when answering a similar question about offshore accounts and interests at the bottom of Schedule B. The IRS can and has taken the position that willfully failing to check the box related to offshores accounts and interests on Schedule B can form the basis for criminal prosecution. Failing to check the box by accident can still result in expensive headaches and draconian penalties. I fully expect a similar result when it comes to cryptocurrency.

The IRS has made cryptocurrency compliance a priority. Beginning in 2019, the IRS mailed letters to more than 10,000 taxpayers who might have failed to report income and pay the resulting tax from virtual currency transactions or did not accurately report their transactions. This wasn’t unexpected since the IRS announced in 2018 that they were making noncompliance related to virtual currency use one of their targeted compliance campaigns.

In 2014, the Internal Revenue Service (IRS) issued guidance to taxpayers (downloads as a PDF), making it clear that virtual currency like Bitcoin and Ethereum will be treated as capital assets, provided they are convertible into cash. In simple terms, this means that capital gains rules apply to gains or losses. (You can read more on the taxation of cryptocurrencies here.)

I know that this tax year feels far from ordinary, but don’t rush through and overlook this question. It’s clear that the IRS is getting serious about cryptocurrency reporting.

You can find the rest of the series here:

The Internal Revenue Service (IRS) has announced the indictment of Michael Rahim Mohammad, a Dutch national. Mohammad, sometimes called “Mr. Dark,” has been accused of operating Dark Scandals, websites that featured violent rape videos and depictions of child pornography. 

According to court pleadings, Mohammad was the administrator of the DarkScandals Sites, which he began operating in or about 2012. The sites were available on the darknet (“DarkScandals Darknet”) and the clearnet (“DarkScandals Clearnet”). 

The dark web, also referred to as “darknet,” refers to content that you don’t typically access through regular internet browsing activities. A “clearnet” website is accessible using traditional web browsers like Internet Explorer; these websites use traditional designations like “.com” or “.co.”

Users of these sites rely on cryptocurrencies like Bitcoin to pay for services because they offer the illusion of anonymity. However, it is often possible to determine the identity of an individual involved in these transactions through several different tools. 

The DarkScandals Darknet and DarkScandals Clearnet sites were virtually identical. They largely offered the same service: directing customers on how to obtain obscene content, including videos that depicted sexual assault and child pornography. Specifically, the sites boasted over 2,000 videos and images, and advertised “real blackmail, rape and forced videos of girls all around the world.”

Users could either pay for the videos using cryptocurrency, such as Bitcoin, or upload new videos to add to the Dark Scandals sites. The Dark Scandals sites included specific rules for the video uploads to the websites, which included “real rape/forced” content, and stated a preference for “own made material.” The site expressly forbade “fake, amateur…or acted movies,” and would reject content if it did not portray real sexual violence. 

A quick word of warning: the indictment (downloads as a PDF) contains language and descriptions that may be disturbing. In fact, Don Fort, Chief, IRS Criminal Investigation, declared, “The types of crimes described in this indictment are the most disgusting I’ve encountered in 30 years of law enforcement. It is a special kind of evil to prey on and profit from the pain of others.”

“Darknet sites that profit from rape and the sexual exploitation of children are among the most vile and reprehensible forms of criminal behavior,” said U.S. Attorney Timothy J. Shea. “This Office will not allow predators to use lawless online spaces as a shield. We are firmly committed to working closely with our partners in the Netherlands and around the world to bring to justice the perpetrators of these abhorrent crimes.”

According to the forfeiture complaint (downloads as PDF), law enforcement was able to trace payments of bitcoin and ethereum to the Dark Scandals site by following the flow of funds on the blockchain. The 303 virtual currency accounts identified in the complaint were allegedly used by customers across the world to fund the website and promote the exploitation of the victims.

Mohammad allegedly received almost two million dollars from selling this obscene and illicit content, and the complaint seeks to recover these funds and return the illegal funds to victims of the crime. The complaint also seeks to forfeit the previously seized website domains associated with DarkScandals.

The charges against Mohammad include various counts of Distribution of Child Pornography, Production and Transportation of Obscene Matters for Sale or Distribution, Engaging in the Business of Selling or Transferring Obscene Matter, and Laundering of Monetary Instruments.

The charges come months after the largest dark web child pornography site was taken down. According to the IRS-CI, agents became aware of that site, Welcome to Video, because of their work on previous dark web marketplaces. As a result of the investigations, Jong Woo Son, 23, a South Korean national, was indicted by a federal grand jury in the District of Columbia for operating the site. Son was sentenced to 18 months in prison in Korea; he still faces charges in the United States. Additionally, in that case, 337 site users residing in 23 states and Washington, D.C., as well as the United Kingdom, South Korea, Germany, Saudi Arabia, the United Arab Emirates, the Czech Republic, Canada, Ireland, Spain, Brazil, and Australia were arrested and charged.

The Dark Scandals investigation was jointly investigated by the IRS-CI (Washington, D.C.) and Homeland Security Investigations (Colorado Springs and The Hague). The Dutch National Police of the Netherlands, Europol, and the German Federal Criminal Police (the Bundeskriminalamt) provided assistance and coordinated with their parallel investigations.

Chief Fort noted, about the investigation, “Criminals should know if you leave a digital footprint, we will find you. If you exploit our children, we will put you behind bars. If you thought you were anonymous, think again. The dark web is not quite as dark today due to the hard work of IRS-CI and our partner agencies.”

Gamers (and their parents) can finally breathe a sigh of relief: Fortnite virtual currency is not taxable.

If you’ve seen headlines suggesting that it is taxable – and then contrary headlines saying that it is not – here’s what happened. In October of 2019, the following language was spotted on the Internal Revenue Service (IRS) website (archived link from the Wayback Machine):

Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin, Ether, Roblox, and V-bucks are a few examples of a convertible virtual currency. Virtual currencies can be digitally traded between users and can be purchased for, or exchanged into, US dollars, Euros, and other real or virtual currencies.

The IRS has been increasing awareness on virtual currency and, in recent months, emphasized that taxpayers may have reporting requirements when buying, selling, trading, or otherwise dealing in cryptocurrencies like Bitcoin. The IRS is so serious about it that a question about cryptocurrency now appears on your federal income tax return.

But Roblox and V-bucks? Roblox is the name of an online game where users can buy upgrades for avatars or special abilities in games using proprietary RobuxV-bucks are a similar in-game currency for the popular game, Fortnite. As with Robux, V-bucks can be used “to purchase things like outfits, pickaxes, wraps, emotes and Battle Passes.”

Tax pros began murmuring within the tax community about the language, with most suggesting that the IRS interpretation was wrong. Last week, the IRS quietly modified the paragraph. It now reads:

Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, US dollars, Euros, and other real or virtual currencies.

There’s no mention of virtual game currency in the new language. The IRS later confirmed that including the original wording had caused confusion and that it had removed the language. It further clarified the treatment of in-game currencies in the following statement on its website:

The IRS recognizes that the language on our page potentially caused concern for some taxpayers. We have changed the language in order to lessen any confusion. Transacting in virtual currencies as part of a game that do not leave the game environment (virtual currencies that are not convertible) would not require a taxpayer to indicate this on their tax return.

Still confused? A little history and some definitions might help. In 2014, the Internal Revenue Service (IRS) issued guidance to taxpayers (downloads as a PDF), making it clear that virtual currency like Bitcoin will be treated as capital assets, provided they are convertible into cash. In simple terms, this means that capital gains rules apply to gains or losses. 

In-game currencies like V-bucks, however, are generally considered “closed” or non-convertible currencies. Closed currencies are those not available outside of specific areas. They commonly discussed in terms of foreign currencies – like those in Cuba. Cuba has two official currencies: the Cuban convertible peso (CUC) and the Cuban peso (CUP), and neither are available outside of Cuba.

The same basic principles apply to in-game currencies. While you can typically buy them with US dollars, you usually can’t freely use or exchange them outside of the game, making them non-convertible. The IRS guidance for virtual and cryptocurrency – so far – only applies to convertible currencies.

While this feels like a new struggle, taxpayers have been seeking guidance on alternate currencies, including virtual currencies, for years. More than a decade ago, there was chatter about whether to include Linden Dollars from Second Life in taxable income (I took the site for a test drive to find out what the fuss was about). And a half-dozen years ago, an alternative currency debuted in Philadelphia as one of many experimental local currencies.

The IRS will, no doubt, continue to issue guidance – and occasionally falter – as the ways that we continue to think about currency and value changes. For now, the rule is this: if a virtual currency, including digital currency and cryptocurrency, is convertible, meaning that it has an equivalent value in real currency or acts as a substitute for real money, then it is treated as a capital asset. That means that it may be reportable and taxable. For more information, check out the IRS FAQ.

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