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cryptocurrency

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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?

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.

Links Mentioned:

Kelly’s Website – Taxgirl

David Kemmerer – LinkedIn

David’s Company – CryptoTrader.Tax

David’s Email- David@cryptotrader.tax

Bitcoin

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.

Form 1040 may look similar to last year’s return, but there’s one key difference that’s attracting attention: a question about cryptocurrency.

As I reported late last year, early drafts of Form 1040 reflected a new question 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 made it onto the final version of Schedule 1:

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

The placement of the question is important. I believe the question is intended to be so conspicuous that it makes it difficult for any taxpayer to argue that they didn’t know that it was necessary to report cryptocurrency transactions.

The Internal Revenue Service (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.

But… so what? If you skip over the question or answer it wrong, you can still claim that you made a mistake, right?

Here’s the thing. 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. This one:

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.

So why all the fuss over this new question? The IRS has made cryptocurrency compliance a priority. Last year, 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 campaigns announced in 2018 that they were making noncompliance related to the use of virtual currency 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.)

It’s clear that the IRS is getting serious about cryptocurrency reporting. If you have questions about how and what to report, don’t stay silent: ask your tax professional for more information.

Looking to reduce your taxable income with a donation of virtual currency to charity? The Internal Revenue Service (IRS) has issued guidance for donors (and charities) on the FAQ page of its website.

The IRS addressed whether gifting virtual currency to a charity could result in income, gain, or loss. The IRS confirmed that if you donate virtual currency to a charitable organization, you will not recognize income, gain, or loss from the donation. That’s the same result as giving stock or other appreciated assets, which are also characterized as capital assets.

The IRS also explained how to calculate the value of a gift of virtual currency to a charity. It’s fairly simple: your charitable contribution deduction is generally equal to the fair market value of the virtual currency at the time of the donation. That’s only true, however, if you have held the virtual currency for more than one year. If you have kept the virtual currency for one year or less, your deduction is the less of your basis (cost plus adjustments) in the virtual currency or its fair market value at the time of the contribution.

The IRS also addressed the charity’s responsibilities for gifts of virtual currency (you’ll see those answers at 35 and 36 of the FAQ). We all know that keeping records is super important for charities and donors. Typically, a charitable organization should provide a contemporaneous written acknowledgment for donations of more than $250; that remains true for virtual currency donations. And, the rules don’t change at higher dollar levels. A charitable organization is generally required to sign a donor’s Form 8283, Non-cash Charitable Contributions, acknowledging receipt of the property if the donor is claiming a deduction of more than $5,000; that’s still true for gifts of virtual currency. The signature confirms the date and receipt of the property and is not a confirmation of the value of the contributed property (that remains the responsibility of the donor).

What about the charity’s reporting requirements to the IRS? A charitable organization that receives virtual currency should treat the donation as a non-cash contribution. Those are reported on a Form 990-series annual return. Also, charities must file Form 8282, Donee Information Return, if they sell, exchange or otherwise dispose of charitable deduction property – and that includes the sale of virtual currency for real currency – within three years after the date they initially received the property. The donor also gets a copy of the form.

The IRS previously issued guidance in 2014 to taxpayers, making it clear that virtual currency will be treated as a capital asset, provided they are convertible into cash. In simple terms, this means that capital gains rules apply to any gains or losses. (You can read more on the taxation of cryptocurrencies like Bitcoin here.)

It’s deja vu all over again as the Internal Revenue Service (IRS) is seeking to access customer data from Bitstamp. As with the Coinbase case, a taxpayer balked at the data sharing and filed suit to stop it. And just like the Coinbase case, the IRS won in part and lost in part.

Bitstamp describes itself as “a European based cryptocurrency marketplace.” It’s based in Luxembourg but runs a United States office out of New York City. The marketplace allows people from all around the world to buy and sell cryptocurrencies like Bitcoin, Ethereum, Litecoin, Bitcoin Cash, and XRP (Ripple).

According to court documents, William Zietzke self-prepared his 2016 tax return using Turbo Tax. He reported long-term capital gains of $104,482 as a result of Bitcoin transactions that he said took place in 2016. He eventually hired a Certified Public Accountant (CPA); the CPA amended his returns and reduced the long-term capital gains in 2016 from $104,482 to $410, which should have resulted in a $15,475 refund.

Zietzke was audited and he told the Revenue Officer that he had two separate groups of Bitcoin holdings. The first group was managed through Armory wallet software, and the second was held in wallets hosted by Coinbase and Purse.io. He did not mention Bitstamp, and the Revenue Officer found at least one transaction through Bitstamp while reviewing the taxpayer’s records.

In June of 2019, the Revenue Officer issued a third-party summons to Bitstamp. A third-party summons is typically issued when the IRS has reason to believe that another party, like a bank or an employer, has information that a taxpayer has not made available.

Here’s where things get tricky. The summons notes that the tax year in question is 2016. However, the summons, which asks Bitstamp to provide all records related to the taxpayer, does not appear to limit the request to the tax year 2016.

The Revenue Officer also asked Zietzke to turn over all documents related to all of his crypto holdings, including any tied to wallets hosted by Coinbase, Bitstamp, BTC-e, and purse.io. However, the request made to Zietzke specifically limited the scope to the tax year 2016. 

Zietzke argued that the summons was overbroad. Not surprisingly, he relied on the Coinbase case. He also noted that the IRS had requested information from Bitstamp (like account opening and application records) that went beyond the scope of what the courts allowed in the Coinbase case.

Zietzke sought to quash the summons entirely, or in the alternative, limit the scope. Quash is a legal term that means to set aside or cancel.

Writing for the United States District Court, Judge John C. Coughenour denied Zietzke’s petition. But it wasn’t a complete loss. Judge Coughenour did find the summons overbroad and required the IRS to file a proposed amended summons that complied with his court order.

Judge Coughenour agreed that the IRS has an interest in determining how many Bitcoin transactions Zietzke engaged in for the tax year in question (2016). However, the request, as written, would require Bitstamp to produce information relating to Bitcoin sales before 2016—even though those transactions could not impact Zietzke’s gain or loss if he sold Bitcoins in 2016. That, the court found, is overbroad.

The IRS was ordered to amend the summons so that the demand for information relates only to Zietzke’s 2016 transactions. Bowing to basis issues, the court found that the requests may ask for information before 2016 only to the extent that it is relevant to determining the tax implications of transactions in 2016. 

After the IRS has prepared a proposed summons, Zietzke gets another bite at the apple and can appeal. The case is Zietzke v. United States of America (2:19-cv-01234).

Bitstamp does not appear to have addressed the matter on its website. I can’t find any mention of it in the news section of the website, and if you type in “tax” in the search box, there aren’t any results.

But don’t expect this to be the last word. Earlier this year, the IRS has announced that they were sending letters to approximately 10,000 taxpayers who might have failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. Compliance from taxpayers using virtual currency is one of five IRS campaigns announced last year. And this year, the IRS issued new guidance for taxpayers who engage in transactions involving virtual currency, including cryptocurrency, the first in five years. You can bet there’s more to come.

Taxpayer asks:

I paid short term and long term capital gains on my Bitcoin when I moved it from Coinbase into my hardwallet. Do you see any reason I should have to pay more taxes again when I spend some of these same Bitcoins from my hardwallet? Thanks.

Taxgirl says:

This is a great question. Guidance on the tax treatment of cryptocurrency has been limited (and late in coming), so there’s still a lot of confusion.

Some background might be helpful. In 2014, the Internal Revenue Service (IRS) issued guidance to taxpayers (downloads as a PDF), making it clear that virtual currency will be treated as a capital asset, provided they are convertible into cash. In simple terms, this means that capital gains rules apply to any gains or losses. 

That means, generally:

  • For those taxpayers buying and selling cryptocurrency as an investment, calculating gains and losses are figured the same as buying and selling stock. That’s true, as well, when it comes to basis, holding period and a triggering (taxable) event.
  • For those treating cryptocurrency like cash – spending it directly for goods or services, or using it to buy other cryptocurrencies – the individual transactions may also result in a gain or a loss.

In your case, the trick is to figure the triggering (taxable) event. A taxable event is typically a sale or disposition of an asset. When it comes to cryptocurrency, a taxable event typically occurs whenever the crypto is traded for cash or other crypto or whenever the crypto is used to purchase goods or services.

It’s also true that cashing cryptocurrency out of an exchange or similar platform may be treated as a sale – even if you’re forced to withdraw it. It sounds like that’s what you did. You moved Bitcoin from one platform to another and paid the resulting tax on the gain. 

But you’re not done yet. When you spend your Bitcoin, you may be subject to tax again. That’s because you’ve experienced another triggering (taxable) event. The good news is that your basis will be adjusted accordingly.

Here’s an example.

Let’s say that you bought Bitcoin for $100, and when you moved it, it was worth $300. The gain was $200, and you paid tax on the gain.

Let’s assume that your Bitcoin are worth $350 when you’re ready to spend it. You will pay capital gains tax again – but using a new basis based on the value of the move from your last transaction.

So, in the first instance, it’s $300 (move price) – $100 (original cost) = $200 of gain. In the second instance, it’s $350 (value at the time you spent it) – $300 (new basis) = $50 of gain. All totaled, you have $250 in gain spread out over time. It’s the same result as though you held onto it for the entire time: $350 (value at the time you spent it) – $100 (original cost) = $250.

But what if it had gone south? Let’s say it was only worth $150 when you spent it. Then:

$150 (value at the time you spent it) – $300 (new basis) = -150 (you have loss).

You can claim up to $3,000 (or $1,500 if you are married filing separately) of capital losses and the amount of your loss offsets your taxable income for the tax year. If your losses exceed those limits, you can carry the loss forward to later years subject to certain limitations and restrictions.

Capital gains tax rates are generally favorable.

Capital gains rates for long term gains (those held more than a year) range from 0% to 20% while short-term capital gains are taxed as ordinary income.

You’ll report all of your realized gains and losses on Schedule D. You don’t file a Schedule D if you don’t have any realized gains or losses: even if the value changes, if there’s no sale or disposition, there’s nothing to report.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Last year, Ohio made news as the first state in the nation to accept tax payments using cryptocurrency. Less than a year later, the program has been suspended after accusations that it wasn’t properly vetted.

The program was initially hailed as a model for the rest of the country. Under the terms of the program, if you operated a business in the State of Ohio, you could register at OhioCrypto.com to pay your taxes. The cryptocurrency payments were processed by a third-party payment processor, BitPay, and immediately converted to dollars before being deposited into a state account. 

(You can read more about the program here.)

That system, according to a new opinion from State Attorney General Dave Yost, was part of a number of potential failings with the program, including a failure to bid it out.

Today, the website at OhioCrypto.com remains shuttered. A notice advises:

It reads: 

OhioCrypto is currently suspended. More information can be found by clicking here. If you have questions, please email OhioCrypto@tos.ohio.gov.

Clicking through leads you to back to the Treasurer’s Office’s site, which offers further details on the takedown.

The program was touted as a game-changer by former Treasurer Josh Mandel. Mandel was elected Ohio Treasurer in 2010. He ran an unsuccessful Congressional campaign against Senator Sherrod Brown in 2012. He was re-elected as Treasurer in 2014 and made plans to again challenge Brown in 2018. He abruptly pulled out of that race last year and left the Treasurer’s office after his term ended in January 2019.

His successor, Robert Sprague, asked the Ohio Attorney General for a formal opinion on whether the payment method facilitated by the program’s third-party processor constitutes a “financial transaction device” under Ohio law. If it did, then by law (Ohio Revised Code §113.40), the contract for the processor must go through a formal procedure that includes approval from state officials and a request for bids from at least three financial institutions. 

The Attorney General did take a look at the program. He found that OhioCrypto.com met the legal definition of a “financial transaction device.” Yost also found that the use of the program was not permitted, claiming that existing state law doesn’t extend to OhioCrypto.com. Yost said the process was basically akin to a currency exchange, finding, “The Treasurer’s use of a payment processor to convert cryptocurrency into dollars for the payment of taxes is not authorized, expressly or impliedly, by statutes allowing the receipt of electronic payments.”

(To read Yost’s opinion, which downloads as a PDF, click here.)

Sprague said, about the findings, “It is vital that Ohio explores innovative, new technologies and processes that continue to drive Ohio into the future. However, we must make sure any new processes that are implemented, such as OhioCrypto.com, are established in accordance with Ohio law.”

Sprague also noted that the program had not been popular: The state accepted fewer than ten payments.

Mandel has not commented on the suspension of the program. Earlier this year, without comment, Mandel deleted all posts on his Twitter and Facebook accounts. He also set his Twitter account to private. 

The largest dark web child pornography site in the world has been taken down. That was the word today from the U.S. Attorney’s Office for the District of Columbia, the Justice Department’s Criminal Division, the IRS Criminal Investigation (IRS-CI), and U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (HSI), together with the National Crime Agency of the United Kingdom and Republic of Korea at a joint press conference announcing arrests and forfeitures. 

According to the IRS-CI, agents became aware of Welcome to Video, the largest child sexual exploitation market by volume of content, because of their work on previous dark web marketplaces. The dark web, also referred to as “Darknet,” refers to content that you don’t typically access through regular internet browsing activities.

IRS-CI was able to trace bitcoin transactions on the site to people all over the world who were uploading and downloading this material, as well as find the location of the site administrator. By analyzing the blockchain and de-anonymizing bitcoin transactions, the agency was able to identify hundreds of predators around the world – even though those users thought that they could remain anonymous.

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 has also been charged and convicted in South Korea and is currently in custody in South Korea. The operation resulted in the seizure of approximately 7.5 terabytes of child pornography videos, the largest of its kind: that’s more than 10,000 CDs full of imagery that are no longer in the hands of child pornographers. The images, which are being analyzed by the National Center for Missing and Exploited Children (NCMEC), contained over 250,000 unique videos; 45% of the videos contain images that have not been previously known to exist.

According to the indictment, on March 5, 2018, agents from the IRS-CI, HSI, National Crime Agency in the United Kingdom, and Korean National Police in South Korea arrested Son and seized the server that he used to operate a Darknet market which advertised child sexual exploitation videos. The site, Welcome To Video, offered these videos for sale using the cryptocurrency bitcoin: the site boasted over one million downloads of child exploitation videos by users.

The website is among the first of its kind to monetize child exploitation videos using bitcoin. Here’s how it worked: each user received a unique bitcoin address when the user created an account on the website. Those accounts could be used to pay to download the videos. An analysis of the server revealed that the website had more than one million bitcoin addresses, signifying that the website had the capacity for at least one million users.  

The data from the seized server was shared with law enforcement agencies around the world. This has resulted in leads sent to 38 countries. In addition to Son, 337 site users residing in 23 states (Alabama, Arkansas, California, Connecticut, Florida, Georgia, Kansas, Louisiana, Maryland, Massachusetts, Nebraska, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Utah, Virginia, and Washington State) 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 have been arrested and charged. Two users of the Darknet market committed suicide after the execution of search warrants.

The complaint alleges that law enforcement was able to trace payments of bitcoin to the Darknet site by following the flow of funds on the blockchain. The virtual currency accounts identified in the complaint were allegedly used by 24 individuals in five countries to fund the website and promote the exploitation of children. An unsealed forfeiture complaint seeks to recover these funds as part of efforts to assist victims of the crime.

In addition to arrests and seizures, the operation is also responsible for the rescue of at least 23 minor victims residing in the United States, Spain, and the United Kingdom, who were being actively abused by the users of the site.

“Children around the world are safer because of the actions taken by U.S. and foreign law enforcement to prosecute this case and recover funds for victims,” said U.S. Attorney Jessie K. Liu. “We will continue to pursue such criminals on and off the Darknet in the United States and abroad, to ensure they receive the punishment their terrible crimes deserve.”

“Through the sophisticated tracing of bitcoin transactions, IRS-CI special agents were able to determine the location of the Darknet server, identify the administrator of the website and ultimately track down the website server’s physical location in South Korea,” said IRS-CI Chief Don Fort. “This large-scale criminal enterprise that endangered the safety of children around the world is no more.”

Chief Fort noted that some might call it an odd pairing for the IRS to work on this type of investigation. But, he explained, “our unique and singular focus in following the money made this a logical next step after playing key roles in dismantling Silk Road, BTC-E, Mt Gox and other crimes perpetrated in the shadows of the dark web.”

He further explained, “Our agency’s ability to analyze the blockchain and de-anonymize bitcoin transactions allowed for the identification of hundreds of predators around the world.”

Whether the funds are fiat or virtual, Chief Fort said, “IRS-CI’s expertise is in tracing money all around the world.” Today, IRS-CI is the only federal agency that devotes 100% of resources to investigating financial crimes. IRS-CI is also the only agency with jurisdiction over federal tax crimes. (For more about IRS-CI, click here.)

Chief Fort had an additional message for criminals around the world. “You used to hide by laundering your money through shell companies around the country, but we traced you. You took your money offshore and hid around the world, but we found you. You went on the dark web thinking that your actions were anonymous, but they weren’t, and we again found you. You now deal in crypto-currency, again thinking this will make you anonymous, but our agents have once again proved that there is nowhere you can hide.” He added, “We will not stop in our pursuit.”