Cryptocurrency has created unique challenges for the Department of Justice (DOJ) and other regulatory bodies that seek to monitor its use. The primary concern is that if they go unregulated, cryptocurrencies could potentially impact public safety and national security. In response, the DOJ recently published an extensive outline on how they plan to regulate tax payments and the other issues cryptocurrencies present.
If you own or are investing in cryptocurrency, it’s important to continually educate yourself on the rapidly evolving landscape of the crypto market. Failure to understand updated regulations could result in incorrect tax reporting and an ensuing IRS audit. The best way to stay current with crypto regulations is to consult a skilled tax attorney.
What Is Outlined in the Recent DOJ Publication?
In October 2020, the DOJ published “Cryptocurrency: An Enforcement Framework,” which outlines how they plan to enforce cryptocurrency issues—specifically tax-related discrepancies. In the publication, the DOJ noted that cryptocurrency does have the potential for some economic benefits, such as reducing the cost of financial transactions. However, they also stated that since cryptocurrencies are challenging to monitor, there is the potential for them to be harnessed for illegal activities. The publication is divided into three sections, including:
● The illegal use of cryptocurrencies
● The laws and regulations that will pertain to cryptocurrencies
● The current and future challenges that cryptocurrencies present in managing criminal activities and strategies for addressing these problems
The Illegal Use of Cryptocurrencies
The allure of cryptocurrencies is that they allow their holders to make direct transactions with other people or vendors—cutting out third-party financial institutions that typically serve as the middle man. Unlike dollars, which are regulated and centralized by the Federal Reserve, cryptocurrency has a high level of anonymity, making it difficult to track and regulate. For many, this characteristic of cryptocurrency is simply another benefit, and for others, it serves as a way to mask criminal activity.
The DOJ publication featured three overarching categories of illegal uses of cryptocurrencies that they will prioritize regulating. These include:
● The commissioning of crimes. Such crimes include selling narcotics and other drugs, buying unregistered weapons, selling and purchaing of child pornography, and so on.
● Money laundering and incorrect tax reporting. This would target individuals who take advantage of the anonymity of cryptocurrency to underreport tax liability.
● Crimes that directly affect the cryptocurrency marketplace. This would target individuals who hack online platforms where cryptocurrency is traded and those who engage in illegal investing behaviors.
How Will the DOJ Enforce Cryptocurrency Tax Reporting?
As a governing federal agency, the DOJ has access to a variety of laws that they can utilize to enforce cryptocurrency tax reporting. This means that any taxpayers who own and trade cryptocurrency could face fines and prison time for incorrectly reporting their earrings.
One law the DOJ is likely to use to enforce tax payments on cryptocurrencies is the Bank Secrecy Act (BSA), which requires financial institutions—including online trading platforms for cryptocurrency—to cooperate with federal agencies to prevent money laundering and illegal activity. Additionally, the DOJ could use federal regulations on the following illegal activities to enforce fines and criminal penalties on individuals who avoid tax payments on cryptocurrencies:
● Wire and securities fraud
● Identify theft and fraud
● Operating an unlicensed money transfer business
● Child exploitation behaviors
These are a few examples of activities with strict federal regulations. However, there are a variety of other federal tools the DOJ could use to enforce tax payments on cryptocurrencies. If you believe that you might be facing penalties associated with incorrect tax reporting on cryptocurrency, seek representation from a skilled tax resolution lawyer.
Consult a Skilled Tax Resolution Attorney
If you are concerned that you may be subject to any penalties associated with incorrect tax reporting it is in your best interest to seek legal representation. At Morgan Sebastian Law, Attorney Becky Sebastian is eager to help you navigate the complexities of your tax situation. We understand that accurately filing your taxes can be a challenge, and we’re here to help guide you through the audit process.
To schedule a consultation with an experienced tax resolution lawyer, call (877) 223-6605 or fill out our online contact form.