Web3 Tax Case Analysis: US Bitcoin Investor Fakes $4 Million in Income, Underpays $550,000 in Taxes, Could Be Sentenced to 3 Years in Prison

According to investigations by the U.S. Department of Justice and the Internal Revenue Service (IRS), Ahlgren sold approximately $4 million worth of Bitcoin between 2017 and 2019, but underreported the capital gains taxes payable by exaggerating the cost basis of Bitcoin and not reporting certain sales gains.

Author: AiYing Compliance

Cover: Photo by Wesley Tingey on Unsplash

Just on September 12, Frank Richard Ahlgren III, an early Bitcoin investor in Texas, faced severe legal penalties for falsely reporting gains from Bitcoin trading. According to investigations by the U.S. Department of Justice and the Internal Revenue Service (IRS), Ahlgren sold a total of approximately $4 million in Bitcoin between 2017 and 2019, but underreported the capital gains tax payable by exaggerating the cost basis of Bitcoin and not reporting certain sales gains. This move resulted in a loss of more than $550,000 in U.S. government tax revenue, and Ahlgren was charged with filing a false tax return and faces up to three years in prison, fines, and back taxes. Ahlgren's case highlights the growing tax compliance challenges within the cryptocurrency industry. As cryptocurrencies such as Bitcoin gradually enter the mainstream financial market from niche investments, tax agencies are increasing their supervision of these assets. Especially in the context of volatile cryptocurrency prices and frequent transactions, how to accurately report gains or losses from cryptocurrency transactions has become a realistic problem that industry practitioners and investors must face.

Legal Background of US Tax Compliance

1. IRS legal regulations on cryptocurrencies

Since 2014, the U.S. Internal Revenue Service (IRS) has clearly stipulated that cryptocurrencies (such as Bitcoin) should be treated as property for tax purposes, which means that the purchase, sale, exchange, or payment of cryptocurrencies all involve the declaration of capital gains or losses . According to this regulation, when individuals or companies dispose of cryptocurrencies, their tax declarations should be similar to the capital gains treatment of property such as stocks or real estate.

The concept of “cost basis”

In tax filings, "cost basis" refers to the cost of a person or business to purchase cryptocurrency, including any related expenses. This basis is used to calculate capital gains or losses when selling or trading cryptocurrency. The specific calculation method is:

• Capital Gain = Selling Price of Cryptocurrency - Cost Basis

If the price at the time of sale is higher than the price at which it was purchased, the investor will have a capital gain and will need to pay tax on the gain; otherwise, a capital loss may occur. In Ahlgren's case, he tried to reduce the capital gains tax payable by inflating the cost basis of his Bitcoin, which is a violation of tax law.

Reporting obligations

According to IRS regulations, all cryptocurrency transactions, whether used for investment, trading or payment, need to be reported. Specifically, investors or users need to report trading gains or losses in the following circumstances:

• Selling cryptocurrency : either to another person or to an exchange;
• Use cryptocurrencies to make payments : e.g. to purchase goods or services;
• Exchange cryptocurrencies : e.g. Bitcoin for Ethereum etc.

These transactions must be reported on the tax return and calculated as capital gains or losses. Ignoring this obligation may result in tax penalties or more serious criminal liability.

2. Enforcement Trends of the Ministry of Justice

According to Aiying, in recent years, with the rapid development of Web3 and the expansion of fiscal pressure, the U.S. Department of Justice (DOJ) has stepped up its enforcement efforts against cryptocurrency-related tax fraud and tax evasion. The anonymity and decentralization of cryptocurrency, while bringing convenience, also make it difficult for regulators to monitor and track illegal transactions. This feature makes cryptocurrency a tool for tax evasion, which has attracted widespread attention from the U.S. government.

The fight against cryptocurrency fraud and tax evasion

The Department of Justice has significantly increased its investigation and prosecution of cryptocurrency fraud cases in recent years. The Ahlgren case is one of the examples, reflecting the government's zero-tolerance policy on tax evasion. According to the DOJ's statement, cryptocurrency users and investors must strictly comply with tax regulations and report all relevant transaction gains, otherwise they will face severe legal consequences.

• The Department of Justice and the IRS are working together to use advanced technology to track cryptocurrency transactions and target investors who attempt to falsely declare or conceal trading income.
• In addition, the DOJ also warned industry participants that as technology advances, the government will be able to track more cryptocurrency transactions and will launch a larger crackdown on tax evasion.

How to achieve tax compliance: A practical guide

As global regulation of cryptocurrencies gradually strengthens, ensuring tax compliance has become a must for industry practitioners and investors. Aiying has listed the following guide to detail how to keep complete transaction records, accurately declare transactions, and make full use of professional resources to avoid legal risks.

1. Establish a complete transaction record

To ensure tax compliance, you must first establish complete and detailed records of cryptocurrency transactions. This is not only a requirement of the IRS, but also the basis for ensuring that capital gains or losses are calculated correctly. Here are the key steps on how to establish and maintain transaction records:

The records should include :

• Transaction Time : The exact date and time of each cryptocurrency transaction to ensure accuracy for subsequent calculation of holding periods for capital gains.
• Transaction Amount : Record the amount of Bitcoin or other cryptocurrency involved in each transaction, as well as the USD or fiat currency value at the time of the transaction.
• Counterparty : Recording the counterparty of a transaction, especially in P2P transactions, is very important to confirm the authenticity and legitimacy of the transaction.
• Transaction Fees : Record the fees for each transaction, such as mining fees, to ensure the cost basis in tax filings is accurate.

How to record transactions :

• Manual Recording: For individual investors who trade smaller volumes, it is possible to manually track trades via a spreadsheet such as Excel or Google Sheets.
• Automated Records: Most trading platforms provide transaction histories that users can export and archive regularly.

2. Accurately report each transaction

Every cryptocurrency transaction must be reported in accordance with regulations, especially when calculating capital gains, correctly calculating the cost basis is the key to avoiding tax problems. The following is a specific example to illustrate how to correctly calculate capital gains and cost basis:

Capital Gains Calculation Example :

• Suppose you bought 5 bitcoins in 2015 at $500 each, for a total cost of $2,500.
• In 2021, you sold 3 of them at $50,000 each, for a total of $150,000.
• Capital Gain Calculation : $150,000 (sale price) - $1,500 (original cost of 3 Bitcoins) = $148,500 capital gain.

Avoid the mistake of overstating your cost basis :

In the Ahlgren case, he reduced his capital gains by exaggerating his cost basis of Bitcoin, an act that ultimately led to serious legal consequences. The cost basis should be based on the actual purchase price and record related expenses, such as transaction fees. By keeping accurate records, investors can avoid the risk of misreporting or underreporting capital gains.

Short-term vs. long-term capital gains :

The reporting of capital gains also takes into account the holding period. If the holding period is less than one year, it is a short-term capital gain, which is taxed at ordinary income rates; if it is more than one year, it is a long-term capital gain, which is generally subject to a lower tax rate. Therefore, it is important to accurately record the date of each transaction to determine the applicable tax rate.

3. Leverage professional resources

To ensure accurate reporting of every cryptocurrency transaction, industry practitioners and investors can use a variety of professional resources and tools. Here are some recommended tools and methods:

Use tax tools :

• CoinTracker : This tool can automatically synchronize transaction data from multiple exchanges, track users' cryptocurrency buying and selling records, and generate capital gains reports based on tax reporting needs.
• TokenTax : A tax tool designed specifically for cryptocurrency users that supports automatic import of transaction records and can generate tax filing documents that comply with IRS requirements.
• CryptoTrader.Tax : Supports simplified management of trading records across multiple exchanges and helps users calculate capital gains and losses through automated functions.

These tools not only help users track complex cryptocurrency transactions, but also generate tax reports that comply with IRS requirements, reducing the risk of errors in manual calculations.

Get help from a tax expert :

Because cryptocurrency tax regulations are complex, especially as compliance requirements may vary in different countries or regions, it is important to seek professional tax advisors. Tax advisors can help investors and businesses:

• Understand the latest tax laws and regulatory requirements;
• Design tax-compliant investment strategies;
• Helps you deal with complex tax filing issues and avoid potential tax disputes and penalties.

Aiying: With the tightening of regulation, cryptocurrency industry players must pay great attention to tax compliance. Any attempt to conceal income through false declarations, unreported transactions, or by false reporting may result in severe legal penalties. The cryptocurrency industry has entered an era of increasing transparency, and any non-compliant behavior may be tracked and punished. In general, the IRS and DOJ's regulation of cryptocurrencies reflects the global attention paid to cryptocurrency tax issues. Industry players need to adapt to this change, strengthen tax compliance, and ensure that every link in transactions and operations complies with legal provisions to avoid legal risks similar to the Ahlgren case.

Information reference:

https://www.justice.gov/opa/pr/early-bitcoin-investor-pleads-guilty-filing-tax-return-falsely-reported-his-cryptocurrency

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