Tax authorities have maintained their pressure on cryptocurrency investors, with the Australian Taxation Office (ATO) sustaining its scrutiny of crypto transactions through the COVID pandemic – and more recently, US tax authorities assembling a specialist team of cryptocurrency investigators.
The creation of ‘Operation Hidden Treasure,’ revealed during a recent speech by Internal Revenue Service (IRS) Fraud Enforcement Office director Damon Rowe, will establish a crack team of specialists whose sole purpose is to reverse-engineer blockchain transactions, find undeclared Bitcoin purchases, and trace them back to the taxpayers that own them.
America’s tax authorities are aggressively working with specialised investigators at the ATO and overseas equivalents – through the Joint Chiefs of Global Tax Enforcement (J5) group as well as partners in the European Union Agency for Law Enforcement Cooperation (Europol) – to identify “tax evasion signatures” in blockchain records of cryptocurrency transactions.
By drawing on expertise in the IRS Office of Fraud Enforcement and Criminal Investigations unit, the Operation Hidden Treasure team will ferret out details of individuals who have structured their purchases in a way that lets them hide their funds and avoid paying tax on them.
“These transactions are not anonymous,” IRS Office of Chief Counsel national fraud counsel Carolyn Schenck said in a warning to cryptocurrency tax evaders. “We see you.”
Questions about the tax treatment of cryptocurrency have been circulating ever since 2014, when the IRS published formal guidance categorising virtual currency as property for tax purposes.
Fast-changing rules and a greater focus on compliance recently drove the agency to publish a FAQ clarifying more of the subtleties in treatment of cryptocurrencies.
It’s not the first time the IRS has wrestled with the treatment of cryptocurrencies: in 2018, it demanded the identities of around 500,000 Coinbase customers, while many cryptocurrency investors were warned in 2020 and 2019 that they had under-reported their holdings and given suggested amounts.
But with cryptocurrency exchange operators calling out confusing guidelines and accountants still working out how to best facilitate compliance, the enforcement regime remains fluid and, for many, confusing.
When anonymous, isn’t
Reining in the ever-growing cryptocurrency space will be a massive effort for regulators, with new data from Crypto Parrot finding that 3,531 new cryptocurrencies were created over the past 12 months – bringing the total number of tradeable cryptocurrencies to 8,728.
The US investigations program is part of a growing global effort to extend traditional regulations into the darkest corners of cyberspace – with some success, such as the takedowns of darkweb markets like DarkMarket and others in recent months that led Europol to declare “the golden age of dark web marketplace[s] is over.”
“Operations such as these highlight the capability of law enforcement to counter encryption and anonymity of dark web marketplaces,” the agency crowed.
“Police no longer only take down such illegal marketplaces – they also chase down the criminals buying and selling illegal goods through such sites…. Vendors and buyers are no longer hidden in the shadow[s].”
Shining a light on cryptocurrencies’ bushel has become increasingly common as tax authorities around the world seek to normalise the application of real-world laws on virtual assets.
The Australian Taxation Office (ATO), for its part, has in recent years been pushing hard to ensure that cryptocurrency investors declare their holdings appropriately – and in 2019 it launched a data-matching program that uses third-party data to expose the holdings of the estimated nearly 1m Australians that have invested in cryptocurrencies.
That program, which partnered the ATO with agencies including the Australian Transaction Reports and Analysis Centre (AUSTRAC) and Australian Securities and Investment Commission (ASIC), leverages on J5 assets that include “cryptocurrency and cyber experts” from Australia, the UK, Canada, and the Netherlands as well as the IRS Criminal Investigations unit – the same one supporting the Operation Hidden Treasure taskforce.
International collaboration through the J5 is designed to address fraud by “organised crime groups and wealthy offshore tax evaders,” the agency explains, noting that “these groups are resourced and have access to professional enablers to hide income and assets using the global financial system.”
Privacy advocates are less than impressed by the growing government effort to pull back the veil of anonymity that privacy-focused cryptocurrencies and anonymity services like Tor and the OPTF provide.
Growing usage of those and similar technologies confirms a strong public appetite for anonymity, some proponents argue, while others have suggested there is a workable compromise between compliance and anonymity.
However the balance changes, cryptocurrency investors need to be vigilant: as Sladen Legal graduate lawyer Henri Sheridan warned last year, ongoing guidance from the ATO “demonstrate that the Commissioner of Federal Taxation’s focus on cryptocurrency has not wavered despite the many challenges posed by COVID-19” and the leeway it granted in many other ways.
“Businesses and individual investors must ensure that they maintain adequate records of and report on all dealing in the cryptocurrencies they own.”