We have been following for years (see here) the steps that the United States Internal Revenue Service has taken to sensitize taxpayers to the need for them to properly report sales of cryptocurrency. There did not, however, seem to be any criminal cases brought for failure to do so. That is why the federal indictment against Frank Ahlgren III that was made public earlier this month was interesting. Unlike prior cryptocurrency criminal tax cases, which had some element of money laundering, fraud or other illicit activity, this indictment was primarily for straightforward tax evasion.
The relevant tax return requirements are simple, as the Justice Department laid out in the indictment: “[taxpayers must] report sales proceeds and any gains or losses from the sale of the cryptocurrency on their tax return. A taxpayer report[s] sales proceeds and any gains or losses from the sale of cryptocurrency on an IRS Form 8949, Sales and Other Dispositions of Capital Assets. The totals from the IRS Form 8949 would flow onto the taxpayer’s Schedule D, Capital Gains and Losses. Both the IRS Form 8949 and Schedule D would be attached to the taxpayer’s Form 1040, U.S. Individual Income Tax Return. To determine the gain or loss from the sale, the taxpayer would subtract their basis from the sales proceeds. The basis was generally the price that the taxpayer paid to purchase the cryptocurrency.”
According to the indictment, in October 2017, Ahlgren sold approximately 640 Bitcoins worth a total of approximately $3.7 million that he used to purchase a house in Park City, Utah but, on his tax returns, knowingly under-reported his capital gains and over-reported his cost basis. The government alleged also that, on his 2018 and 2019 tax returns, Ahlgren failed to report all of the proceeds from his cryptocurrency sales.
Ahlgren was also charged with violating Section 5324(a) of Title 31. Domestic financial institutions engaged in a currency transaction in excess of $10,000 with a customer are required to report the transaction to the United States Department of the Treasury by filing a Currency Transaction Report (“CTR”). A person who structures cash deposits to avoid triggering the filing of a CTR violates Section 5324(a). The indictment alleged numerous examples of where, after selling some of his Bitcoin to an individual in exchange for cash, Ahlgren made a series of bank deposits of the cash in amounts less than $10,000 each to avoid triggering the CTR requirements.
As we have reported in the past, there has not always been complete clarity around the IRS and digital assets, such as its recent decision to put on hold the reporting requirements for businesses who receive $10,000 or more in digital assets (see here). There is, however, no ambiguity in a taxpayer’s falsely reporting the proceeds from cryptocurrency sales. It will be interesting to see if the Ahlgren prosecution is the beginning of a trend.
