The Internal Revenue Service (IRS) has charged an individual for underreporting as well as failing to report his cryptocurrency transactions, the first time the agency has taken legal action on such matters.
On Feb. 6, a federal grand jury indicted a Texas man with filing false tax returns that failed to report his cryptocurrency transactions. In 2017, Frank Richard Ahlgren III from Austin, Texas, sold $3.7 million worth of Bitcoin to buy a residence. In his 2017 tax return, Mr. Ahlgren allegedly inflated the price he paid for Bitcoin, thus underreporting his gain from the sale. In 2018 and 2019, he sold more than $650,000 worth of Bitcoin and allegedly failed to report the transaction in his tax returns. He faces a prison term of up to five years for each count.
This is the first time that someone was charged “solely for failing to report or underreporting cryptocurrency earnings and gains on their tax return,” the IRS told Bloomberg. The indictment acts as a warning to crypto users—failure to pay tax on digital asset transactions will face the risk of IRS charges.
Shehan Chandrasekera, head of Tax Strategy at CoinTracker, noted that many individuals have a misconception that crypto transactions are “anonymous” and the government is unable to track such transactions.
The IRS can track crypto transactions via third-party reporting like crypto exchanges as well as by analyzing blockchain—the public ledger which holds records of such transactions.
On the tax forms, citizens are asked the following question: “At any time during 2023, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
All taxpayers filing forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, 1120, and 1120S must answer the question regardless of whether or not they conducted digital asset transactions.
Talking about Mr. Ahlgren’s case in a LinkedIn post, Don Fort, the former chief of the IRS’s Criminal Investigation division, pointed out that “it seems most of the crypto cases in the past few years have been focused on money-laundering cases or illegal source tax cases.”
However, Mr. Ahlgren’s indictment was a “big day as we seem to have crossed the line to legal source tax cases,” he wrote. “While the #IRS continues to debate thresholds and reporting requirements for crypto, one thing not up for debate is the requirement to report capital gains.”
Cracking Down on Crypto
Late last month, the IRS announced it was adding two private-sector experts “to help the agency’s efforts in the cryptocurrency and other digital assets arena … The pair, who have extensive experience in the tax and crypto industries, will help lead IRS efforts building service, reporting, compliance, and enforcement programs focused on digital assets.”The first appointee is Sulolit Mukherjee, who left his job at a private blockchain software technology company to join the agency. The second appointee, Seth Wilks, has worked in the digital asset tax policy space for over six years.
“Seth and Raj expand our ability to understand this sector while designing systems for reporting of cryptocurrency and digital assets and related transactions,” said Doug O'Donnell, IRS deputy commissioner of services and enforcement.
“Improving employee capacity and access to tools in this rapidly evolving global landscape is a top IRS priority.”
With the IRS boosting its crypto focus, tax professionals are preparing for more stringent enforcement actions from the agency. “Everybody’s been waiting for the tidal wave of this enforcement activity,” James Creech, an attorney and senior manager at accounting firm Baker Tilly, said to CNBC.
Ryan Losi, a certified public accountant, warned that taxpayers who haven’t been truthful about their digital assets transactions could get into trouble. “If you’ve consistently shown a pattern of deceitfulness, and it starts to look like willfulness, that’s where the hammer comes down,” he said.
Brokers would be required to report on the sale and exchange of digital assets in 2026 for activities that took place during the prior year. A 2022 Barclays report estimated that the IRS could be missing out on more than $50 billion annually due to crypto traders not paying their taxes.
Lawrence Zlatkin, the vice president of Tax at cryptocurrency exchange platform Coinbase, criticized the proposal.
“The sheer magnitude of this data requirement would be hundreds of times more than the annual reported transactions of any major brokerage—and goes well beyond the scope of pursuing wealthy tax cheats,” he said in a statement, according to Bloomberg.
“The practicality of the IRS’s requirement to report—let alone enforce—this incredible minutia of taxpayer data is questionable at best.”
