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Pay your taxes when you sell Bitcoin

Technology for Lawyers

Published: March 22, 2024

Cryptocurrency may be some brave new world to most people, replete with it’s own rebellion rules and not understandable to eh normal masses. But not to the Internal Revenue Service. To the IRS, if you buy Bitcoin and sell it at a profit, it is just simple capital gains. And you gotta pay taxes on capital gains.
The IRS has been publishing guidances on this topic for years, but they hadn’t arrested anyone. Maybe because they figured that thieves didn’t proliferate in the cryptocurrency space? Or maybe because they were waiting for a big case to bring the hammer down.
And then that case appeared.
In October 2017, Frank Ahlgren III sold approximately 640 Bitcoins worth, at that time, about $3.7 million and used the proceeds to purchase a house in Park City, Utah. According to his indictment, this transaction was knowingly under-reported on his subsequent tax returns, both in terms of the cost basis and the profit from that sale.
And he also did the Carmelo Soprano thing of making a series of bank deposits, each under $10,000. Clever.
Probably/possibly/potentially, because cryptocurrency runs on secretive servers with secretive algorithms and can only be accessed by the owner of the blockchain that the crypto sits on, that said owner thinks that the transactions on that blockchain are somehow secret from the prying eyes of the IRS and the DOJ.
Well, nope to that.
Profit and loss from cryptocurrency are to be reported on IRS Form 8949, Sales and Other Dispositions of Capital Assets. Ahlgren fudged the figures on Schedule D thereof.
Besides tax evasion, Ahlgren was also charged with violating Section 5324(a) of Title 31 for structuring his bank deposits to try to avoid that $10,000 cash deposit floor after which banks have to notify the IRS of the transaction.
Once the DOJ has notice that there was a violation of 5324(a), then they look at the underlying transaction that scored the cash in the first place. Lo and behold, in this case, it was a Bitcoin sale. Et voila, now there’s a Bitcoin sale criminal case.
Rather be lucky than good, eh?