Why Jail Time Is a Possibility if Virtual Currency Gains are Concealed

Jan 13, 2021 | Blog

Any tax attorney would likely agree that virtual currency, such as bitcoin, litecoin, and ethereum, is an ongoing subject of interest for the Internal Revenue Service. Furthermore, many filers may have noticed a new question on their tax return last year referring to this type of currency. This is a unique question that showed up on the Schedule 1 Section, falling under the heading of “Additional Income and Adjustments to Income.” It specifically asks if the person acquired any financial interest in cryptocurrency of any kind, such as exchanging, selling, receiving, or sending this type of “currency.” Taxpayers are required to check “Yes” or “No” to this question; it should never be left blank.

Cryptocurrency Tax Lawyer

IRS to Continue to Pursue Cryptocurrency Capital Gains Taxes in Coming Years

Not surprisingly, the IRS plans to continue using this question in 2020, and will even ask more filers if they have had any dealings involving cryptocurrency. The question will now be asked on the U.S. Individual Income Tax Return on Page 1 of the 1040 Form. This shows pretty clearly that the intentions of the IRS are to pursue additional information concerning this very new method of paying for goods and services.

Even taxpayers seeking to offer collection alternatives to the IRS are not protected. In fact, on Form 433-A, the Collection Information Statement for Self-Employed Individuals specifically asks the filer to declare cryptocurrency, as well as provide an attachment that contains public keys for all virtual currencies, according to 

Possible Criminal Consequences for Filers Who Conceal Virtual Currency 

Most individuals are well aware that there are many consequences associated with failing to file taxes or making incorrect claims regarding how much money was received or earned in any given year. Numerous criminal tax provisions were designed and enacted to keep filers honest, and taxpayers should never assume that they can conceal cryptocurrency gains from Big Brother.

For example, Section 7201 states that anyone willfully attempting to defeat or evade imposed taxes under the Internal Revenue Code in any manner could be charged with a felony. All the government must show to successfully convict someone is that the person had a tax deficiency and willfully attempted to evade payment. This includes making false statements to the IRS or concealing assets, which, of course, includes virtual currency.

According to local cryptocurrency tax lawyers, there is an additional criminal statute that the government could use to legally pursue filers for a felony. This is Section 7206(1), which makes it a felony to sign a return that contains information that is not true. This Section has been used in the past successfully to get convictions against taxpayers who falsified information.

It is not difficult to see that adding false information to a tax return or attempting to hide gains coming from cyber currency are dangerous activities that could result in jail time. Although some people may think it will never happen to them, any crypto lawyer would likely say that it’s not worth taking a chance.

Ultimately, with the IRS’s increased focus on cryptocurrency, all American taxpayers should be aware that incorrect statements put forth in the form of a tax return or other collection-type document can be used against them in a felony prosecution. For this reason, it is important to be extremely careful when answering questions on these forms concerning cryptocurrency, including the simple “Yes” or “No” question referred to above. Contact a cryptocurrency lawyer at our office to obtain additional information about these laws or to get help filling out a tax return.


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