As Bitcoin reaches prices not seen since November 2021, individuals and entities will undoubtedly consider selling – sometimes called “taking profit” on – Bitcoin and other digital assets to capture previously unrealized gains.  But crypto market participants should be aware of the U.S. tax implications of realizing gains on the sale of digital assets – more importantly, properly reporting such gains to the Internal Revenue Service (“IRS”).  As a recent U.S. Department of Justice (“DOJ”) Indictment makes clear, the willful failure to report such gains to the IRS may lead to potential criminal charges.

The Criminal Charges

On February 7, 2024, the DOJ announced criminal charges against Texas resident Frank Richard Ahlgren III, alleging he filed false tax returns (three criminal counts) and structured cash deposits to avoid currency transaction reporting requirements under the Bank Secrecy Act (“BSA”) (four criminal counts).  As alleged in DOJ’s indictment and press release:

Between 2017 and 2019, Ahlgren filed tax returns that failed to accurately report Ahlgren’s gains of approximately $3.7 million resulting from an October 2017 sale of roughly 640 Bitcoins, which he used to purchase a house in Park City, Utah.  While Ahlgren did report gains and basis from his sale of Bitcoin, he reported a cost basis (his original purchase price for the Bitcoins) that was substantially higher than his actual cost basis and reported gains that were less than his actual gains, therefore underreporting to the IRS his long-term and capital gains on the sale of the Bitcoins and other cryptocurrencies. 

In 2018 and 2019, Ahlgren sold 82 Bitcoins in multiple transactions for about $693,000, some of which was for in exchange cash and gold coins.  In his tax returns for the years 2018 and 2019, Ahlgren failed to report all the proceeds and capital gains of these Bitcoin and other cryptocurrency sales to the IRS.

Additionally, on four separate occasions, Ahlgren took the cash from his Bitcoin sales and knowingly made cash deposits in amounts less than $10,000 at various financial institutions, to evade those banks’ BSA obligations to report to the U.S. government cash transactions in excess of $10,000.  While deposits in cash less than $10,000, standing alone, are not ordinarily unlawful under the BSA, the BSA prohibits such deposits if they are intended (or “structured”) to avoid the BSA’s reporting requirements.

Takeaways

This appears to be the first time DOJ has brought a “pure” criminal tax case involving digital assets – in other words, DOJ did not charge the defendant with fraud, money laundering, or some other type of criminal activity.  Rather the charges are based only on alleged tax violations (underreporting / failing to report gains) and what the defendant then did with the cash proceeds of his Bitcoin sales.  

Given DOJ’s pronouncement that “[a]ll taxpayers are required to report any sale proceeds and gains or losses from the sale of cryptocurrency, such as bitcoin, on a tax return,” taxpayers may wish to consult with counsel familiar with both digital assets and tax matters in understanding implications of their past and future transactions in digital assets, as well how to handle inquiries from the IRS or DOJ.

View the full indictment

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Photo of Anand Sithian Anand Sithian

For high-stakes internal and government investigations and complex regulatory and compliance matters, companies and individuals look to Anand to provide strategic advice and counseling, particularly on issues relating to the Bank Secrecy Act and Anti-Money Laundering (“BSA/AML”), economic sanctions, and digital assets. Anand

For high-stakes internal and government investigations and complex regulatory and compliance matters, companies and individuals look to Anand to provide strategic advice and counseling, particularly on issues relating to the Bank Secrecy Act and Anti-Money Laundering (“BSA/AML”), economic sanctions, and digital assets. Anand is resident in the firm’s New York office and a member of the firm’s International Trade, White Collar and Regulatory Enforcement, and Financial Services groups.

A former federal prosecutor, Anand leverages his government experience to guide clients through complex white-collar matters, including grand jury and regulatory investigations, enforcement proceedings, and internal investigations. Anand has deep experience in parallel criminal and civil investigations and proceedings, and often represents clients in defending against civil lawsuits related to government investigations.

Representing some of the world’s largest banks and technology companies, Anand has addressed a wide range of issues, including economic sanctions, BSA/AML; economic sanctions and national security; payments and cryptocurrency; securities laws; and cybersecurity enforcement. In the regulatory space, Anand prides himself on providing commercial and actionable advice, including in the developing areas of digital assets, FinTech, and payments.

Photo of Starling Marshall Starling Marshall

When clients face complex commercial and tax disputes, they rely on S. Starling Marshall as their advocate and counselor. Starling is a trial lawyer with over 15 years of experience who has successfully represented clients before federal and state courts, arbitration panels, and

When clients face complex commercial and tax disputes, they rely on S. Starling Marshall as their advocate and counselor. Starling is a trial lawyer with over 15 years of experience who has successfully represented clients before federal and state courts, arbitration panels, and administrative tribunals. Drawing on her years of government service and private practice, she guides clients toward business-minded solutions throughout all phases of an investigation or litigation.

Starling is a partner in the Litigation and Tax groups in the firm’s New York office. In addition to representing clients in all stages of litigation, she guides clients through complex IRS audits and administrative appeals, provides tax-related advice, conducts internal investigations, and represents individuals and corporate entities in criminal tax matters.