IRS’s First Crypto Tax Charge Signals Beefed-Up Enforcement Push

Crypto tax cheats just might have more to worry about this filing season as a newly confident IRS worked with the Department of Justice on the first standalone criminal charges for crypto tax fraud.

The agency accused Frank Richard Ahlgren III, of Austin, Texas, of underreporting or failing to report the sale of $4 million worth of bitcoin in 2017 and 2019 and substantial capital gains that came from those sales.

It was the first time someone was charged “solely for failing to report or underreporting cryptocurrency earnings and gains on their tax return,” the IRS said by email. The charge is being seen as a warning to those using cryptocurrency that the IRS is serious about cracking down on tax crimes in this space.

The IRS has been beefing up its involvement in the crypto space for more than a year, issuing guidance around crypto staking and working to finalize proposed broker reporting rules that would require exchanges to disclose information about their users’ identities and transactions.

“It’s a big step for the IRS,” Miles Fuller, head of government solutions at digital assets compliance and reporting company TaxBit, said in an interview.

These kinds of charges typically have piggybacked on other criminal investigations.

“A lot of these prominent cases were discovered as part of a crime or fraud or money-laundering crimes,” Vivian Fang, finance professor at the Kelley School of Business at Indiana University, said in an interview. “If you’re going to do some illegal activities, chances are you’re also going to evade tax.”

But proving crypto tax fraud on its own can be tough, and would require extensive technical resources and expertise—something the agency has been building up over the years.

Steptoe Partner Lisa Zarlenga said this latest action is the culmination of years of these efforts, rather than a pivot or change of focus in the agency.

Tricky Tax Math

Proving crypto tax fraud can be tricky.

When users buy cryptocurrencies over time and later sell some of it, it can be hard to track which of the sold coins were bought at which times—vital information for figuring out how much the seller paid for them. Without pinning down the basis, the sale price on its own can’t determine the gains that should be paid.

Tax cheats themselves aren’t always clear about best tactics to evade paying legally owed taxes to the IRS.

One lingering myth is that the government has no way to track crypto transactions, said Shehan Chandrasekera, head of Tax Strategy at CoinTracker.

“A lot of people still have this misconception that crypto is anonymous,” he said.

The agency recently announced it was bringing on two private industry crypto experts—Sulolit “Raj” Mukherjee, formerly of Binance.US and Consensys, and Seth Wilks, formerly of TaxBit—in a sign that it’s continuing to invest in understanding the space as it ramps up enforcement and rulemaking.

“Nothing can replace that in-industry experience,” said Ledgible CEO Kell Canty.

More to Come

Fuller said if the Ahlgren case goes to trial, prosecutors would have the monumental task of educating the jury on how cryptocurrencies work to get them to the point they feel comfortable handing down a verdict.

Other prosecutors could take note, if that does happen, as more cases could be coming and there’s little precedent for getting juries comfortable weighing in on these kinds of cases, Fuller said.

Tax pros are watching to see if more cases like this are on the way, as the IRS keeps looking to crack down on what it perceives to be tax abuse, Zarlenga said.

“I’m pretty sure this is the first of a string,” she said. “They’re still convinced there’s a ton of underreporting going on. I doubt this will be the last time.”