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Russian Conflict Could Spur Greater IRS Scrutiny of Crypto Use

March 22, 2022, 8:45 AM

Russia’s invasion of Ukraine and resultant economic sanctions imposed against Russia for initiating the conflict have triggered a growing debate in Washington, one that centers on whether Moscow will try to sidestep crippling economic sanctions by using cryptocurrencies and cryptocurrency exchanges.

Going a step further, it’s possible that growing anti-cryptocurrency rhetoric from congressional policymakers could cause the Internal Revenue Service to increase the focus of its tax collection efforts this year on cryptocurrency tax filers. Here’s what these tax filers need to know in order to stay on the IRS’s good side.

Sentiment in D.C. Shifts Away From Crypto

After Western countries united to enact sanctions, concerns quickly surfaced about the possibility of targeted Russian individuals and the Russian government subverting sanctions by channeling funds into cryptocurrencies and cryptocurrency exchanges. Sen. Elizabeth Warren (D-Mass.) and a handful of other lawmakers recently asked the Treasury Department to confirm if “criminals, rogue states, and other actors may use digital assets and alternative payment platforms as a new means to hide cross-border transactions for nefarious purposes.”

The senators’ Treasury inquiry paralleled a separate request from the White House asking top cryptocurrency trading exchanges to monitor accounts that are supposed to be blocked by sanctions. However, major cryptocurrency exchanges such as Coinbase, Binance, and Kraken have refused to block all Russian digital wallets from crypto trading, stating that it would hurt innocent citizens rather than those leaders responsible for the actual conflict.

And this may be what these citizens are doing. A recent article noted that a large number of Russian individuals and households have been converting rubles, and the ruble hit a record low of 142 versus the dollar in early March.

Fleeing Russian Fiat Currency

The article went on to state how there are additional signs suggesting that people are rushing to convert their Russian fiat savings into cryptocurrencies. According to blockchain research site CryptoCompare.com, trading volumes between the ruble and cryptocurrencies hit 15.3 billion rubles ($140.7 million) on the last day of February, marking a 300% increase compared to the prior week.

Existing Obstacles Limit How Much Crypto Can Subvert Sanctions

Despite these events, it needs to be stated that it would be extremely difficult for the Russian government to fully sidestep global economic sanctions using cryptocurrencies. A panel of cryptocurrency experts recently said there was no evidence of major sanctions dodging, and there are problems converting digital currencies to traditional money via financial firms that are subject to anti-money laundering rules.

“Even at the level of individual elites, laundering billions of dollars through digital wallets would expose themselves to those tracking flows within virtual currency markets,” a Treasury spokesperson said, adding that anti-money laundering rules and sanctions also apply to cryptocurrency exchanges.

Regardless, the cryptocurrency industry is an easy scapegoat. Dave Grimaldi, executive vice president and head of government relations at the Blockchain Association, has said that it’s very easy for the pendulum of political and public opinion to swing against a new, technologically complex industry.

“You’re always one crisis away from goodwill eroding within minutes,” Grimaldi said. “Look at the examples involving data breaches, car emissions disclosures, health-care cover ups, on and on. Crypto’s unfamiliarity, relative ‘newness,’ and complexity have elected officials, especially Democrats, skeptical and leery.”

IRS May Help Track Russian Fund Movement—Nothing Official About U.S. Crypto Taxpayers

It’s important to note that, as of the time of writing, there has not been any official word from the IRS regarding any plans to increase scrutiny of U.S. tax filers for cryptocurrency assets because of the crypto crackdown against Russia or the anti-crypto rhetoric from Warren and other politicians.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Mark Kang is a seasoned CPA with a Ph.D. in Physics. He is the founder of Cointelli, a crypto tax software provider.

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