The IRS Building — Stock Editorial Photography

IRS braces for spike in digital asset tax fraud in coming weeks

The U.S. Internal Revenue Service (IRS) criminal investigation department has announced that it is prepping itself for a barrage of virtual currency tax fraud cases ahead of the new tax season.

Jim Lee, head of the division, noted that the cases are in their “hundreds,” with the bulk being in the field of “off-ramping” transactions. Lee claimed that virtual currency investors fail to report gains upon exchanging their assets for fiat while others paid in digital assets are outrightly choosing not to declare.

In a press call with Bloomberg Tax, Lee noted that there had been a major shift in the agency’s investigation of digital asset crimes. Prior to 2019, the bulk of cases investigated by the IRS was related to money laundering, but cases related to tax evasion using digital currencies make up nearly 50% of cases.

“We’ve been doing it for more than 100 years, and we’ve followed criminals into the dark web and now into the metaverse,” said Lee.

To combat digital asset tax fraud incidents, the IRS created the Office of Cyber and Forensic Services in 2021, and barely a year into its operations, it has scored a number of impressive wins. The arrest of Ilya Lichtenstein and Heather Morgan in connection with the 2016 Bitfinex hack and the sentencing of Bitqyck’s founders for tax evasions have been hailed as wins.

The busy day in court for the IRS is a direct result of introducing the “Digital Assets” category that merges virtual currencies, non-fungible tokens (NFTs), and stablecoins in the same basket. Transactions related to any of the asset classes fall under either capital gains or income sections of the 2022 tax return.

Ramping up efforts across the United States

The IRS is not the only agency stepping up efforts to police the digital asset industry in the United States. The Securities and Exchange Commission (SEC) nearly doubled the size of its Crypto Assets and Cyber Unit “to police wrongdoing in the crypto markets” and improve investigations on the ecosystem.

Gurbir S. Grewal, director of the SEC’s Division of Enforcement, noted that the bolstered division “will be at the forefront of protecting investors and ensuring fair and orderly markets” amid the pining macroeconomic challenges. So far, the SEC’s digital asset arm has notched a series of high-profile wins in court, including monetary relief in excess of $2 billion.

The Department of Justice (DoJ) is also making concerted efforts to improve policing the industry with the announcement of a new Digital Asset Coordinator (DAC) Network that will be led by the National Cryptocurrency Enforcement Team (NCET).

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