Written by: TaxDAO
Related news: Early Bitcoin investors sentenced for falsely reporting cryptocurrency gains.
Author: Office of Public Affairs. U.S. Department of Justice
Frank Richard Ahlgren III, a Texas man, was sentenced to two years in prison for submitting false tax returns and underreporting $3.7 million in Bitcoin capital gains. Ahlgren was an early Bitcoin investor who, between 2017 and 2019, used various means to conceal profits from Bitcoin trading, including inflating purchase prices and using mixers to obscure transactions. Ultimately, Ahlgren was convicted of tax evasion totaling over $1 million.
According to court documents and statements, Frank Richard Ahlgren III submitted false tax returns, underreporting or failing to report substantial gains from the sale of $4 million worth of Bitcoin. However, under U.S. tax law, all taxpayers must report any sales income, actual gains, or losses from the sale of cryptocurrencies (like Bitcoin) on their tax returns.
Ahlgren was an early Bitcoin investor who began purchasing Bitcoin in 2011. In 2015, he bought 1,366 Bitcoin through Coinbase. In October 2017, he sold 640 Bitcoin, profiting $3.7 million, and purchased a house in Utah. When reporting his 2017 income tax, he submitted false income summaries, exaggerating the purchase prices of Bitcoin and underreporting capital gains. Between 2018 and 2019, he sold Bitcoin worth $650,000 but did not file tax returns. To conceal the transactions, Ahlgren employed various complex methods over the years, attempting to obscure his Bitcoin trading activities by using multiple wallets, conducting offline Bitcoin cash transactions, and utilizing mixers designed to obscure the identity of traders. It is estimated that Ahlgren's total tax evasion from Bitcoin reached $1 million.
This case marks the first criminal tax evasion case in the U.S. fully centered around cryptocurrency. Officials from the DOJ Tax Division stated that Ahlgren was sentenced for concealing Bitcoin profits and attempting to obscure transaction profits on the blockchain. The head of the IRS Criminal Investigation Division emphasized that they have the expertise to trace cryptocurrency transactions and pointed out that tax evasion will be legally punished regardless of the form of currency used.
In addition to two years of imprisonment, U.S. District Court Judge Robert Pitman of the Western District of Texas also sentenced Ahlgren to one year of supervised release and ordered him to pay $1,095,031 in restitution to the U.S. government.
TaxDAO Brief:
Prior to this case, cryptocurrency tax evasion was often 'mixed' with other tax violations. However, the U.S. Department of Justice (DOJ) has specifically prosecuted cryptocurrency tax evasion, making this case the first criminal tax evasion case in the U.S. entirely centered around cryptocurrency. This case reminds cryptocurrency investors that while earning wealth, they should also be constantly aware of tax compliance risks.
Cryptocurrency tax evasion is prosecuted independently for the first time.
Prior to this, although cryptocurrency transactions had been included within the IRS's tax regulatory scope, instances of cryptocurrency tax evasion were often prosecuted alongside other illegal activities. For example, in previously adjudicated cases like Bruno Block and Bitqyck, prosecutors primarily focused on charges of securities fraud and did not specifically target tax evasion issues. Ahlgren's case marks the first criminal tax case in the U.S. solely targeting cryptocurrency, indicating that future U.S. regulatory scrutiny on cryptocurrency tax compliance will become stricter, and cryptocurrency investors need to pay more attention to the tax compliance of related transactions and gains to avoid tax penalties and unnecessary losses.
Falsely reporting cryptocurrency gains carries a penalty comparable to that of intentional assault.
In the U.S., tax evasion is explicitly classified as a felony. According to Section 7201 of Title 26 of the U.S. Code (26 U.S.C. §7201), anyone who willfully attempts to evade or defeat tax may be sentenced to up to 5 years in prison, a fine of up to $100,000 (up to $500,000 for corporations), or both, provided they pay back taxes. In comparison, criminals who cause serious injury to others (Aggravated Assault) may only be sentenced to over 5 years in prison, which implies that the U.S. considers tax evasion to be only slightly less harmful than causing serious injury to others.
"Invisible" transactions can also be tracked
The characteristics of decentralization and anonymity are the core appeal of cryptocurrencies, but this does not mean that cryptocurrency transactions can escape tax regulation. To enhance regulatory capabilities, law enforcement may adopt various anti-anonymity measures, such as using data analysis technology to identify abnormal transactions, strengthening information sharing and cooperation with international financial institutions, and developing monitoring tools for emerging payment methods to ensure the transparency and compliance of financial activities. Additionally, relevant departments may use blockchain analysis tools to trace cryptocurrency transactions, locking onto targets by associating wallet addresses with known identity information. Furthermore, the U.S. Treasury and the IRS have passed the Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions Act, requiring cryptocurrency brokers to report their customers' cryptocurrency sales and transactions starting January 1, 2025, which further limits the space for concealing cryptocurrency income.
Cool reflection on hot topics: the tax system is not inherently perfect.
While this case has sparked heated discussions, it also prompts us to reflect on the cryptocurrency tax system in the United States. That is, the U.S. cryptocurrency tax system itself may have several ambiguities, and the tax burden on individual investors may be too heavy. Does this design flaw in the system also contribute to the occurrence of cryptocurrency tax evasion to some extent? Cryptocurrency tax systems in various countries are still in the exploratory stage, and the U.S. is no exception. The current U.S. tax system does not fully and clearly guide investors on how to accurately report and pay taxes on cryptocurrency transaction income, especially when Ahlgren first invested in Bitcoin. For example, accurately calculating the purchase cost in cryptocurrency transactions is a long-standing issue. Due to the extreme volatility of cryptocurrency prices, investors may adopt different trading methods when purchasing, such as batch purchases, using different platforms, or different payment methods. These factors complicate the calculation of actual purchase costs. The existing tax framework lacks clear regulations on how to handle these price fluctuations and trading methods, especially for ordinary investors who often do not have sufficient expertise to understand how to correctly calculate the cost basis of each transaction. Moreover, the tax agency's tax guidelines are often based on traditional asset trading models and do not fully consider the characteristics of cryptocurrencies, such as cross-border transactions, fee differences between exchanges, and the use of privacy tools like mixers. The lack of clear guidance in this situation can easily lead to errors in reporting by investors, resulting in tax compliance risks and potentially leading to underreporting and tax evasion. For tax authorities, the existing ambiguous standards also increase the difficulty of tax audits, posing greater challenges for regulatory work.
Furthermore, cryptocurrency transactions involve cross-border transactions and anonymous trading, making tax collection itself technically and operationally challenging. Taxpayers' proactive cooperation can help reduce collection costs. If the government still imposes strict regulation and high tax burdens on cryptocurrencies at this time, it may force taxpayers to passively report their taxes or even evade or underreport taxes. Perhaps, compared to the illegal activities of individual Ahlgren, it is more worth noting the soundness of the tax regulatory framework.
Tax risks should not be taken lightly; compliance is the solution.
Undoubtedly, paying taxes according to the law is a basic responsibility of citizens, but we should also urge legislators to design clearer tax rules and more appropriate tax burdens to avoid allowing excessive tax burdens to hinder the development of the cryptocurrency market. At the same time, the crypto community should understand and respect the importance of tax compliance. The goal of tax compliance is to make the cryptocurrency market healthier and more transparent, promoting its long-term development rather than falling into endless legal disputes and policy confrontations. In particular, as the U.S. and other countries continuously improve the regulatory framework for cryptocurrencies and combat money laundering and terrorist financing, the legitimacy of the sources of cryptocurrencies becomes increasingly important, and complete tax documentation is a strong proof of the legitimacy of asset sources. From this perspective, current tax compliance closely aligns with the long-term property interests of cryptocurrency investors.
