Recent Developments in Cryptocurrency Tax Fraud

August 18, 2022

The U.S. government continues to crack down on cryptocurrency tax avoidance and evasion.

IRS’s criminal division recently reported seizing more than $3.5 million in cryptocurrency during its most recent fiscal year; those proceeds came from tax and wire fraud, drug trafficking, and money laundering.1 

So, IRS’s cryptocurrency enforcement remains at the forefront of its strategic compliance priorities. Clients must be vigilant in knowing when and how to report crypto transactions on tax returns to avoid criminal and civil IRS penalties. 

Here are the most recent developments everyone should know that highlight IRS’s ongoing compliance initiatives:

  • IRS has recently included crypto tax evaders the opportunity to participate in its ongoing Voluntary Disclosure Program (the “VDP”). That program allows evaders to voluntarily disclose crypto avoidance or evasion to avoid criminal prosecution.2
  • Since 2019, the Joint Chiefs of Global Tax Enforcement (or the “J5) have been working to identify international crypto tax evaders and strengthen enforcement via joint operations. The J5 includes the United States, United Kingdom, Australia, Canada, and the Netherlands.
  • In March 2021, IRS created a special civil enforcement division known as “Operation Hidden Treasure.” That unit investigates tax avoidance and evasion relating to crypto transactions.
  • IRS’s “Operation Hidden Treasure” unit provides specialized training to IRS enforcement employees to understand, analyze, and identify crypto basis tracking, computing taxable gains, blockchain tracking, dark web, and fraudulent crypto cases.
  • Crypto fraud comes in various forms, such as falsely concealing or disclosing crypto transactions on tax returns or intentionally underreporting crypto transactions on tax returns. Taxpayers face criminal penalties in addition to a 75% civil fraud penalty from understating or underreporting such transactions on tax returns.
  • IRS has issued summonses to crypto exchanges requesting their customers’ names, addresses, taxpayer identification numbers, and account activity records. So far, we know that Coinbase, Circle, and Kraken have received and challenged such summonses. So far, the federal courts have enforced the summonses against those crypto exchanges.
  • Another new crypto phenomenon surfaced, DeFi, which means decentralized finance. DeFi reportedly uses crypto and blockchain technology for conducting financial transactions. DeFi aims to replace traditional banking transactions such as savings, loans, and mortgages.
  • Nonfungible tokens, or NFTs, continue to exceed expectations in the virtual finance and investment markets. NFT’s reached between 1,785% and 2,100% growth in the first quarter of 2021 alone and totaled more than $2 billion.3  Since NFTs are a relatively new crypto class, IRS is ramping up its understanding and analysis of NFTs to identify pockets of tax noncompliance.

According to IRS, virtual cryptocurrency is viewed as “property.” And as such create taxable gains or losses when used to acquire, trade, sell, or exchange goods or services.4  Moreover, annual individual federal tax returns (Forms 1040), and other federal tax returns, require a taxpayer to disclose whether they used virtual currency during the tax year. Clients must retain accurate records of crypto acquisition costs and records supporting the use of crypto to acquire goods and services.

The increased use of cryptocurrency will increase IRS enforcement efforts to assure these transactions accurately disclose taxable gains and losses by taxpayers.


[1] IRS-Criminal Investigation’s (IRS-CI) 2021 Annual Report, (i.e., fiscal year ending September 30, 2021).  

[2] IRS Information Release IR-2022-23.

[3] VIMworld, “The NFT Market: Our Thoughts on the Creation of a Life Changing Hyper-Growth Industry, PRNewswire, March 14, 2021.

[4] IRS Notice 2014-21.

About the Author

Howard L. Richshafer

Howard L. Richshafer

Howard Richshafer joined Wood + Lamping in 2008

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