Key Takeaways:
- As robust enforcement of laws against tax abuses related to cryptocurrency continues, a Southern District of New York judge imposes a maximum sentence of four years on a cryptocurrency founder for tax evasion.
- In their most recent meeting, the Joint Chiefs of Global Tax Enforcement (J5) focus on data mining and financial reports to strengthen agencies’ ability to enforce tax crimes with global implications – leading to more than 50 new leads for international law enforcement.
The Department of Justice (DOJ), IRS Criminal Investigations (CI) and international tax authorities continue to prosecute tax abuses related to digital asset transactions. In imposing a multiyear prison sentence in a recent case in the Southern District of New York, the court sent a strong message that taxpayers caught by the IRS in the service’s ongoing efforts to address this issue face severe consequences. After pleading guilty in April to two counts of tax evasion, cryptocurrency founder Amir Elmaani (aka Bruno Block) was recently sentenced to the maximum term of four years in prison. Damian Williams, U.S. attorney for the Southern District of New York, warned that “[p]articipants in the cryptocurrency markets must play by the rules, and this Office will be tireless in prosecuting those who are not.”[1]
In addition to federal prosecutors not getting any sleep, their colleagues around the globe are working on new investigations. Specifically, international collaboration continues to strengthen agencies’ ability to investigate and prosecute complicated tax cases related to transactions in digital assets. The J5 met recently for their fifth “challenge,” bringing together criminal investigators and financial intelligence units from Canada, the Netherlands, the United States, the United Kingdom and Australia. The challenges are forums for representatives from the five countries to collaborate on tax crimes; this challenge focused on data mining and financial reports and included assistance from industry experts. According to Jim Lee, chief of IRS CI, this challenge led to more than 50 leads on potential tax crimes and money laundering, and those cases are “high-dollar, high-impact leads that have cross-jurisdiction representation.” Examples of the success of the J5 are a recent case out of the Eastern District of New York, where three founders of a cryptocurrency called SafeMoon were charged with a conspiracy to misappropriate millions of dollars, and a globally coordinated case against a non-fungible token Ponzi scheme worth at least $1 billion.
Elmaani, who is the creator of Pearl tokens, admitted to filing a false tax return in 2017, claiming to have earned $15,000 for that fiscal year and failing to file altogether in 2018. In reality, he was earning far more, with the calculated loss to the IRS from these misrepresentations being more than $5 million. In order to aid his attempts to evade paying tax on these proceeds, Elmaani used a pseudonym, Bruno Block, to conduct all business and transactions related to the Pearl tokens he created. Elmaani told investors in Pearl tokens that there was a finite number of tokens available, and no new tokens would be created. He used a back door to secretly mint new Pearl tokens and then sold the tokens in exchange for other cryptocurrencies before the market could adjust to the increase in tokens. After cashing out, he failed to pay taxes on the proceeds and attempted to use shell companies, friends and family members to disguise his identity.
Despite his plea for leniency due to mental illness, he received the full sentence requested by prosecutors and the maximum sentence allowed by law. In support of his sentence, prosecutors stated that “[t]he defendant did not fail to pay his taxes because he lacked the mental ability to pay his taxes – he failed to pay his taxes because he did not want to pay them.”[2]
The prosecutors in the case from the Southern District of New York have focused on abuses related to digital asset transactions, and they recently brought actions and since have convicted failed FTX founder Sam Bankman-Fried as well as others involved in FTX. In addition, they have also indicted targets in the first-ever digital asset insider trading case in 2022. Tax crimes in particular remain heavily scrutinized by both the DOJ and the IRS CI as both agencies continue to ramp up their capabilities to stay ahead of digital asset technology.
Elmaani’s case is just one of many in the area of tax issues related to digital assets where people have gotten caught in the crosshairs of the increasingly focused and capable enforcement agencies. Though this case dealt with a fairly intricate scheme and a somewhat large underpayment of tax, the IRS and the DOJ are committed to rooting out abuses—whether big or small. In 2019, the IRS began requiring taxpayers to disclose on the first page of Form 1040 whether they were involved in any digital asset transaction,[3] building the case for a willful violation against any taxpayer who then failed to report those transactions. Taxpayers should ensure that they are taking steps to comply with all applicable laws and regulations and that they have competent counsel to navigate situations where they believe they may not have complied in years past or they come under investigation.
[1] Press Release, Cryptocurrency Founder “Bruno Block” Sentenced to Four Years in Prison, Oct. 31, 2023, available at https://www.justice.gov/usao-sdny/pr/cryptocurrency-founder-bruno-block-sentenced-four-years-prison.
[2] Crypto Founder Gets Max 4-Yr. Sentence for Tax Crimes, Law360, Oct. 31, 2023, available at https://www.law360.com/articles/1738959/crypto-founder-gets-max-4-yr-sentence-for-tax-crimes.
[3] IRS, Form 1040, available at https://www.irs.gov/pub/irs-pdf/f1040.pdf.
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