Crypto Tax Evasion and Operation Hidden Treasure

What is Operation Hidden Treasure?

Operation Hidden Treasure was introduced on March 5, 2021, by the IRS Director of the Office of Fraud.

You may feel like the IRS is not always on your side, but you cannot argue their creative abilities in naming departments needs a gold star. Operation Hidden Treasure is unfortunately not the next title of the Pirates of the Caribbean film series.

Operation Hidden Treasure was explicitly designed to bring taxpayers to justice for trying to “hide” their crypto income. But, unfortunately, they are starting to make examples of some taxpayers to push fear into the space and let you know that big brother is, in fact, watching.

In our recently released blog “United States: 6 Crypto Myths busted!” we explored different myths in the crypto community. One of the biggest myths is that taxpayers say, “Nobody can trace any of my blockchain transactions” in fact, this is not the case; your transaction is traceable.

Anonymity is a big attraction in the Decentralized Finance (DeFi) world, but you need to remember that blockchain is a public ledger. Every transaction is verified, and this makes all the transactions public domain.

The government is able to track and link these “anonymous” wallets to people, exactly because of this transparency. The main reason is that nearly all people’s transactional history is an on-ramp (starting point) via a KYC (know-your-customer). Exchanges are required to follow these KYC rules that regulatory authorities have implemented. In addition, most exchanges have already been requested to report their customer’s crypto activities to IRS.

This makes it possible for the IRS to partner with private firms like Chainalysis, which connects real-world activities to blockchain transactions and enables them to track your transactions.

What is the IRS looking for?

It is all in the name, hidden treasure. If you have found your pot of gold on the other side of the crypto rainbow and perhaps kept that secret all too safe, it is possible they are looking for a few extra coins from you.

The IRS is most likely looking for people with tremendous gains in the market - that made a lot of profit. Profits, or gains can come from a sale, swap, exchange, staking coin, airdrops or utilizing that token or coin in another way.  And it is important to report it on your taxes.

3 Examples of crypto transactions considered to be tax evasion

1. People who structure their transactions to mask the transaction activity: meaning structuring your transactions in $10 000 or less, as it is stated in the money laundering law or if you are trying to take your money out of the bank, amounts of $10 000 & higher needs to be reported to the IRS.
2. Holding companies or shell companies to hide your coin assets from the IRS, forensic accounting would be able to identify this behaviour and if you mask your transaction history through a shell company this is seen as tax aviation.
3. On and off-blockchain transactions, for example, cash to bitcoin or bitcoin to cash – without reporting the transaction.

Doing the above or perhaps being more creative could be considered tax evasion. Although the IRS does not pursue criminal tax evasion cases for many people, the penalty for those caught is harsh. They must repay the taxes with an expensive fraud penalty and possibly face jail time of up to five years.

Income Tax Form 1040

Do remember to tick the box on your individual income tax form 1040; if you did receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency.

If you are not so familiar with how your virtual currency is taxed or seen in the IRS’s eyes, do yourself a favor and contact a professional with the necessary knowledge to keep you in compliance because ignorance is never a good fallback.