A recently released annual report by the Internal Revenue Service Criminal Investigation (CI) Unit has revealed a surge in investigations surrounding crypto and digital asset reporting.
In the report released on December 4, the investigative division revealed that it had opened over 2,676 cases linked to tax and financial crimes, uncovering over $37 billion during the 2023 fiscal year. The team noted an upsurge in the use of digital assets, leading to a corresponding increase in digital asset-related tax investigations.
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These investigations cover various issues, such as failure to report capital gains or income from mining activities (including wages, rental income, and gambling winnings), intentional nondisclosure of cryptocurrency holdings and many more.
IRS Crypto Regulatory Challenges
In the report, Jim Lee, head of the criminal division, acknowledged that “most people using cryptocurrency do so for legitimate purposes.” However, he also stressed the potential to be used to facilitate illicit activities such as terrorism financing and ransomware attacks.
According to Lee, three years ago, almost all active cryptocurrency investigations – surpassing 90 percent – centered on money laundering activities. The unit was among multiple agencies that contributed to the investigation of Binance, which led to a $4 billion settlement.
In addition to the hefty financial penalty, Binance acknowledged its guilt in failing to adhere to registration regulations and operating as an unlicensed money transmitter. Former Binance CEO Changpeng “CZ” Zhao also pleaded guilty to violating anti-money laundering violations. He has resigned from his role as CEO of the company.
“Our team of investigators uncovered that Binance disregarded anti-money laundering [know-your-customer] laws, failed to register as a money transmitter, and willfully violated U.S. sanctions tied to the International Emergency Economic Powers Act,” Lee said in November following the settlement announcement.
Since the agency began increasing efforts to investigate crimes involving cryptocurrency in 2015, the IRS has seized more than $10 billion in digital assets.
📊 Our FY23 Annual Report highlights more than 2,600 investigations, $37.1 billion identified from tax and financial crimes. #IRSC #ByTheNumbers#WhatWeDoCounts
https://t.co/B1hZw8ClXm pic.twitter.com/EZWQKNB2uu— IRS Criminal Investigation (@IRS_CI) December 4, 2023
Regulating crypto reporting
Legislators on Capitol Hill have urged the IRS to expedite the development of cryptocurrency tax regulations. However, the agency is facing challenges in establishing a new framework for cryptocurrency taxation.
In late October 2023, the IRS extended the deadline for submitting comments on crypto tax reporting requirements until January 25, 2024, citing the “substantial volume of comments” received from various stakeholders.
The current proposed rule, released on October 19, aims to implement the provisions of the American Families Plan Act of 2023, enacted by President Joe Biden in August.
The proposed rule mandates cryptocurrency exchanges and other intermediaries to provide transaction details for digital assets valued at over $10,000 to both the IRS and the respective taxpayers. It also requires that cryptocurrency businesses must verify the identities of their customers and maintain comprehensive transaction records.
According to U.S. regulators, the rule aims to strengthen tax compliance and transparency within the crypto domain and curb money laundering and other illicit activities.
There will also be a new tax form for taxpayers to fill out. Starting from 2026 (for the 2025 tax filing season), cryptocurrency users will be required to complete IRS Form 1099-DA. According to the U.S. Treasury, it will simplify the process of determining whether they owe taxes on cryptocurrency gains.
This initiative is expected to curb the tax evasion risks and help ensure all crypto holders adhere to their tax obligations.
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