DOJ Successfully Prosecutes First Crypto Tax Case
The criminal division of the IRS (CID) has historically taken a targeted approach to enforcement of the Internal Revenue Code (IRC). This results in the government targeting certain sectors or tax practices for criminal investigation. Some of the targeted groups have become mainstays, including tax preparation firms and high cash entities. However, each year CID adds new investigative tools or attacks to their arsenal. In 2024, CID put two new areas under a microscope – crypto investors and conservation easement tax schemes.
For the last five years, our firm has written blogs related to crypto tax enforcement. These blogs highlighted the task forces and other government allocations geared toward crypto tax enforcement. The government was laying the foundation for criminal investigations into retail investors. In 2024, CID launched its first successful investigation, and prosecution, of a crypt retail investor who failed to report Bitcoin gains.
This blog post will walk through the government’s successful prosecution of Frank Ahlgren in the Western District of Texas. During that walkthrough, we will highlight important legal issues before discussing the diversion of focus under the new presidential administration.
CIDs First Successful Prosecution of Retail Crypto Investor
In February of 2024, Frank Ahlgren was charged in federal court under seven counts: three counts of filing a false return for tax years 2017, 2018, and 2019 and four counts of structuring cash deposits to avoid the currency transaction report requirements. We will consider each scheme in turn.
False Statement Scheme
Under 26 U.S.C § 7206(1), it is a criminal offense to file a tax return the filer knows is materially false. This statute is commonly triggered when taxpayers knowingly underreport income, overstate expenses, or underreport gains. Though more advanced schemes are present in the U.S. tax system, these three general areas account for most false statement prosecutions.
Under current IRS guidance, cryptocurrencies are treated similarly to common stocks. This means a taxpayer must report their gains in cryptocurrencies on Form 8949. These gains are passed through to Schedule D on personal returns. The filer is responsible for paying capital gains tax on the net gain for the year.
The gain or loss in a particular capital asset sale is determined by subtracting the total proceeds from the taxpayers cost basis in the asset. For example, if a taxpayer buys 1 BTC for $10,000 and sells that 1 BTC for $20,000, they will have a $10,000 gain reported on Form 8949. The taxpayer would owe capital gains tax on the $10,000 gain.
According to the indictment, Mr. Ahlgren filed false statements in his tax returns for 2017, 2018, and 2019. In 2017, Ahlgren reported his BTC sales proceeds to the government. However, Ahlgren overstated his basis to fictitiously lower the capital gains reported on Form 8949. Using the example from the prior paragraph – if the taxpayer falsely stated he paid $20,000 for the BTC sold, he would zero out the gain and the tax owed to the IRS. This material false statement lowered Ahlgren’s tax liability and resulted in a significant loss to the United States Treasury.
In 2018 and 2019, Ahlgren decided to take a different approach. For these years, Ahlgren filed tax returns that excluded all BTC sales. This allowed Ahlgren to avoid discussing any gains from his crypto investments. In truth, Ahlgren had multiple BTC sales during 2018 and 2019, including the sale of 38 BTC on chain that was worth $398,000 and multiple private cash sales of BTC that totaled over $125,000. By excluding the sales from his tax return, Ahlgren failed to lay out numerous taxable events. This failure significantly lowered his tax burden.
Structuring Transactions to Avoid Currency Transaction Reports (CTRs)
In the United States, a bank is required to submit a CTR for all cash deposits or withdrawals > or = to $10,000. This requirement allows the government to track cash as it flows through the monetary system.
Under Title 33, it is a criminal offense to structure cash deposits in increments below $10,000 to avoid the CTR requirements. This offense is commonly an add-on charge to a parallel white-collar scheme. We often see small structured transactions as white collar defendants move money into their bank accounts. After all, multiple large cash deposits, and the CTRs that will follow, can trigger federal investigations into the depositor’s finances.
In 2019 and 2020, Ahlgren conducted multiple private cash transactions involving BTC sales. These transactions totaled over $150,000. Ahlgren deposited most of the cash in his personal bank accounts. However, every deposit was for just under $10,000.
A specific transaction will help highlight the structuring case. On February 13, 2019, Ahlgren sold 13 BTC for $47,000 cash. On that same day, Ahlgren made three separate deposits into his bank accounts ($8,060, $7,060, and $6,000). Two days later, Ahlgren deposited $9,040. A week later, Ahlgren deposited $9,680 and $4,665 in two separate transactions. This general practice was observed across all four counts in the indictment for private BTC sales.
The total cash deposits nearly equal exact purchase price of 13 BTC. This fact would allow the government to presume Ahlgren received $44,000 on February 13, 2019 before slowly leaking that cash into his bank accounts over the course of the month. This slow leak never involved a deposit that hit the $10,000 threshold.
Certainly, there may be explanations for this financial behavior that do not involve avoidance of the CTR rules. These could include showing the cash was received in a piecemeal fashion; via the BTC sale or another source. However, those defenses become tough to spin when its shown that Ahlgren later decided to hide all BTC cash sales from the government on his tax return. That reality allows the government to show the structured transactions played a pivotal role in the tax fraud scheme.
Ahlgren is Sentenced to Twenty Four Months and Ordered to Pay Restitution
In late 2024, Ahlgren pleaded guilty to count one of the indictment – filing a materially false statement within a tax return in violation of Title 26 U.S.C. § 7206(1). Ahlgren agreed to a tax loss over one million dollars; indicating Ahlgren’s total unreported gains exceeded $3,000,000 during the investigation years.
Ahlgren was ordered to pay the government restitution in the amount of $1,095,031 and was sentenced to 24 months in federal prison. This sentence marked the first successful conviction of a crypto retail investor in the United States.
The Future of Crypto Tax Enforcement
Federal white-collar investigations are resource intensive. The government lacks the resources to investigate every criminal fraud scheme. This reality forces the government to target certain areas where they believe they will recover the most waste. Or target certain pet projects of the head of the executive branch, the United States President.
When a new President is elected in the United States, many of the cogs in the law enforcement apparatus remain. Individual agents, including CID agents, and other lower level personnel often retain their jobs. However, there is normally significant turnover in the higher-ranking officials. For instance, a new presidential administration often appoints their own attorney general (head of the DOJ), local United States Attorneys, and heads of investigative agencies (CID, FBI, DHS, OIG, and ATF). These higher-ranking officials are tasked with implementing the policies of the new administration.
In the federal criminal defense world, the president and his appointees can have a huge impact on business. Some administrations focus their finite resources on street crimes (bank robbery, drug trafficking, sex trafficking, gun offenses, and RICO gang conspiracies). Others focus on white-collar criminal fraud schemes (criminal tax, wire fraud, FCPA claims, healthcare fraud, and money laundering). Most try to throw a reasonable net that captures the worst actors in all areas.
Though all federal crimes are prosecuted yearly, a president’s focus can greatly impact the scope of enforcement. This phenomenon is evident when analyzing the CID’s enforcement of criminal tax cases in the crypto market. To prosecute these cases, the government must employ task forces that understand the intricacies of the market; notably, the role of hardware wallets, the use of DEXs, on-chain information, and how to track crypto movement across distributed ledgers. Without a knowledgeable task force, the government will be highly inefficient in recouping tax losses over time.
During the Biden administration, the federal government took an aggressive approach towards the crypto industry. They set up tax enforcement squads, pushed the SEC to file suits against crypto projects, and refused to provide regulatory guidance to the industry. The government viewed crypto as a tool for criminals and treated those that participated in the industry as such.
The Trump administration has taken the opposite approach publicly. Trump’s administration has gone out of their way to advocate openly for the crypto industry. Trump even went so far as to start his own meme token (a topic for another post). While the rhetoric has been positive, very little substantive changes have been made for regulatory guidance. The only tangible step included closing the Biden era SEC cases against crypto projects and businesses. All that being said, it certainly appears the new administration views the crypto space as an emerging market instead of a place for money laundering and shysters.
This pivot comes alongside the Trump administration’s hyper focus on federal street crime and immigration. It is clear from enforcement practices that Trump’s administration is going to go after illegal immigrants and gang activity with the full weight of the federal government. However, the administration has taken a much softer approach to white collar crime. While promoting DOGE to shore up inefficient spending in the government, there is very little talk from the White House regarding the recoupment of losses through criminal tax or healthcare fraud prosecutions.
It is possible that Trump will leave these agencies alone and allow them to continue business as usual. However, he could decide to pull finite resources into his pet projects; effectively handcuffing the governments’ ability to cast a large net on white-collar enforcement. The adminstration’s focus on street crime, combined with the positive crypto stance, makes it unlikely that the federal government will continue to expend significant resources in the crypto tax arena. It would be surprising if the government delivered numerous indictments against retail crypto investors over the next three years. They are far more likely to use the civil audit process to recoup losses.
Under the federal government’s focused enforcement model (weighing resources spent vs loss amount recouped), crypto tax enforcement makes a ton of sense. It is well known that U.S. citizens are failing to report all their crypto gains on their annual tax returns. The lack of clear regulations, and use of non-compliant exchanges, leaves a ton of wiggle room for tax filers to fudge numbers. When there is an easy path to save thousands, a certain slice of the country will take the bait. Unlike stock investors with accounts at Charles Schwab, crypto is still the Wild West by comparison.
It is also well known that some of these unreported gains are huge. There are small retail investors obtaining seven and eight figure gains in the market every few years (while many are suffering similar losses). These large gains put crypt investors right in the wheelhouse of DOJ enforcement under almost any prior administration.
It is hard to envision the government giving a free pass to such a significant source of revenue loss. But there is more than one way to skin the cat. Criminal enforcement provides an additional deterrent effect to would be violators in the future. However, it is not the most efficient way to recoup government loss. In the criminal setting, taxpayers are required to spend significant capital on a competent legal team to defend themselves. Often, criminal defendants do not have the resources to pay back their tax liabilities at the end of a criminal case.
The civil process offers a more functional avenue to recoup losses while saving criminal resources for the areas the current administration covets. A drop in criminal focus, in exchange for the civil pathway, makes the most sense under the current administration. However, crypto investors should remain vigilant in the preparation of their returns. If the enforcement push does not come under Trump, it is coming soon thereafter. The losses are too large and the problem is too pervasive. At some point, the government is going to use their existing task forces to make an example out of the worst actors.
In our next post, we will lay out the conservation easement tax scheme CID heavily targeted in 2024.