In my previous column, I hinted that we might all go to jail for money laundering. While that was a lighthearted reference to today’s topic, Senate Bill 1241, which aims to tighten the controls on money laundering, counterfeiting, and bulk currency smuggling primarily in an effort to reduce the funding of terrorism, the bill actually does throw out a few zingers at the crypto space.
I’ve heard quite a ruckus about this bill so decided to take a look at it myself. It was introduced in the Senate in May but was referred to the Senate judiciary Committee November 28th and, in its pure form, it really does just appear to be designed to strengthen regulation against money laundering, which is a crime perpetrated to make money earned from another crime seem like legitimate income. Think of the whole garbage and construction businesses in the Sopranos. If you haven’t seen the Sopranos, stop reading immediately and go binge the entire series. I’ll wait here.
The crypto community seems to be up in arms partially because digital currency is specifically mentioned in a bill with such negative connotations. The truth is, digital currency is mentioned in a lot of bills with negative connotations. Countering Iran’s Destabilizing Activities Act of 2017 is about as negative a connotation as you can have, and it directly names digital currencies as a means by which this could be accomplished.
I think the simple rule for us legitimate, law-abiding crypto HODLers and traders is to simply not do crime with our crypto. Easey Peasey. We make bundles of money, legally, and can all sleep at night.
That said, there are a couple of other pretty concerning references to cryptocurrency in this bill if you dig deeply enough.
The bill itself establishes that cryptocurrency is a means by which money laundering or bulk currency smuggling can occur. Not a big deal in itself until you see that the bill seeks to establish that the money laundering statute will apply to tax evasion.
The specific language is this:
SEC. 11. MAKING THE INTERNATIONAL MONEY LAUNDERING STATUTE APPLY TO TAX EVASION.
‘‘(ii) with the intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986;’’
Section 7201 of the internal revenue code is entitled, Attempt to evade or defeat tax, and Section 7206 of the Internal Revenue Code is entitled, Fraud and false statements.
I have included the exact language of both sections here (US Code Sections 7201 & 7206) if you want to read them in detail but just know that, in general, efforts to evade tax, when prosecuted, can result in serious jail time and monetary penalties.
Uh-oh.
Not “uh oh” for me, cause I am going to pay Uncle Sam every penny I owe. which is a lot of pennies and not a lot of dollars. But, given that so many in the crypto space seem intent on avoiding the reporting of taxable income related to crypto, it could be an “uh-oh” for many somebodies.
To be completely honest, though, none of that is new. There have always been significant penalties for tax evasion and they haven’t changed with this bill. They are just being folded into the criteria defining money laundering. Why?
That is where what I believe is the scariest point related to this bill comes into play, Section 10, entitled:
SECTION 10: TECHNICAL AMENDMENT TO RESTORE WIRETAP AUTHORITY FOR CERTAIN MONEY LAUNDERING AND COUNTERFEITING OFFENSES.
Specifically, Section 10 aims to include offenses related to (among others) violations of US Code Section 5324 of the Internal Revenue Code which prohibits the intentional structuring of transactions to avoid reporting requirements for taxable income. This is frequently referred to as “structuring” or “smurfing” in the non-crypto world. If you read my last column, Will we finally get some relief from taxes on our crypto? I joked about buying a Lambo with 350+ transactions of $599.99 to avoid taxable reporting under the potential new tax rules. Doing exactly that would be considered structuring by the Feds.
There are currently no real world examples of how exactly this would apply in the crypto space, but I have read an interesting, although somewhat dated, article here: http://www.fraudsandscams.com/Commentaries/Smurfing.htm
I suppose the bottom line for me after reading through this piece of the bill can be summarized using simple logic in a nice little if…then statement: If the bill aims to restore wiretap authority for money laundering and counterfeiting offenses and the bill aims to apply the money laundering statute to tax evasion, then Uncle Sam can wiretap anyone suspected of avoiding income taxes.
In an environment that values anonymity and seeks to enhance the widespread benefits of decentralization, wiretapping at the source (i.e. the personal internet activity of the individual initiating the transactions) could pretty much do away with any anonymity.
All that said, I don’t believe that you will start seeing white vans with guys in black suits running sophisticated electronic monitoring equipment parked on your street anytime in the near or distant future. I suspect that just like they have set an example with Coinbase (we’ve all by now seen the pop-up message to “please pay your taxes” when you log in), the IRS will find some gross violator and maybe wiretap them (if this bill passes) and prosecute just to show the gazillion small-time investors that it can be done, thereby encouraging them to report.
As an investor and a CPA, let me say that I too encourage you to report, but not because I do not value personal freedom. Simply put, there is too much legal money to be made by us early adopters through legitimizing cryptocurrency in the public eye and drawing more investors into the space. The high-risk bet of “saving” money on taxes by failing or refusing to report crypto gains is not likely to pay off in the long run compared to the trillions at stake in market capitalization as crypto is increasingly recognized more and more as a legitimate investment.
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© Michael L. Collins