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US Spent Over $5 Million on Blockchain Espionage in 2018

The United States government has spent USD 5.7 million with blockchain analytics firms so far in 2018 and this spending is accelerating, according to a report by digital currency publication Diar. Blockchain analytics firms are paid to conduct blockchain espionage, for criminal prosecution, taxes, and to ensure crypto regulations are being followed.

Bitcoin has a public blockchain ledger, where every transaction and address can be viewed by anyone. Firms like Chainalysis, Elliptic, CipherTrace, Scorechain, Coinfirm, Blockchain Intelligence Group, Bloq, and DMG Blockchain Solutions have developed advanced software which can attach identities to Bitcoin transactions, and transactions for other cryptocurrencies as well. The biggest customers of these firms are banks and financial institutions, who use blockchain analytics to ensure no breach of know your customer (KYC) or anti-money laundering (AML) policies. Collectively, the major blockchain analytics firms listed have received USD 28.8 million of contracts.

The Internal Revenue Service (IRS) is the biggest spender relative to other US government agencies at USD 2.19 million. The IRS is in charge of taxes in the United States, and it seems it is using the most advanced blockchain tracing technology people to build cases against crypto users who are not paying taxes. This despite members of the United States congress requesting that the IRS make its crypto tax guidelines clearer, since at this point the crypto tax code issued by the IRS is so unclear, prohibitive, and arduous that most crypto users don’t know how to pay crypto taxes.

The second biggest government spender is Immigrations and Customs Enforcement (ICE) at USD 1.54 million. This is probably because the ICE seizes drugs and other illegal goods at customs, and sometimes these packages are linked to crypto payments done over the darkweb.

The Federal Bureau of Investigations (FBI) takes third place in spending with USD 1.14 million, and this is probably related to crypto activity associated with criminal suspects and crime organizations. The Drug Enforcement Agency (DEA), in fifth position with USD 0.22 million, probably uses blockchain analytics firms for the same reasons the FBI does. The FBI and DEA can actually use blockchain analytics data in court for criminal prosecution.

The Securities and Exchange Commission (SEC) is at sixth place at USD 0.18 million. The SEC is cracking down hard on initial coin offerings (ICOs) and other fraudulent crypto-related securities, so it makes sense they’re spending some money on blockchain analytics. The Commodity Futures Trading Commission (CFTC) spends USD 0.12 million, likely to ensure exchanges are maintaining regulatory compliance, since Bitcoin trading is regulated under commodity laws.


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US Members of Congress Call for Clear Crypto Tax Rules

Lawmakers in the United States have reached out to the Internal Revenue Service (IRS), the nation’s tax collection agency, calling for clearer taxation rules concerning cryptocurrency.

Failure to inform

The letter has been signed by Representatives David Schweikert, Darin LaHood, Lynn Jenkins, Brad Wenstrup, and Kevin Brady, who is the chairman of the committee on Ways and Means.

The open letter, dated 19 September, recalls a letter sent to the IRS over a year ago with regards to enforcement actions taken by the IRS against cryptocurrency holders. With some tone of complaint, the letter says that after this time, the IRS has expanded enforcement “without issuing any further guidance for taxpayers”.

It said, “We therefore write again today to strongly urge the IRS to issue updated guidance, providing additional clarity for taxpayers seeking to better understand and comply with their tax obligations when using virtual currencies.”

“Adequate time”

The letter also makes note of the March 2018 notice that the IRS released as a reminder to taxpayers who have not declared their cryptocurrency transactions can be held liable for penalties and interest.

It adds, “The IRS has had four years to work through these issues since its preliminary guidance was issued, providing more than adequate time for the IRS to thoughtfully consider what additional information is needed.”

Earlier this year in April, the IRS released a notice on the treatment of cryptocurrencies for taxation purposes although, at this time, Arizona was the state which was attempting to pass crypto tax bills.

The letter argues that the IRS has failed to provide adequate guidance to taxpayers, significantly hindering their capacity to comply with crypto tax obligations.

This motion has received backing from the community, cryptocurrency advocacy group Coin Center published a blog post saying that they were “glad to see Congress take action”. It wrote, “Currently, a user needs to calculate capital gains on every stick of gum they buy with cryptocurrency. That doesn’t make sense. The Cryptocurrency Tax Fairness Act, introduced last year, would address this issue.”

Strong words

The lawmakers’ letter closes by “strongly urging” the IRS to introduce robust clarifications on crypto tax obligations. It also asks for a written response from the IRS which provides an outline on efforts to be made by the IRS, a timeline for release and what the IRS “intends to cover in this guidance”.

Furthermore, it states, “To assist the Committee in better understanding this issue, we will be asking the Government Accountability Office to undertake an audit on this matter.”

In the United Kingdom, similar efforts to create clearer cryptocurrency regulations have been made by the Treasury Committee, calling for the “Wild West” market to be regulated.


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Landmark Hearing: US Hacker Ordered by Court to Pay Bail in Bitcoin

A US court has ordered an alleged hacker to pay for his bail using cryptocurrency.

Magistrate Judge Corley has ordered the defendant, Martin Marsich — a 25-year-old Serb/Italian national charged for a hacking offense to pay an equivalent of $750,000 in cryptocurrency for bail.

Marsich is accused of hacking US video games company Electronic Arts (EA), and obtaining in-game currency to buy and sell in-game items. He is also said to have sold access to online games though black-market websites. Marsich is accused of hacking into 25,000 user accounts.

Residing Judge Corley has been in the news before regarding cryptocurrency. Last November she ruled in favor of the IRS, against cryptocurrency giant exchange Coinbase. Judge Corley ordered the cryptocurrency platform to submit information about clients’ transactions to the government agency.

District Attorney of St Mateo County, Steve Wagstaffe was quoted saying, “[he has] never heard of anyone bailing out of jail with cryptocurrency in any courtroom.” While acknowledging that cryptocurrency was acceptable in the federal court, he claimed that a similar bail “would fly in a San Mateo County Superior Court”

Assistant District Attorney Abraham Simmons explained that “judges can order many kinds of bail, including real estate owned by another person.”

Further, he was quoted saying, “The judge could order just about anything…It really is quite broad…What the objective is, is to get the defendant to comply with an order to appear later.”

With regards to the fluctuating value of cryptocurrencies, particularly in the current volatile market ,and how this would affect a “crypto-paid” bail, Simmons commented, “I would imagine that either side would alert the court of an extreme change in the value of the asset, but it doesn’t mean that the court would care one way or the other.”

The initial complaint charges Marsich with:

“…intentionally accessing a protected computer without authorization to obtain information for the purposes of commercial advantage and private financial gain…and accessing a protected computer to defraud and obtain anything of value.”

Marsich was arrested while boarding a flight to Serbia on August 8th by San Francisco Police. If convicted, the defendant could face a maximum of  5 years imprisonment, a fine of $250,000 plus restitution.

Although bail bonds paid using cryptocurrency may be regarded as beyond the norm, paying taxes in this may well become acceptable in the US after the Rules Committee of the Arizona House of Representatives passed a bill this year that allows residents of the state to use cryptocurrencies in making tax payments.

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Crypto Hedge Funds Face Tax Uncertainty

With US government scrutiny focusing in on cryptocurrencies, hedge funds face tense uncertainty due to the unclear tax regulations regarding digital currency assets.

Trying to play by the rules

With billions of dollars on the line, cryptocurrency hedge fund managers face a challenge when trying to fully comply with tax laws just as individual investors do. Their jobs required them to maximize profits while minimizing liabilities, but with few guidelines regulating their holdings, there is a lack of direction for this to take place in a fully legal manner.

The US Internal Revenue Service (IRS) is attempting to keep up with the pace of innovation with regulations, last month announcing that the large business and international division would focus on cryptocurrency audits in the coming year. Bigger tax bills and penalties have been threatened by the government department when the rules come in.

Clay Littlefield, a tax attorney for Alston & Bird in Charlotte, North Carolina, told Forbes that there is indeed a lot of uncertainty considering how the IRS will treat cryptocurrencies in the near future. Littlefield acknowledged that while there is plenty of analogies that can be placed on circumstances, there is not a lot of solid legal framework for investors to reference.

Why the lack of clarity?

There are several key factors that have contributed to this uncertain climate. Most crucially, regulatory bodies such as the IRS have been slow in laying out their full positions on digital currency.

Karl Walli, senior counsel at the Treasury Department’s office of tax policy earlier this year told tax professionals there is a ”long list” of issues the IRS needs to address, adding that planned new tax laws would increase the efficiency of comprehending all these problems. Walli said: “There’s no way in this environment that we’re going to be able to put out guidance on the majority of those issues.”

In 2014, the IRS settled on considering crypto as property, not currency, meaning that investors, miners and those earning wages in Bitcoin would be required to report profits and losses as is required with property. The market was dominated at this time by small investors; hedge funds trading in cryptocurrency has created problematic issues for the concept of crypto as property which has yet to be addressed.

Ultimately, funds may well end up owing more in taxes than their current estimations, dependent on the IRS’s decision.  David Shakow, professor emeritus at the University of Pennsylvania Law School assumes that the lack of guidance right now may well provide a solid defense for hedge funds, regardless of future implementations.

For now, however, offshore tax havens such as the Cayman Islands have begun to attract big investors looking to avoid the necessity of following the unclear US tax regulation, although operations investing in cryptocurrencies for a foreign investor have not yet been legitimized by the IRS as non-taxable by the US.


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IRS Issues Reminder to Report Crypto Earnings

The US Internal Revenue Service (IRS) has published a document ahead of a 17 April deadline to report all income derived from virtual currency transactions, including from cryptocurrencies.

Referring to the IRS Notice 2014-21, which is a guidance on general tax principles, the revenue agency views all virtual and digital currency transactions as taxable, just as any other transactions on properties would. It also warned citizens against withholding such information, noting the privacy features of major cryptocurrencies such as Bitcoin:

“Virtual currency, as generally defined, is a digital representation of value that functions in the same manner as a country’s traditional currency… because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, some taxpayers may be tempted to hide taxable income from the IRS.”

Taxpayers who fail to report related earnings can be subject to IRS audits and can be liable for penalties and interest. The reminder states that the tax agency could also resort to criminal prosecution “in more extreme situations”, targeting crimes such as tax evasion and falsification of tax returns. Convictions for tax evasion could result in harsh prison terms of up to five years and a fine of up to $250,000, while false returns could be subject to prison terms of up to three years and a fine of up to $250,000.

Under the same notice, this means that even salaries paid by employers in virtual currency must be filed by employers on the regular Form W-2 and subject to federal income tax withholding and payroll taxes. Freelancers and remote workers classified as independent contractors who get paid in virtual currency are not exempt, either, with self-employment tax rules applying.

However, under current laws, virtual currency is not treated as currency that could generate forex gains or losses and are, therefore, such gains or losses will not be subject to US federal tax.

IRS eyes trained firmly on cryptocurrency

The IRS has been increasingly active in pursuing tax revenue from US citizens involved with virtual currency, especially since 2016 when the combined market capitalization of cryptocurrencies hit USD 8 billion, before racing past USD 600 billion by the end of 2017, with Bitcoin leading the way to an all-time high approaching USD 20,000.

In November 2016, a US federal court ordered cryptocurrency exchanger Coinbase to hand over some 13,000 customer records to the IRS as part of a bid to recover missing revenue from tax evaders who bought Bitcoin from 2013 to 2015.

Despite bitter resistance on the part of Coinbase, they eventually caved in, issuing a statement on their blog last month notifying that Coinbase would hand over data to IRS as per the court summons. It claimed a “partial” victory, after fighting the summons in court “in an effort to protect its customers, and the industry as a whole, from unwarranted intrusions from the government.”.

The data requested includes taxpayer IDs, names, dates of birth, addresses, and transaction records from the period of 2013 to 2015.



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Carrie Kirby – Bitcoin Paychecks

Carrie Kirby – Bitcoin Paychecks:

Writer Carrie Kirby (@CarrieKirby), in an article on Coindesk, describes some experiences by those who earn their incomes in Bitcoins.  Excerpts:

“It’s interesting to learn how little inconvenience and uncertainty is being reported by the select few who collect their pay in bitcoins.”

“San Francisco bitcoin wallet company CoinBase pays all six of its employees entirely in bitcoins, and employee Olaf Carlson-Wee says: ‘I try to stay within the bitcoin economy as much as possible.’”

“’If I received my bitcoin on September 1 and it’s worth $10, but then I sell it at $20, the initial $10 is (subject to) payroll tax, but then the additional $10 would be considered a capital gain, from the advice that I received,’ Holland said.”

“The companies issue W2 forms and report the salaries paid to the government as they normally would.”

“Carlson-Wee, who keeps most of his savings in bitcoins aside from a small USD reserve, admits that a personal financial emergency could put him in the position of having to sell off a lot of his bitcoins at a low price.”

 –  (Further discussion of this post)

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