Last week, the US Department of Justice (DOJ) announced sentencing in what the IRS is calling “the first criminal tax evasion prosecution centered solely on cryptocurrency.” An Austin-based individual crypto investor, Frank Richard Ahlgren III, was sentenced to two years in prison (plus one year of supervised release) for underreporting capital gains from $4M+ in crypto sales from 2017-2019. (Most of the cryptocurrency sold was originally purchased in 2015, although Ahlgren was buying bitcoin as early as 2011.) Ahlgren was also ordered to pay the government $1.1M in restitution (the estimated tax loss was $1M+).

While this was not the first prosecution involving crypto, it was the first that focused solely on crypto tax evasion (i.e. it didn’t include other charges like fraud). According to the DOJ, the sentence was aggravated by Ahlgren’s efforts to conceal the transactions. These efforts included lying to his accountant by “submitting a false summary of his gains and losses,” “moving his bitcoins through multiple wallets, meeting an individual in person to exchange bitcoins for cash,” using crypto mixers, and filing false federal tax returns.

In the US, cryptocurrency is generally treated as property and taxpayers are required to report capital gains from its sale on their tax returns, just like any other income. Like property, a gain or loss is recognized upon sale of the asset, and subject to a one-year holding period to be considered a long-term gain/loss. (Purchasing assets using real currency, holding assets, and transferring assets between wallets alone do not require a “yes” response to the IRS’ “digital assets” question.)

In 2023, the Internal Revenue Service (IRS) finalized new crypto tax-reporting regulations requiring brokers to report on digital asset transactions, starting in 2026 for the 2025 tax year. This is expected to significantly improve tax compliance. According to a Treasury report, “When there is income information reporting from third parties, tax compliance exceeds 90 percent; however, when there is no third-party income information tax compliance is 55 percent.”

While the IRS guidance to treat crypto as property has held since at least 2014, the recent standalone prosecution signals a shift in enforcement. In late 2022, the IRS Criminal Investigation (IRS-CI) arm revealed it was building hundreds of crypto criminal tax cases where it expected to bring charges, and hiring 500+ new employees to support enforcement. The case against Ahlgren, who was indicted in Feb 2024, is the first to reach sentencing but more will come. Guy Ficco, the head of IRS-CI, said earlier this year that he is seeing more “pure crypto tax crimes” (Title 26 federal income tax violations) in the division’s inventory, and expects more charges going forward.

In FY24, the IRS-CI saw a 90% federal conviction rate. This may have played a role in Ahlgren pleading guilty and avoiding the maximum penalty of 3 years in prison. (Ahlgren originally faced a maximum penalty of 3 years for each false return and 5 years for each count of “structuring” or deposits deliberately structured not to trigger the $10K reporting requirement.)

While relatively few cases are referred for criminal prosecution, these are more likely to be cases of willful non-compliance rather than error or oversight. Once flagged by the IRS, a case of non-compliance can often be readily investigated, given the inherent transparency of crypto transactions. One crypto tax advisor called crypto “one of the worst asset classes to evade taxes since all transactions are permanently recorded and traceable.”

In addition to its own in-house data scientists, the IRS is using vendors like Chainalysis and similar partners to de-anonymize public transaction chains, often by tracing them back to real-world entities or compliant exchanges. The IRS Whistleblower Program, which pays out 15-30% of proceeds collected and has handed out awards ranging into the tens of millions of dollars, can also play a role in de-anonymizing crypto transactions.

There is a growing industry of crypto monitoring tools emerging to assist governments and corporations in tracing crypto transactions. There’s also a burgeoning set of crypto tax software and crypto accounting solutions to support individuals and businesses in crypto tax compliance.

Much will change with the transition in Jan 2025. Incoming US president Donald J. Trump campaigned as strongly pro-crypto and promised to end the crypto crackdown. (The Trump family launched a new crypto venture recently with Trump as “chief crypto advocate.”) Trump has nominated Paul Atkins as chair of the Securities and Exchange Commission (SEC), a crypto advocate and lobbyist who would be a sea change from current chair Gary Gensler. (Gensler’s term ends Jun 2026 but he plans to step down on Inauguration Day.) Separately, venture capitalist David Sacks has been named AI and crypto czar, and will work on a legal framework for crypto. Trump has also nominated loyalist and ex-Congressman Billy Long – who at one point co-sponsored a bill to abolish the IRS – as head of the IRS, although the pick has raised questions about whether he is qualified.

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