Friday, April 25, 2014

Guest Blog: Virtual Tax Evasion: Virtual Currency and the Offshore Account Enforcement Campaign (4/25/14)

This is a guest blog by Peter Hardy and Mehreen Zaman.  See the end of the blog for information on the authors:

The U.S. government has enjoyed remarkable success in undermining offshore bank secrecy practices that previously had existed for centuries, as reflected by a string of criminal prosecutions of both institutions and individuals, as well as the many thousands of voluntary disclosures of traditional offshore bank accounts by U.S. taxpayers in recent years.  However, would-be tax evaders, at least for the moment, may turn to a new but risky way to attempt to circumvent the government’s in-roads into offshore accounts:  virtual currency.

Virtual currency – the most prominent example of which is bitcoin – represents a digital unit of exchange that is not backed by a government.  How virtual currency actually works may be initially difficult to understand, but it ultimately depends on the same fundamental principle underlying any other system of money:  it has real-world worth so long as enough people believe that it will continue to have worth tomorrow, and beyond.  Although virtual currency has encountered serious setbacks within the last year, including stories of investor losses and criminal prosecutions, the fact remains that its use and acceptance is growing in certain parts of the world, and it continues to garner the attention of some wealthy and creative investors. If virtual currency does not collapse under the combined weight of investor risk and regulatory pressure, it is entirely conceivable that some version of virtual currency will take root and become a major medium of exchange across the world.

Currently, virtual currency has some of the same characteristics that once attracted would-be tax evaders to traditional offshore accounts:  relative anonymity and difficult in tracing.  Although it is not impossible to trace a virtual transaction, it is not easy, and it can be particularly hard to trace all of the virtual transactions conducted by a given individual.  The government certainly has recognized its potential for tax evasion, and the IRS issued guidance in March 2014 declaring that virtual currency is taxable as property.

One question that remains is whether the government also will regard the FBAR filing requirements for foreign accounts as applying to holdings of virtual currency.  The possible answers are less than clear, and likely depend upon the particular technology employed by an individual user of virtual currency.  We explore in detail this issue – the collision between an evolving technology and regulations written with something much more concrete in mind – in an article in the Bloomberg BNA White Collar Crime Report, 09 WCR 267 (4/18/14), available here:

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Guest bloggers Peter Hardy and Mehreen Zaman are with the Internal Investigations & White Collar Practice at Post & Schell P.C. in Philadelphia.  Their firm bios are here and here, respectively.  Peter previously served as an assistant U.S. attorney in Philadelphia and as a trial attorney in the Criminal Enforcement Section of the Justice Department’s Tax Division in Washington, D.C.  He is the author of Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation, a legal treatise published by Bloomberg BNA (see


  1. CLN = Certificate of Loss of
    Nationality=Certificate of Manumission

    The US stalks expats across the globe expecting them to pay taxes even if they have the flimsiest of attachments to the USA, such as being born there. This is a clear human rights abuse under the United Nations Declaration of Universal Human Rights, and it is therefore clear that the United States treats its citizens as slaves. The CLN is the acknowledgment by the State Department that a person is no longer a slave of the United States. Thus, it is a certificate of manumission.

    I am in possession of such a CLN and I live outside the USA. This means I don't have to worry about whether an unreported account holding bitcoin or other virtual currency is a potential FBAR violation.

  2. The press and certainly Congress focuses on the handful of wealthy individuals who renounced citizenship to pay less U.S. income, estate and gift taxes. Little focus has been on the millions of middle income or even low income individuals who live around the world and are caught up in the complex U.S. tax (estate, income, gift and inheritance tax and reporting) and bank account reporting legal web.

  3. Interesting. I thought Bitcoin had individual accounts and all transactions were traceable. That is one of the "advantages" of Bitcoin. It is difficult to steal Bitcoin because each transaction is traceable to the account and the owner. Even if I could hack into a Bitcoin "bank", I would have a hard time using the money because the account would identified as hacked and the payee could detect that hack. If the payee were part of the scam, the payee would have a hard time putting the payment into the his/her Bitcoin account.

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