Big Gains, Bigger Tax Bill

On Jan. 1, 2022, Mann sold 3,700 songs for about $3 million in ETH. Expecting prices to rise, he held the tokens instead of selling. When ETH dropped and IRS demanded $1.1M in taxes based on the original value, panic set in.

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Trying to avoid selling at a loss, Mann borrowed against his ETH via Aave — but the Terra collapse triggered a cascade that liquidated his collateral. He lost 300 ETH instantly.

Rare NFT Saves the Day

With the IRS looming, Mann sold a rare Autoglyph NFT for $1.1 million to cover the tax debt. Thanks to his prior losses, the sale triggered no capital gains tax.

Now, Mann is back to writing daily songs and minting NFTs, still hopeful for a second chance at crypto success.

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In a document dated May 30, U.S. Solicitor General D. John Sauer stated that James Harper, a Coinbase user, does not have a constitutional right to hide his crypto transaction records. The government noted that Harper had “voluntarily” shared his information with Coinbase and that the IRS followed a legal process by obtaining the data through a court-approved summons.

Harper’s case is tied to an IRS investigation launched in 2016. At that time, the agency observed that millions of users were conducting Bitcoin transactions through Coinbase, while only a small number were reporting those gains on their tax returns. As a result, the IRS issued a “John Doe” summons to access the data of high-volume users.

Coinbase User Filed a Lawsuit Against the IRS

Harper claimed he traded Bitcoin via Coinbase during the relevant years and argued that the IRS’s data collection constituted an unconstitutional search of his personal information. However, lower courts ruled that the records in question were business documents of Coinbase, not Harper’s private data, and confirmed that the IRS acted within the law.

In its submission to the Supreme Court, the government referenced prior cases to support its stance. Specifically, it cited the United States v. Miller decision, stating that individuals do not have a reasonable expectation of privacy regarding financial information held by third parties. Additionally, it pointed to Coinbase’s privacy policy, which clearly warns users that data may be shared with legal authorities if necessary.

The document stated, “The appeals court rightly rejected these arguments as inconsistent with Supreme Court precedent and lacking merit.”

The Supreme Court has not yet decided whether it will hear the case. If the request is denied, the ruling by the First Circuit Court in favor of the IRS will stand.

Coinbase Hit by Data Breach

On May 15, Coinbase revealed that some customer support staff in India were bribed to leak user data. The breach exposed sensitive details, including customer names, account balances, and transaction histories. The company reported that approximately 1% of its monthly active users were affected. Among them was Roelof Botha, managing partner at Sequoia Capital.

Following the breach, multiple lawsuits were filed against Coinbase. At least six separate complaints were submitted on May 15 and 16, accusing the exchange of inadequate security measures and poor incident response.

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This leadership shift comes at a pivotal time for U.S. crypto taxation policy, as the agency faces mounting internal and external pressures.

Senior Figures Step Down

As of May 5, two crypto-focused specialists with private sector backgrounds stepped down from their roles within the IRS after about a year of service. Sulolit “Raj” Mukherjee, who held the position of Executive Director of Compliance and Implementation, and Seth Wilks, responsible for Strategy and Development, both confirmed their departures.

In a public statement, Wilks noted the challenges faced by federal employees in recent months, adding, “If stepping aside helps someone else keep their job, I’m at peace with that decision.”

IRS Tightens Oversight on Crypto Activities

In recent years, the IRS has ramped up its scrutiny of digital asset transactions, intensifying audits and launching more criminal investigations. It has also worked on expanding its reporting rules, including controversial proposals affecting decentralized finance (DeFi) platforms.

One such proposal, which would have required DeFi platforms to report transaction data and gross proceeds, was scrapped during Donald Trump’s previous term. Initially set to take effect in 2027, the rule faced backlash from the crypto community due to concerns over privacy and compliance burdens.

A Softer Regulatory Stance in Washington

With the return of the Trump administration, U.S. federal agencies have begun scaling back stringent regulations that were viewed as stifling digital asset innovation. For instance, the Securities and Exchange Commission (SEC) has paused several enforcement actions, and the Department of Justice has disbanded its cryptocurrency enforcement unit.

Meanwhile, concerns are growing within the IRS itself. A recently reintroduced deferred resignation policy by Trump has reportedly led over 23,000 IRS employees to consider leaving their posts, raising alarms about staffing stability and morale.

Under Turner’s leadership, the agency will be tasked with redefining its digital asset strategy. In a changing political and regulatory environment, how the IRS approaches the crypto space moving forward remains a key question.

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Challenges of DeFi for Institutional Players

According to Shibtoshi, the high transparency of blockchain transactions clashes with corporate needs to protect sensitive information, such as trading strategies, payroll details, and B2B agreements.

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“The main concerns — regulatory uncertainty, privacy limitations, and complex user experience — are real, but solvable. Innovations in privacy-preserving protocols are making DeFi increasingly compatible with enterprise needs.”

Regulatory inconsistencies across jurisdictions further hinder adoption. Are DeFi tokens securities? How are DAOs legally accountable? These questions remain unanswered.

The Risk of Overregulation in DeFi

The U.S. Congress recently repealed the IRS broker rule, which required DeFi platforms to report customer transactions. However, DeFi still faces major regulatory threats.

Crypto entrepreneur Artem Tolkachev warned that strict compliance measures could undermine decentralization in DeFi:

“Overregulation increases censorship risks and shifts control from users to third-party intermediaries and large institutions.”

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Sacks Rejects 0.01% Transaction Tax on Crypto!

In a recent episode of the All-In Podcast, host Jason Calacanis suggested a 0.01% tax on every crypto transaction. The tax would apply whether a user is buying, selling, or transferring cryptocurrency. Sacks responded:

“That’s always how taxes start. They are described as being very modest. You know, when the income tax started, it only applied to like a thousand Americans, and the legislators swore up and down that it would never be applied to middle-class people.”

He continued:

“I don’t particularly like the idea of new taxes, even if it is promised that they won’t affect people very much. That sounds burdensome to me.”

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Many crypto investors criticized the idea, warning it would create unnecessary costs even for transfers between wallets owned by the same person.

The recent White House Crypto Summit did not present any official tax policies. However, the Trump administration has signaled support for major tax reform in the United States.

Trump Proposes Eliminating Income Tax and IRS!

President Donald Trump has proposed eliminating the federal income tax and replacing it with tariffs on imported goods. Commerce Secretary Howard Lutnick added that the IRS would be replaced by an “External Revenue Service.”

According to Dancing Numbers, the plan could save each American taxpayer at least $134,809, and possibly up to $325,561 if state income taxes are repealed as well.

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White House Signals Support for DeFi Industry!

David Sacks, the AI and crypto czar in the Trump administration, stated on March 4 that the White House backs legislative efforts to overturn the IRS regulation expanding the definition of “broker” to include DeFi access providers.

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Sacks confirmed via X (formerly Twitter) that the administration supports a resolution introduced by Texas Senator Ted Cruz and Ohio Representative Mike Carey under the Congressional Review Act to repeal the rule.

Senior White House advisers have reportedly recommended that Trump sign the resolution into law if passed by Congress.

Why Is the DeFi Broker Rule Controversial?

The IRS rule aims to classify software providers enabling access to DeFi protocols as brokers, thereby imposing strict reporting obligations on them.

The crypto community argues that such regulations could stifle innovation and undermine the decentralized nature of DeFi. White House support for rescinding the rule sends a positive signal to the DeFi industry.

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According to the U.S. Department of Justice (DOJ), Ahlgren “falsely underreported the realized capital gains” from selling Bitcoin worth $3.7 million between 2017 and 2019. The DOJ stated on December 12 that “all taxpayers are required to report any sale proceeds and gains or losses from the sale of cryptocurrency, such as Bitcoin, on a tax return.”

Ahlgren, who had invested in Bitcoin since 2011, bought 1,366 BTC on Coinbase in 2015 when Bitcoin was priced under $500. He later sold about 640 BTC in October 2017 at an average price of $5,807.53 and reinvested the $3.7 million in real estate. Authorities discovered discrepancies in his 2017 federal income tax return, where Ahlgren inflated the cost basis of his Bitcoin holdings, thus underreporting his true capital gain.

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Additionally, Ahlgren failed to report more than $650,000 in Bitcoin sales in 2018 and 2019. The DOJ indicated that he attempted to hide the movement of his funds using wallet transfers, crypto mixers, and cash transactions. Notably, in May 2014, Ahlgren had blogged about using mixers for Bitcoin transactions.

The criminal tax evasion case culminated in a two-year prison sentence for Ahlgren, making it the first criminal tax evasion prosecution focused solely on cryptocurrency. The Internal Revenue Service’s Criminal Investigation Houston Field Office stated that Ahlgren’s belief that his crypto transactions were untraceable led to his conviction.

In addition to the prison sentence, Ahlgren was ordered to pay $1.1 million in restitution to the U.S. government and serve one year of supervised release.

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According to a statement released Thursday, FTX CEO John J. Ray III noted, “This timeline reflects the experience and ongoing efforts of the professional team that has recovered billions of dollars on behalf of creditors and customers.”

FTX also stated it will finalize the arrangements for fund distribution with special distribution agents by the end of December and will soon announce a definitive date for the payouts.

Customers wishing to receive payments must create an approved account with a distribution agent, complete KYC verification, and submit the necessary tax documentation before the first distribution date.

FTX expects to pay customers between 129% to 146% of the fiat value of their claims as of the bankruptcy filing date. However, many creditors argue that payments should be made in cryptocurrency due to the market’s rise.

The company’s restructuring team has claimed to have received overwhelming support from creditor classes, with more than two-thirds of claims participating in the process.

FTX’s total liabilities to its customers are reported to be approximately $8 billion. In April, it was revealed that CEO John J. Ray charges an hourly rate of $1,575.

Meanwhile, the IRS claims that FTX owes nearly $24 billion in taxes, a sum more than three times the value of the company’s current assets.

Former CEO Sam Bankman-Fried was convicted of seven charges, including fraud and conspiracy, and was sentenced to nearly 25 years in prison.

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Ji Kim, Head of Global Policy, Digital Assets, and General Counsel at the Crypto Council for Innovation, said on the social networking platform X, “As a refresher, this is the form that ‘brokers’ will start using in 2025 to report digital asset transactions to customers. Initial evaluation shows that, among other things, wallet addresses, transaction IDs, and time gained were eliminated from this draft form. These are significant adjustments.

With its updated Aug. 8 draft, Form 1099-DA, which tracks “digital asset proceeds from broker transactions,” is scheduled to go at least partially into force in 2025.

First suggested in August 2023 by the IRS and the U.S. Department of the Treasury, the crypto brokerage taxation form Early forms of the form needed filers to note if assets are “non-covered security” and to provide a digital wallet address. But members of the crypto sector expressed privacy issues in addition to how the tax reporting would impact the distributed finance sector.

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The June 6 letter directed to Secretary of State Antony Blinken said, “The U.S. government’s efforts to date have been totally lacking; the consequences of further inaction are possibly dire.”

Related: Nigerian Court Denies Bail to Binance’s Tigran Gambaryan

Former government authorities honored Gambaryan’s ten-year service to the country as a Special Agent with the Internal Revenue Service (IRS).

“Several of us worked alongside Tigran during these cases and saw his relentless dedication to the rule of law firsthand,” it said, then enumerated the several cases he has previously worked on, ranging from child pornography and terrorism funding to identity theft and even “the Silk Road public corruption cases.”

According to the cohort, Tigran is presently under custody on “false charges” in regard to tax evasion and money laundering; his position at Binance should not see him bearing accountability for the company’s activities.

“He is absolutely innocent of these charges and, as a mid-tier employee at Binance, does not hold a position that makes him an appropriate stand-in for the company,” it said.

Tigran visited Nigeria in January to have conversations with Nigerian regulators on financial compliance alongside other Binance staff members.

Following the conference, Nigerian officials approached them, asking for a “substantial payment” to resolve claimed Binance compliance concerns.

Not sure about their safety, they left the nation right away. Just one month later, Tigran was invited back to the nation, apparently when his “passport was confiscated and he was arrested.”

Suspected of tax evasion and money laundering, the Nigerian government detained Gambaryan and Nadeem Anjarwalla in February. Anjarwalla escaped incarceration and went to Kenya; Gambaryan stayed in the Kuje prison in Abuja, Nigeria.

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