IRS:CI 2023 Top Ten Tax Crimes: No. 7--Fraudster on the Dark Web

bigstock-Auction-Gavel-And-Bitcoin-Cryp-314391931Criminal intent takes many forms on the internet. Our #7 entry on the IRS:CI top ten crimes prosecuted in 2023 is a defendant who made his living on the Silk Road.


For some, the Silk Road refers to an ancient trade route between East and West. For others, it was an anonymous online marketplace located on the darknet or “deep web” that offered many illegal products and services for sale. The Silk Road was busted in 2013 by the Federal Bureau of Investigation (FBI). As an aside and fair warning about how seriously regulatory agencies consider this type of illegal activity, the founder of the Silk Road, Ross Ulbricht, was arrested and eventually sentenced to two life sentences—without the possibility of parole.


The #7 spot, though, is occupied by James Zhong, an early adopter of Bitcoin who knew exactly when to cut his losses.


When using the Silk Road in 2012, Mr. Zhong identified and exploited a programming glitch that allowed him to take out more coins than he had deposited. Using several accounts, Mr. Zhong was able to steal about 50,000 Bitcoin and then hide it for the following decade while he enjoyed the good life. By 2021, the missing Bitcoin had grown in value to $3.36 billion, according to the Department of Justice (DOJ).


Mr. Zhong was eventually tripped up when he ran a small number of stolen Bitcoin through a crypto exchange that required confirmation of identity. The IRS located him and executed a search warrant in November 2021. The agents found Bitcoin in a safe, on a single circuit computer board found in a popcorn tin in a bathroom closet, and gold and silver bars, along with almost $700,000 in cash.


In March of 2022, Mr. Zhong likely deduced he was in serious trouble for wire fraud and stealing from Silk Road and was probably facing a stiff prison sentence. As a result, Mr. Zhong voluntarily surrendered the balance of his Bitcoin kingdom to the federal government. The stash was valued at $3.4 billion at the time and is valued at $1.57 billion today.


The U.S. Attorney remarked, “Back in 2012, James Zhong committed wire fraud by stealing 50,000 Bitcoin from Silk Road, and for the next 10 years, he managed to conceal what he had done and how he obtained his fortune. Zhong used a decentralized Bitcoin mixer, an overseas cryptocurrency exchange, and an impressive array of technological tools to frustrate tracing efforts."


In April of 2023, Mr. Zhong was sentenced to one year and one day in prison. Very likely working with experienced legal counsel, Mr. Zhong was able to avoid a legal fight, dump the Bitcoin the government would have fought to keep, and resolve it all with a minimal prison term. While no one wants to go to prison for a year—Mr. Zhong will serve his time and be free to move forward with his life.


If you are involved in a tax crime, speak with an experienced criminal tax lawyer to clearly understand your options.


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