Like dollars, crypto that has been illegally sourced must be cleansed of its tarnish. How does that happen?
We often discuss money laundering in this space. The idea behind money laundering is to move ill-gotten funds through transactions, accounts, and assets long enough to dissolve their criminal legacy. When scrubbed, the money can return to its owner through legitimate means, such as investments, luxury items or collectibles, real estate, crypto, or other money vehicles.
Crypto follows a roughly similar laundering path, which involves placement of the coin into a financial system, layering the crypto through a series of transactions that transform the coin enough to disguise its origin, and integration, where the coin emerges again in or through legitimate means.
Tactics that raise red flags for investigators
While this isn’t a guide for bad actors, it’s important to understand the techniques that often draw attention from the Internal Revenue Service (IRS), Department of Justice (DOJ), and other regulatory bodies. These are the laundering methods commonly scrutinized in crypto-related tax investigations:
- Use of privacy coins: Privacy coins are designed for anonymity. They are more difficult to hack, create opacity for those who use them, and help users maintain the privacy of their wallets. Types of privacy coins include Zcash, Monero, Dash, and others. Because privacy coins boost secrecy, they offer those who launder money, trade in illicit goods, and finance criminal enterprise a strong platform for commerce.
- Tumblers: A crypto tumbler or mixer is a service that blends crypto obtained through legal and illegal means to disguise the illegal stuff. Mixers may send blended crypto through multiple accounts, pooling them, breaking them out into different accounts, and blending them again repeatedly. Eventually, the crypto is reintegrated into the account of its owner.
- Chain-hopping: The rapid movement of crypto through blockchains is another way to disguise and dissolve the origin of the coin. Chain-hopping is also used to convert standard public blockchain coins like Kadena, Bitcoin and Ethereum, into private coin.
Once cycled, crypto can be very difficult to trace to its origins. For years, the prominent crypto mixer on the darknet was Bitcoin Fog, an enterprise that operated between 2011 and 2021. Roman Sterlingov, a dual Swedish-Russian national, was sentenced to 12 years in prison for running the show. Sterlingov also forfeited his Bitcoin Fog wallet worth $103 million and received a judgment of $395,563,025.39, along with other fines.
Laundering illicit money or crypto is tax fraud, which often involves tax evasion. If you are a party to a laundering scheme of any kind, connect with an experienced tax lawyer to learn your options for coming clean.
Hiding something from the IRS?
Whether crypto or dollar, if you are involved in a tax crime, your best defense is knowledge and a highly skilled legal tax defense. If you believe you are being surveilled by the IRS, making good choices matters. Call us at 440-250-9709 or reach out to set up a consultation. We serve domestic and international clients from offices in Cleveland and Chicago.
And when you need straightforward information concerning tax evasion and money laundering—download our guide, Understanding Tax Fraud eBook.
