Crypto Money Laundering and Tax Evasion

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We’ve all heard about the widely debated connection between virtual assets and money laundering. Despite being less widespread than originally thought, this misuse has been linked to terrorism and drug trafficking in numerous treaties and investigations. Where should tax authorities and anti-money-laundering organizations focus their efforts?

We’ve all read stories or heard experts talk about the connection between virtual assets and unlawful behavior (money laundering, drug trafficking, terrorism). In discovered situations, however, the relationship has much more to do with their usage as a source of payment or financing for such unlawful operations than with their specific use for money laundering. And it is significantly less common than most people believe.

The unique characteristics of these assets, such as anonymity (transactions are traceable but not originally linked to a specific person or entity), the lack of a centralized issuer, and the ease of transaction, allow them to be used by individuals or groups engaged in unlawful activities.

A brief Recall of The History of Anti-Money Laundering Law

In the 1920s, Al Capone, an American mobster, amassed a fortune from extortion, prostitution, gambling, and the selling of illegal liquor. Nonetheless, he needed to provide a valid source of income. As a result, he bought a number of laundromats in order to mix his illegal earnings with their legitimate earnings. Laundromats were preferred by gangsters as they were cash businesses. Many people believe that this is where the phrase “Money Laundering” originated.

Nonetheless, in October 1931, Al Capone was accused and convicted of tax evasion, because money laundering was not a crime in the United States until 1986.

Is The Crypto Space Under Control?

According to preliminary research, the proposals are geared at the registration of Virtual Asset Providers (e.g., Exchanges), registration and information operations, and special alert parameters (number of operations, solvency, activity declared, withdrawals or repeated contributions in small amounts, FIAT cash withdrawals, etc.).

Everything indicates that the original purpose is to get control of the exchange platforms, their customers, and their relationships with traditional banks; in other words, to convert crypto assets into fiat money.

Crypto Money Laundering

Tax Bodies Face Real Challenges

And what if making a tidy profit by buying and selling virtual assets and paying taxes in compliance with local regulations is, in fact, an asset laundering method in and of itself?

In many jurisdictions, profits from the purchase and sale of digital assets are taxed at lower rates than income in general. While this is inconvenient, we believe it does not constitute money laundering. They are paying the normal rate…

What documentation will a taxpayer need to show in the event of an exponential increase in Bitcoin trading (for example) to prove that they bought BTC at $30,000 and sold them for, let’s say, $60,000 the same year? Worse than that, what would tax officials and anti-money laundering authorities do to refute the existence of such operations?

To return to the beginning of this article, virtually all money laundering methods attempt to finance or channel money through virtual assets rather than converting them into FIAT money, recordable assets, or traditional investments.

However, how can illegal money be funneled into the formal circuit if these assets are utilized in isolation and without connection with other assets? Nothing seems to make it more difficult now for a person to declare that he or she has doubled his or her capital—even paying taxes—without being able to demonstrate it consistently. How can the precise date of each operation be determined?

The Financial Action Task Force (FATF), a group that proposes reporting withdrawals of virtual assets from Exchanges to cold wallets in the alerts, has noticed this issue, but it appears to be insufficient.

Peer-to-Peer Transactions & The Real Value of Digital Assets

Some governments have provided guidance to users on how to document person-to-person transactions. In the case of Spain, for example, it can be observed in the Binding Query V0999-18 that “In relation to the market value corresponding to the virtual coins which are permuted, it would be up to the agreed price for sale between independent entities at the time of the swap.” In any case, the determination of this value is a matter of fact, thus beyond the competence of this management center, and can be certified by legal means of proof, the assessment of which will be carried out by the Tax Administration’s management and inspection authorities. In the case of the United States, it has been stated that “the IRS will accept, as proof of fair market value, the value determined by a cryptocurrency or blockchain explorer that analyzes the world indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact date and time.”

Traceability and Self-Declaration as Effective Prevention Measures

Consider that now, in all countries, a small firm or commerce, for example, must issue a voucher, register it, and declare a basic retail sale. There are an infinite number of information regimes in the world: financial transactions, real estate transactions, stock market transactions, and so on. In a nutshell, economic realities between individuals must be externalized and communicated to control bodies. So … What is the logical reason why virtual asset person-to-person operations should not be externalized until an annual tax position is completed?

The many controls that have been arranged, in many levels, are headed in the right path. However, the combination of traceability control and an Operations Declaration Scheme may undoubtedly provide the control aspects that the system presently requires.


Several measures are being taken to keep up with the rapid boom—and capitalization—of virtual assets. Perhaps it is time to assess which ones are effective and those that are not. And it is surely time to consider new and targeted remedies for a financial economic sector that has sparked a revolution in the whole world.

Do you have any thoughts on this article? Let us know what you think in the comments section below.

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