Tax fraud has evolved with the advancement of technology making it difficult for tax authorities to keep pace. Keep reading to learn more.
Digital Everything
When it comes to money, the options for how to digitally manage it, store it, and spend it are limitless. Of course this wasn’t always the case, and with anything “new” comes a modern way of handling it. Physically going to the bank to deposit money or make a withdrawal to pay your debts or purchase a new recliner for your living room just doesn’t happen anymore. The digital age has changed the way we use money, the way we think about money, and the way we make money.
With this new way of doing business comes the opportunity for advanced ways of cheating the system, complex schemes to scam others out of money, and crafty ways to avoid paying taxes. Understanding this new technology and how it is monitored gives you an advantage in protecting your assets and your livelihood.
Digital Assets & Digital Payment Systems
There are two categories that most monetary digital advancements can be placed into: digital assets and digital payment systems.
Digital assets include anything that has value and comes with rights of use. Typical digital assets include documents, ebooks, images, email, and gaming accounts–the things that most people have on their phones or home computers. Blockchain-based digital assets use blockchain technology to make safe digital transactions and procure ownership; this would include cryptocurrencies and anything that is digitized and traded or sold online like NFTs (Non-Fungible Tokens).
Digital payment systems allow for financial transactions to take place without the need for physical currency. These types of systems are incredibly popular and continue to be adopted by more and more consumers every year. Mobile payment apps like PayPal, Venmo, and Zelle, along with mobile wallets like ApplePay and GooglePay are the current accepted way to make payments. Also, contactless payment made by tapping your credit card on a small terminal at the checkout is now a mainstream way of payment.
While all of these state-of-the-art technologies are convenient and easy to use, one has to wonder how safe they are. How is the consumer protected and how are the companies monitored for compliance with tax laws? Ensuring that these technologies are safeguarded is the responsibility of the Federal government and something that is continuously evolving.
The Federal Monitoring of Digital Assets and Payment Systems
For U.S. tax purposes, digital assets are considered property, not currency. The tax definition of a digital asset is any digital representation of value recorded on a cryptographically secured, distributed ledger (blockchain) or similar technology. Assets like cryptocurrencies and NFTs that can be bought, sold, traded, owned, or transferred fit into this category.
On federal income tax returns, you must answer the question: “At any time during the tax year, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”. Your “yes” or “no” answer then leads the way for your digital assets to be taxed correctly.
Digital payment systems are also monitored by the federal government, and if you’re making business transactions on those platforms, and the total amount is greater than $2,500, you could be sent a 1099-K tax form from the IRS. Payments on PayPal and Venmo can be designated as “family and friends” or as “business”; make sure you’re designating the exchange of money under “family and friends” to avoid receiving a tax form.
Preventing Fraud in the Digital Space
Many steps and initiatives are being put in place to combat fraud in digital assets and payment systems. The government is aware that the number of digital transactions and assets is only going to increase, and taxpayers need to know the obligations they have to properly report digital asset transactions.
The U.S. The Securities and Exchange Commission says it is developing regulatory approaches for digital assets. There are also regulatory bodies like the Financial Crimes Enforcement Network (FinCEN) that are developing rules for digital asset holders to follow, as well as for digital payment companies to adhere to.
The best advice to prevent fraud from happening to you in the digital asset and payments space is to be aware of the risks and pay attention to red flags. If something seems too good to be true, it probably is. Securing your devices and accounts with strong passwords, using secure networks, and regularly updating your software can also help. Some other helpful tips include:
- Choosing reliable platforms
- Investing in secure storage
- Verifying any transaction details
- Using only a few trusted parties
The digital asset and payments space can be confusing, however being aware of what can happen is the first step in preventing it from happening. Knowing what’s expected of you as a consumer when using these types of platforms is also important to not doing something illegal. Fraud can happen anywhere, but the digital space opens the door for it to happen at any time.
If you’ve been accused of fraud in the digital space, securing a knowledgeable, experienced defense attorney should be your first move. The legal team at the Law Offices of Robert J. DeGroot can help. Navigating the legalities of a fraud investigation and trial is not something you should do alone.
Reach out to the Law Offices of Robert J. DeGroot today if you or someone you know has been accused of fraud!
