Following the 2024 presidential election, many investors have scrambled to purchase cryptocurrency for fear of missing out on the next wave of massive returns. In the process, they have driven the price of bitcoin and other cryptocurrencies to all-time highs.

Many investors are banking on the possibility of even greater returns as the new administration implements its pro-crypto policy agenda in the coming months.

President Donald Trump heightened that excitement with the stroke of a pen when he signed an executive order promoting American leadership in digital assets and financial technology. But amid the flurry of trading, crypto investors would do well not to let one consideration get lost in the shuffle: Uncle Sam is watching.

A recent case serves as a cautionary tale. Richard Ahlgren III was an early investor in bitcoin who sold approximately 640 bitcoins in 2017 for a total of $3.7 million to fund the purchase of a house in Park City, Utah. Ahlgren, however, failed to properly report the capital gains from his bitcoin sale on his taxes.

Instead, he falsely inflated the acquisition cost of the bitcoins he sold to purchase the home, which had the effect of fraudulently lowering his taxable income. If that was not enough, he also brokered in-person cash sales of bitcoin that he did not report to the Internal Revenue Service and structured bank deposits to avoid raising red flags with his bank.

In some ways, these facts make out a fairly straightforward tax fraud case. But Ahlgren's case was actually the first of its kind, marking the government's first criminal prosecution of a taxpayer for failing to accurately report gains from the sale of cryptocurrency. Ahlgren pled guilty and was sentenced in December 2024 to two years in prison, in the case of U.S. v. Ahlgren in the U.S. District Court for the Western District of Texas.[1]

It is unclear whether the new administration will continue to pursue criminal prosecutions of pure crypto tax fraud cases. But until the rules change, special attention must be given to the IRS' complex reporting requirements if one wishes to stay out of the government's crosshairs.

Taxpayers need not look any further than the first page of Form 1040 to confirm the importance that the IRS places on accurate reporting. One of the very first questions asks the taxpayer to declare under penalty of perjury whether he or she engaged in any covered cryptocurrency transactions in the past year.

What counts as a taxable transaction can get complicated, as the IRS defines it much more broadly than the simple selling of a digital asset. It includes, for instance, situations in which an individual receives a digital asset as a reward, or as a result of staking or mining activities. It can even include swapping one digital asset for another. To add even another layer of complexity, the taxes you owe will also differ depending on whether your crypto is classified as a long-term or short-term asset.

Recent regulatory changes — unless repealed by the new administration — will also assist the IRS in tracking down crypto tax evaders. New IRS rules are in effect starting this year that require brokers, namely cryptocurrency exchanges with custodial possession of digital assets, to report transaction information directly to the IRS.[2]

Brokers will do so using a new Form 1099-DA. The 1099-DA will require key details about individual transactions to be reported to the IRS, such as proceeds from sales or exchanges as well as transaction dates.

Previously, the IRS only received limited information such as interest income earned on crypto-assets through activities like staking. It was left up to taxpayers to self-report any capital gains.

All of that has changed with the new rules that have now taken effect. Whether the new administration rolls back these regulations remains to be seen.

Those who trade in so-called memecoins in particular are likely to draw the IRS' attention. Unlike bitcoin, a memecoin is a token that typically has no value other than the hype generated by the community promoting it. Memecoins are often born out of pop culture references or jokes, and can essentially be created by anyone with a computer. Some prominent examples are dogecoin and shiba inu coin.

Although most memecoins fail to gain traction, some skyrocket and lead to massive gains for the coins' creators and for traders who invested early. The stories of "memecoin millionaires" are plentiful, with some investors turning small investments into enormous gains.

Many of these memecoins, however, are often not sold on mainstream crypto exchanges that take custodial possession of digital assets on behalf of traders and, as such, would not be covered by the IRS' new reporting rules.

This does not mean, however, that noncustodial exchanges can count on less scrutiny in the months to come. Indeed, the IRS has previously indicated that it is continuing to evaluate its approach to monitoring noncustodial brokers.

Thus, even those exchanges that are currently not required to report trading information to the IRS may be forced to disclose that information at some point in the future through regulatory changes or the legal process.

Taxpayers — even those who use so-called cold wallets that are entirely disconnected from the internet — can take no solace in the decentralized nature of the blockchain. While transactions may be harder to trace, it is not impossible. Just ask Richard Ahlgren. The government used a tracing expert who was able to reconstruct Ahlgren's bitcoin transactions in damning fashion.

Short of a tracing expert, there will now be simpler ways for the IRS to keep track of many crypto transactions, such as through the new Form 1099-DA filing requirement.

With the ubiquity of trading apps, anyone with a bank account and an internet connection can become a day trader. But with this newfound opportunity comes significant risk.

Richard Ahlgren's case serves as a learning lesson, and a shot across the bow, for U.S. taxpayers. Ahlgren may be the first individual charged for underreporting capital gains from the sale of digital assets, but he is not likely to be the last.

Now more than ever, those who invest in crypto must take a proactive approach to tax compliance. Those who do not do so at their own peril.

Saverio S. Romeo is a partner at Fox Rothschild LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] United States v. Ahlgren, III, No. 24-cr-00031 (W.D. Tx.) (judgment entered Dec. 13, 2024).

[2] Gross Proceeds Reporting by Brokers That Regularly Provide Services Effectuating Digital Asset Sales, 89 Fed. Reg. 106928-01 (Dec. 30, 2024), https://public-inspection.federalregister.gov/2024-30496.pdf.

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