What is a Cryptocurrency Forfeiture and Seizure

What is a Cryptocurrency Forfeiture and Seizure

What is a Cryptocurrency Forfeiture and Seizure

What is a Cryptocurrency Forfeiture and Seizure: In certain limited situations, the Internal Revenue Service and and US Government are authorized to pursue a seizure of property. Technically, the US Government has the right to seize the property, which is then forfeited to the US Government. The code sections that authorize these types of actions are found in Internal Revenue Code under section 7321, 7301 and 7302. In recent years, the Internal Revenue Service has increased enforcement of matters involving cryptocurrency — and on multiple occasions, the US government has sought to pursue a forfeiture and seizure of cryptocurrency assets.

26 USC 7321: Authority to Seize Property Subject to Forfeiture

      • Any property subject to forfeiture to the United States under any provision of this title may be seized by the Secretary.

26 USC 7301: Property Subject to Tax

In pertinent part: 

(a) Taxable articles

    • Any property on which, or for or in respect whereof, any tax is imposed by this title which shall be found in the possession or custody or within the control of any person, for the purpose of being sold or removed by him in fraud of the internal revenue laws, or with design to avoid payment of such tax, or which is removed, deposited, or concealed, with intent to defraud the United States of such tax or any part thereof, may be seized, and shall be forfeited to the United States.

IRM (Authority Granted in Title 26 USC §7301)

As provided by the IRM:

        • Title 26 USC §7301 provides for the forfeiture of taxable property which is in the custody of any person intending it to be sold, removed, concealed, or deposited to defraud the United States of the tax, or is possessed with the intent to avoid payment of the tax.

        • It also provides for the forfeiture of assets used to manufacture, contain, or transport the taxable property that is the object of the fraud or evasion scheme.

        • As an example, 26 USC §7301 has been used to seize property for violations of the motor fuels excise tax laws. Motor fuels are considered a taxable property under 26 USC §7301(a).

        • Accordingly, it follows that any equipment that is used (such as computers used to track sales) under 26 USC §7301(c), any storage facilities for fuel under 26 USC §7301(d), and any trucks that are used to transport fuel under 26 USC §7301(e), are all forfeitable if the fuel excise tax has been, or is intended to be, evaded.

26 USC 7302: Property Used in Violation of Internal Revenue Laws

      • It shall be unlawful to have or possess any property intended for use in violating the provisions of the internal revenue laws, or regulations prescribed under such laws, or which has been so used, and no property rights shall exist in any such property.

        A search warrant may issue as provided in chapter 205 of title 18 of the United States Code and the Federal Rules of Criminal Procedure for the seizure of such property.

      • Nothing in this section shall in any manner limit or affect any criminal or forfeiture provision of the internal revenue laws, or of any other law.

        The seizure and forfeiture of any property under the provisions of this section and the disposition of such property subsequent to seizure and forfeiture, or the disposition of the proceeds from the sale of such property, shall be in accordance with existing laws or those hereafter in existence relating to seizures, forfeitures, and disposition of property or proceeds, for violation of the internal revenue laws.

Authority Granted in Title 26 USC §7302

As provided by the IRM:

      • Title 26 USC §7302 provides for the forfeiture of any property used, or intended for use, in violation of the provisions of the Internal Revenue laws or regulations prescribed under such laws. It is the more commonly used statute for a Title 26 forfeiture. The wording of 26 USC §7302 is very broad. Although 26 USC §7302 authorizes the seizure and forfeiture of any property used, or intended to be used to violate any of the Internal Revenue laws, it is not to be used as a substitute to the collection of taxes. Consequently, most Title 26 forfeitures have involved property used to violate the provisions of the wagering tax laws (26 USC §4401, §4411, and §4412), the sale of motor fuels (26 USC §4081 and §4091), and, to a lesser degree, the equipment used in these tax fraud schemes. Forfeiture can also apply to other sections, such as the sale of tires (26 USC §4071).

      • The same assets listed in subsection above, can also be forfeited under 26 USC §7302 as property intended to be used to facilitate a violation of the Internal Revenue laws or its regulations. In addition, other applications of 26 USC §7302 have occasionally occurred. For example:

        • A luxury car was forfeited because it was the investment object of a fraudulent tax shelter.

        • In false refund investigations, computers and other equipment have been forfeited because they were used in the false refund operation.

        • In wagering investigations, the currency or “bank” that was maintained by the operator of the business, was forfeited since the currency was needed in order to provide a sufficient supply of ready cash to meet the demands of the wagering business, that is, to pay off its winners.

    • Theoretically, 26 USC §7302 can be used to forfeit assets attributable to violations of IRC 6050I (Form 8300, Report of Cash Payment over $10,000 Received in a Trade or Business, filing requirements). However, as explained in subsection below, the absence of a tracing provision in 26 USC §7302 makes these forfeitures very difficult to support. Unless the seizure occurs immediately after the transaction requiring the filing of a Form 8300, the money involved in the transaction would typically have already been deposited into the bank or else used in a subsequent transaction that would necessitate tracing.

$1B Sought Civil Action To Forfeit Silk Road

As provided by the IRS:

      • San Francisco, CA — The United States filed a civil complaint today to forfeit thousands of Bitcoins, valued at over $1 billion dollars, seized by law enforcement on November 3, 2020, announced Special Agent in Charge of the Washington, DC Field Office, Internal Revenue Service Criminal Investigation (IRS-CI) Kelly R. Jackson, and United States Attorney David L. Anderson of the Northern District of California. The seizure represents the largest seizure of cryptocurrency in the history of the Department of Justice.

      • “Criminal proceeds should not remain in the hands of the thieves. Through CI’s expertise in following the money, we were able to track down the illicit funds,” said IRS-CI Special Agent in Charge Kelly R. Jackson. “The Washington, DC Cyber Crimes Unit is uniquely specialized in tracing virtual currency transactions and we will continue to hone our skills to combat illegal activity.”

      • According to the allegations of the civil forfeiture complaint, from 2011 until October 2013 when it was seized by law enforcement, Silk Road was the most sophisticated and extensive criminal marketplace on the Internet. It served a sprawling black market bazaar where unlawful goods and services were bought and sold regularly by the site’s users. The complaint alleges that while in operation, Silk Road was used by thousands of drug dealers and other unlawful vendors to distribute hundreds of kilograms of illegal drugs as well as other unlawful goods and services to well over 100,000 buyers, and to launder hundreds of millions of dollars derived from these unlawful transactions. At the time it was taken down in 2013, Silk Road had nearly 13,000 listings for controlled substances and many more listings offering illegal services, such as computer hacking and murder for hire, which generated sales revenue totaling over 9.5 million Bitcoins and commissions from these sales totaling over 600,000 Bitcoins. The complaint further alleges that Silk Road used a so-called “tumbler” to process Bitcoin transactions in a manner designed to frustrate the tracking of individual transactions through the cryptocurrency Blockchain.

      • The Silk Road creator Ross Ulbricht, following his arrest in San Francisco, was convicted in 2015 by a New York federal jury of seven criminal counts, including conspiracy to distribute narcotics and money laundering.

      • The complaint further alleges that in 2020 agents of the IRS CI used a third party bitcoin attribution company to analyze bitcoin transactions executed by Silk Road and were able to identify 54 previously undetected bitcoin transactions executed by Silk Road, all of which appear to represent bitcoin, which was the proceeds of unlawful activity, that was stolen from Silk Road in or about 2012 and 2013.

      • The complaint alleges that these funds were traced to a bitcoin address. Further investigation of that bitcoin address by IRS CI agents and the United States Attorney’s Office revealed that the funds were connected to Individual X. It was further determined that Individual X had hacked the funds from Silk Road. Pursuant to that investigation of the hack, law enforcement seized several thousand Bitcoins on November 3, 2020. On November 4, 2020, the seized Bitcoin had a value of over $1 billion.

      • “Silk Road was the most notorious online criminal marketplace of its day,” said U.S. Attorney Anderson. “The successful prosecution of Silk Road’s founder in 2015 left open a billion-dollar question. Where did the money go? Today’s forfeiture complaint answers this open question at least in part. $1 billion of these criminal proceeds are now in the United States’ possession.”

      • The civil complaint merely alleges that certain property is subject to forfeiture. The United States must prove, by a standard of preponderance of the evidence, that the items are subject to forfeiture. If the United States prevails, the court will order all interests of any potential claimant forfeited.

CNBC Reports $1.2B in Cryptocurrency Forfeiture and Seizure

      • “In fiscal year 2019, we had about $700,000 worth of crypto seizures. In 2020, it was up to $137 million. And so far in 2021, we’re at $1.2 billion,” Koopman told CNBC. The fiscal year ends Sept. 30.”

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