Where there's a way to make money, someone is trying to hide that money from the IRS. Cryptocurrency is no exception. For more than a decade, Bitcoin Fog offered to hide the origin and destination of customers' bitcoin transactions, making it an institution on the Dark Web. Now, U.S. authorities say they've arrested the man behind the virtual machine.

IRS Identified the Bitcoin-Laundering Kingpin

The IRS says it identified the Russian-Swedish administrator and charged him with laundering hundreds of millions of dollars worth of bitcoin, much of it from dark web drug markets, over more than a decade. Federal law enforcement agents arrested Roman Sterlingov in Los Angeles.

Bitcoin Fog claimed to launder bitcoin by allowing users to blend their Bitcoin transactions with those of other users, preventing anyone tracing a Bitcoin blockchain from identifying a single individual's transactions. Sterlingov took a two to two-and-a-half percent commission on each transaction, using exchange rates current at that time. 

Tracing the Untraceable

The IRS found Sterlingov through the transactions he originally used to set up Bitcoin Fog's server hosting in 2011. Ironically, the IRS traced him by following his cryptocurrency trail, the same type of tracking Bitcoin Fog supposedly prevents. The IRS complaint details how Sterlingov exchanged Euros for bitcoins on an early cryptocurrency exchange. Next, he moved the bitcoin through several addresses before exchanging them for now-defunct Liberty Reserve currency on another cryptocurrency exchange. Finally, he used that currency to set up Bitcoin Fog's servers.

By identifying Sterlingov's account on early exchanges, the IRS found his name and address and even his Google account. The Google account contained a Russian-language document that offered detailed instructions on how to obscure bitcoin payments. Sterlingov followed these same instructions to set up Bitcoin Fog. Bitcoin Fog is still online, but it's unclear who is now running the laundering service.

Lessons We Can Learn

Don't try to hide bitcoin transactions from the IRS. While many claim that cryptocurrency transactions are easier to hide, the blockchain's ledger of all Bitcoin transactions since the currency's creation often allows law enforcement officers to track decades-old transactions. Cryptocurrency experts often warn that blockchain activity is forever.

Hire an Experienced Tax Attorney

If you're unsure about how to report cryptocurrency income or you're in dispute with the IRS, it's time to talk to a qualified, experienced tax professional. You need specialized tax guidance. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.