The prominence of online cryptocurrency scams, colloquially known as ‘pig-butchering’ scams, is increasingly concerning for tax professionals and law enforcement alike. The scammers, who mainly operate in Southeast Asia, have targeted victims worldwide, using various tactics to lure their victims into the traps.
These scams typically involve building a relationship with the victim, often through promises of romantic involvement or enticing investment returns. Once trust is established, the victims are encouraged to convert their money into cryptocurrency and invest it in a fraudulent app. This app falsely displays a dramatic increase in the victims’ funds, luring the victims into investing more money. Attempts to withdraw are met with demands of additional fees or non-existent ‘government exit taxes’. Eventually, the victims realize they have fallen prey to a complex scam.
Recognizing the severity of these cases, the Internal Revenue Service (IRS) Criminal Investigation Department recently issued a
warning
to taxpayers, emphasizing that losses have been as high as $2 million.
Other authorities have also issued warnings about these scams: The Financial Crimes Enforcement Network (FinCEN) released a
similar warning
in September, and several state attorney general offices have alerted the public to these risks.
Victims of these scams may be eligible to deduct their lost amounts from taxable income. The IRS
guidance
suggests cryptocurrency-related losses can be claimed as a capital loss. In certain instances, victims may claim a nonpersonal theft loss, which could reduce their income taxes for the year of the theft or in future years, if losses exceed that year’s income.
Several governments are taking action to combat these schemes. Notably, the Chinese government has worked with multiple Southeast Asian countries to apprehend nationals suspected of running such scams. In the U.S., the Department of Justice has managed to seize some of the stolen funds, showcasing arrests and seizures such as
one in April 2023
where $112 million was captured, and
another recent case
where $9 million worth of cryptocurrency was seized.
However, recovering the stolen funds is an arduous process and victims are unlikely to receive compensation. The IRS Criminal Investigation Department is potentially focusing its efforts on online crypto-scammers, advising victims to contact local law enforcement or one of its 20 field offices, offering potential deductions from tax burdens for victims who qualify.
The author of the article from where this information was derived, Steven Chung, a tax attorney based in Los Angeles, California, encourages victims to consult with a tax professional because of the complex theft loss rules. For further consultation, he may be reached via
email,
Twitter,
or
LinkedIn
for further discussion on this significant topic.