{"id":290627,"date":"2021-07-04T10:17:00","date_gmt":"2021-07-04T07:17:00","guid":{"rendered":"https:\/\/en.buradabiliyorum.com\/are-cryptocurrency-ransom-payments-tax-deductible\/"},"modified":"2021-07-04T10:17:00","modified_gmt":"2021-07-04T07:17:00","slug":"are-cryptocurrency-ransom-payments-tax-deductible","status":"publish","type":"post","link":"https:\/\/buradabiliyorum.com\/en\/are-cryptocurrency-ransom-payments-tax-deductible\/","title":{"rendered":"# Are cryptocurrency ransom payments tax deductible?"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_85 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a35a67c0bd1d\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #dd3333;color:#dd3333\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #dd3333;color:#dd3333\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a35a67c0bd1d\" checked aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/buradabiliyorum.com\/en\/are-cryptocurrency-ransom-payments-tax-deductible\/#US_tax_implications_of_ransom_payments_in_cryptocurrencies\" >U.S. tax implications of ransom payments in cryptocurrencies<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/buradabiliyorum.com\/en\/are-cryptocurrency-ransom-payments-tax-deductible\/#Conclusion\" >Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<p>&#8220;<strong># Are cryptocurrency ransom payments tax deductible? <\/strong>&#8221;<br \/>\n<img decoding=\"async\" src=\"https:\/\/images.cointelegraph.com\/images\/840_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjEtMDcvMzBiODExNTAtNThlOS00YTIyLTk1NGYtMGNkNDdlOWZhY2RhLmpwZw==.jpg\" \/><\/p>\n<div class=\"post-content\" data-v-128018ef>About 2,000 years ago during its Han dynasty, China made peace with some of the nomadic people of Central Asia who continuously ransacked Silk Road traders for an easy payday. It did so in order to fully establish the Silk Road trade route, which stretched from China to Europe, and to secure a great source of wealth from trading in luxury goods.<\/p>\n<p>Now, as trade increasingly has shifted to the digital realm during the global COVID-19 pandemic, cyberattackers are taking advantage of organizations\u2019 lax cybersecurity measures. They are using ransomware to lock these organizations\u2019 data with encryption until a ransom payment in cryptocurrency is made. Back in 2019, 98% of ransomware payments were made in Bitcoin (BTC). <\/p>\n<p><strong><em>Related: <\/em><\/strong><strong><em>Not like before: Digital currencies debut amid COVID-19<\/em><\/strong><\/p>\n<p>Anne Neuberger, United States deputy national security adviser for cyber and emerging <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/technology\/\" data-internallinksmanager029f6b8e52c=\"4\" title=\"Technology\" target=\"_blank\" rel=\"noopener\">technology<\/a>, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.cnbc.com\/2021\/06\/03\/they-are-hair-on-fire-biden-admin-mulling-cyber-attacks-against-russian-hackers.html\">explained<\/a>:<\/p>\n<blockquote><p>\u201cThe number and size of ransomware incidents have increased significantly. [&#8230;] The U.S. government is working with countries around the world to hold ransomware actors and the countries who harbor them accountable, but we cannot fight the threat posed by ransomware alone. The private sector has a distinct and key responsibility.\u201d <\/p><\/blockquote>\n<p>The administration of President Joe Biden is moving to treat cyberattacks \u2014 which are <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.techrepublic.com\/article\/how-cybercrime-will-cost-the-world-1-trillion-this-year\/\">estimated<\/a> to cost $1 trillion a year and often take the form of ransomware \u2014 as a national security threat. Intelligence agencies have concluded that they pose an elevated threat to the country, with gasoline, food supplies and <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.nbcnews.com\/tech\/security\/cyberattack-hits-major-u-s-hospital-system-n1241254\">hospital systems<\/a> at risk.<\/p>\n<p>Recently, the U.S. Department of Justice <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.justice.gov\/opa\/pr\/department-justice-seizes-23-million-cryptocurrency-paid-ransomware-extortionists-darkside\">seized<\/a> 63.7 BTC (worth <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/download-scripts-themes-apps\/\" data-internallinksmanager029f6b8e52c=\"9\" title=\"Download Scripts &amp; Themes &amp; Apps\" target=\"_blank\" rel=\"noopener\">app<\/a>roximately $2.3 million at the time) representing the proceeds of a ransom payment made by Colonial Pipeline to the group known as \u201cDarkSide.\u201d It did so via a coordinated effort with the DoJ\u2019s Ransomware and Digital Extortion Task Force, which collaborates with domestic and foreign government agencies in addition to private-sector partners to combat this significant criminal threat.<\/p>\n<p><strong><em>Related: <\/em><\/strong><strong><em>Cybercrime task force monitoring the global digital financial system<\/em><\/strong><\/p>\n<p>Lisa Monaco, the DoJ&#8217;s deputy attorney <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/general\/\" data-internallinksmanager029f6b8e52c=\"3\" title=\"General\" target=\"_blank\" rel=\"noopener\">general<\/a>, noted: \u201cFollowing the money remains one of the most basic, yet powerful tools we have.\u201d She continued:<\/p>\n<blockquote><p>\u201cRansom payments are the fuel that propels the digital extortion engine, and [..] the United States will use all available tools to make these attacks more costly and less profitable for criminal enterprises.\u201d <\/p><\/blockquote>\n<p>Paul Abbate, deputy director of the Federal Bureau of Investigation, added:<\/p>\n<blockquote><p>\u201cWe will continue to use all of our available resources and leverage our domestic and international partnerships to disrupt ransomware attacks and protect our private sector partners and the American public.\u201d<\/p><\/blockquote>\n<h2><span class=\"ez-toc-section\" id=\"US_tax_implications_of_ransom_payments_in_cryptocurrencies\"><\/span>U.S. tax implications of ransom payments in cryptocurrencies<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>One question is whether ransomware payments can be considered an \u201cordinary and necessary\u201d cost of doing business and be deducted from taxable income as a theft loss under Sections <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.irs.gov\/pub\/irs-drop\/rr-99-7.pdf\">162(a)<\/a> and <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.irs.gov\/pub\/irs-drop\/n-04-27.pdf\">165(a)<\/a> of the Internal Revenue Code, which provides the authority to deduct any losses that were not covered by insurance or some other means. There are several judicial and administrative definitions of theft, and the Internal Revenue Service\u2019s definition seems broad enough to encompass a cyberattack and allow for ransomware payments made in cryptocurrency to be deducted as a business expense for federal tax purposes.<\/p>\n<p>However, under Section <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.law.cornell.edu\/uscode\/text\/26\/162\">162(c)<\/a>, if the ransom payment in cryptocurrency constitutes an illegal bribe, illegal kickback, blackmail payment or other illegal payment \u2014 such as one made to a group classified as a terror organization under any U.S. law \u2014 it would not be tax-deductible. Thus, a taxpayer should distinguish illicit payments from ransomware cryptocurrency payments by highlighting the theft of property. Questions of illegality may arise when paying a ransomware demand in cryptocurrency to a cybercriminal with a known connection to a sanctioned or boycotted foreign government.<\/p>\n<p><strong><em>Related: <\/em><\/strong><strong><em>Sanctions compliance for transactions in fiat and cryptocurrencies are the same: Expert take<\/em><\/strong><\/p>\n<p>Here is an example, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.elliptic.co\/blog\/darkside-ransomware-has-netted-over-90-million-in-bitcoin\">provided<\/a> by Elliptic co-founder and chief scientist Tom Robinson: \u201cElliptic was first to identify the Bitcoin wallet used by the DarkSide ransomware group to receive a 75 Bitcoin ransom payment from Colonial Pipeline. [&#8230;] DarkSide [which is believed to be based in Eastern Europe] is an example of \u2018Ransomware as a Service\u2019 (RaaS). In this operating model, the malware is created by the ransomware developer, while the ransomware affiliate is responsible for infecting the target computer system and negotiating the ransom payment with the victim organisation. This new business model has revolutionised ransomware, opening it up to those who do not have the technical capability to create malware, but are willing and able to infiltrate a target organisation.\u201d<\/p>\n<p>Ransomware attackers may even offer a victim company a discount if it transmits the infection to other companies. These ransom payments in BTC are then laundered on dark web markets, according to a report <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.zdnet.com\/article\/russian-dark-web-marketplace-hydra-cryptocurrency-transactions-reached-1-37bn-in-2020\/\">issued<\/a> by Flashpoint and Chainalysis.<\/p>\n<p>Any ransom payment made in cryptocurrency is taxed as property rather than currency. Therefore, taxpayers are expected to keep detailed records of these ransom payment cryptocurrency transactions, report any gains and report the fair market value of any mined cryptocurrency on their tax returns as well.<\/p>\n<p>Additionally, the Financial Crimes Enforcement Network, or FinCEN, also regulates cryptocurrency-related transactions pursuant to the <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.investopedia.com\/terms\/b\/bank_secrecy_act.asp#:~:text=The%20Bank%20Secrecy%20Act%20(BSA)%20is%20U.S.%20legislation%20aimed%20toward,transactions%20involving%20sums%20over%20%2410%2C000.\">Bank Secrecy Act<\/a> (BSA) by <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.fincen.gov\/resources\/statutes-regulations\/guidance\/application-fincens-regulations-persons-administering\">stating<\/a> that \u201cAn administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter.\u201d<\/p>\n<p>Thus, under the BSA, a cryptocurrency transmitter is required to complete a risk assessment, develop a written program to avoid money laundering, designate an individual compliance officer and complete other action items.<\/p>\n<p><strong><em>Related: <\/em><\/strong><strong><em>The United States updates its crypto AML\/CFT laws<\/em><\/strong><\/p>\n<p>It should be noted that other profiting and culpable participants in a Bitcoin ransom payment scheme might find themselves facing criminal and tax fraud\/evasion penalties. For example, John McAfee, founder of the antivirus company bearing his name, had recently been <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.justice.gov\/opa\/pr\/john-mcafee-indicted-tax-evasion\">charged<\/a> with various tax crimes in the U.S. relating to nominee-held cryptocurrency transactions and was facing many years in prison if convicted. This may have been a factor in his decision to commit suicide in a Spanish jail after the court ruled he could be extradited to the United States.<\/p>\n<p><strong><em>Related: <\/em><\/strong><strong><em>John McAfee\u2019s suicide reports raise disbelief, spark conspiracy theories<\/em><\/strong><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In remarks to the U.S. Senate Appropriations Committee, FBI Director Christopher Wray advised ransomware victims to not pay a ransom to retrieve hijacked data or regain network access. He <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.reuters.com\/technology\/fbi-director-wray-urges-companies-stop-paying-ransoms-hackers-2021-06-23\/\">said<\/a> that \u201cIn general, we would discourage paying the ransom because it encourages more of these attacks, and frankly, there is no guarantee whatsoever that you are going to get your data back,\u201d <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.appropriations.senate.gov\/imo\/media\/doc\/Wray%20Witness%20Testimony3.pdf\">adding<\/a>: \u201cWe have to make it harder and more painful for hackers and criminals to do what they are doing.\u201d And he continued:<\/p>\n<blockquote><p>\u201cWe took upwards of 1,100 actions against cyber adversaries last year, including arrests, criminal charges, convictions, dismantlements, and disruptions, and enabled many more actions through our dedicated partnerships with the private sector, foreign partners, and at the federal, state, and local entities.\u201d<\/p><\/blockquote>\n<p class=\"post-content__disclaimer\"><em>The views, thoughts and opinions expressed here are the author\u2019s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.<\/em><\/p>\n<div>\n<div style=\"background: rgb(239, 239, 239); border: 1px solid rgb(204, 204, 204); padding: 10px;\"><strong>Selva Ozelli<\/strong>, Esq., CPA, is an international tax attorney and certified public accountant who frequently writes about tax, legal and accounting issues for Tax Notes, Bloomberg BNA, other publications and the OECD.<\/div>\n<\/div>\n<p><template data-name=\"subscription_form\" data-type=\"markets_outlook\"><\/template><\/div>\n<blockquote><p><strong><span style=\"color: #ff6600;\">If you liked the article, do not forget to share it with your friends. 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It did so in order to fully establish the Silk Road trade route, which stretched from China&#8230;<\/p>\n","protected":false},"author":1,"featured_media":290628,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/images.cointelegraph.com\/images\/1200_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjEtMDcvMzBiODExNTAtNThlOS00YTIyLTk1NGYtMGNkNDdlOWZhY2RhLmpwZw==.jpg","fifu_image_alt":"","footnotes":""},"categories":[1],"tags":[74862,74863,20101,73434,73240,70934,46483,67874],"class_list":["post-290627","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-bitcoin","tag-cryptocurrencies","tag-fbi","tag-irs","tag-ransomware","tag-regulation","tag-taxes","tag-united-states"],"_links":{"self":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/290627","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/comments?post=290627"}],"version-history":[{"count":0,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/290627\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media\/290628"}],"wp:attachment":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media?parent=290627"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/categories?post=290627"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/tags?post=290627"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}