By Garrett L. Brodeur and David Taylor
Tax Notes State
July 25, 2022
Abstract: In this article, Brodeur and Taylor examine the New York Attorney General’s intention to use the state’s False Claims Act to ensure cryptocurrency tax compliance, which they argue raises important tax policy concerns and should serve as a reminder to cryptocurrency investors to closely monitor developments pertaining to the Act and the taxation of cryptocurrency transactions.
In 1932 Justice Louis Brandeis theorized that the states could serve as “laboratories of democracy” by testing new legislation. Today, this idea finds support in a variety of pioneering state laws and regulations, including New York’s False Claims Act (NY FCA). The NY FCA was modeled after the federal False Claims Act, but it has been amended over the years to target a wider variety of conduct than its federal counterpart. Today, the NY FCA is generally considered the most far-reaching state whistleblower statute in the country and a model for other jurisdictions.
While Brandeis may have predicted the emergence of statutes like the NY FCA, he could not have foreseen the application of the statute to enforce tax compliance among cryptocurrency investors. In late March 2022, the New York State Attorney General (AG) issued a warning to cryptocurrency investors and their tax advisers to “accurately declare and pay taxes on their virtual investments.” Most importantly, the AG warned that the NY FCA will be used to punish those who fail to properly report and pay tax on income from their cryptocurrency transactions.
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