Bitcoin Jesus Challenges Constitutionality Of Expatriation “Exit Tax”

Roger Ver, an early Bitcoin investor renowned as “Bitcoin Jesus” for his evangelism of cryptocurrency since 2011, now finds himself in a legal maelstrom. Ver, a controversial figure in the blockchain world, was arrested in April 2024 in Spain on U.S. criminal charges stemming from allegations of mail fraud, tax evasion, and filing false tax returns.

The indictment, originally filed in February 2024 but unsealed in May, has now been challenged by Ver and in parallel has reignited discussions about the U.S. expatriation tax regime. Ver’s case also serves as a reminder that with criminal tax matters, the U.S. government has certain helpful provisions in the tax law that can extend the statute of limitations.

Bitcoin Jesus’ Exit Tax Dispute, Decades in the Making

Ver renounced his U.S. citizenship in early 2014 after acquiring citizenship in St. Kitts and Nevis. His renunciation subjected him to the mark-to-market tax or so-called “exit tax”. The exit tax applies to individuals known as “covered expatriates,” which includes individuals having a net worth of $2 million or greater.  The exit tax is essentially a “deemed sale” of worldwide assets, requiring the covered expatriate to report and pay tax on unrealized gains. Ver’s 2014 expatriation should have included a detailed declaration of his global holdings on IRS Form 8854 and the exit tax calculations on his final U.S. income tax return.

The indictment alleges that Ver concealed significant assets, including millions of dollars in Bitcoin held through two U.S.-based companies. By failing to accurately disclose these holdings, Ver allegedly avoided an estimated $48 million in exit taxes. Further allegations include filing a false 2011 gift tax return and omitting substantial Bitcoin transactions on his 2017 tax return, filed after he had relinquished his U.S. citizenship.

Expatriation and Constitutional Challenges to the Exit Tax

On December 3, Ver’s attorneys filed a motion to dismiss the criminal indictment. It is based in part, on grounds that charges in the indictment are unconstitutional since the charges are based on the exit tax regime which Ver contends is itself unconstitutional.

Expatriation, Exit Tax and Unrealized Income

Roger Ver argues that the exit tax is a direct tax, which, under the Constitution, must be apportioned among the states based on their populations unless specifically exempted by the Sixteenth Amendment, which exempts taxes imposed on income. This is a very complex analysis but simplifying the issues, Ver contends that the exit tax, by imposing a “deemed sale” on unrealized gains, does not fall within this exemption. The argument is that unrealized gains do not constitute realized income under constitutional and longstanding tax principles. In summary, Ver asserts the exit tax unconstitutionally imposes a direct, unapportioned tax that unfairly penalizes individuals for expatriating.

Due Process

To pass constitutional muster, laws must be fundamentally fair and not overly burdensome on individuals’ rights. Ver contends that the expatriation exit tax regime oversteps due process protections by being overly punitive, vague, and burdensome. Additionally, the exit tax targets only a specific subset of individuals raising issues of fairness.

Exit Tax and the Fundamental Right to Expatriate

Ver’s legal team also argues that the exit tax is an unconstitutional burden on the fundamental right to expatriate. It imposes a financial burden directly tied to the decision to renounce citizenship and acts as a disincentive through high and potentially insurmountable tax obligations. For individuals with substantial assets but low liquidity, the tax creates a prohibitive financial barrier.

This case, if successful, could challenge the legitimacy of the exit tax and its enforcement. It raises fundamental questions about the fairness and clarity of U.S. tax laws applied to those severing ties with the United States.  Critics have long argued that the rules place an undue burden on such individuals. Ver’s case may bring renewed scrutiny to the laws governing expatriation and their compatibility with constitutional protections.

Criminal Tax Statute of Limitations: No Escape From the Taxman?

While Ver’s legal team challenges the constitutionality of the exit tax, his criminal indictment also implicates the statute of limitations for tax crimes. Under civil tax law, fraudulent returns or willful attempts to evade taxes allow the IRS to examine records indefinitely. Criminal tax cases, however, have a defined six-year statute of limitations.

Yet, the limitations clock doesn’t necessarily start ticking when a crime is committed. In criminal tax evasion, the statute begins running either from the date the return was due or filed, or, from the taxpayer’s last affirmative act of evasion. For Ver, that could mean the statute began in December 2018, when he allegedly filed a false return related to the 2017 sale of Bitcoins and subsequent transfer of millions to offshore accounts. Furthermore, the statute of limitations is tolled or halted while the accused is outside the U.S., potentially extending the timeframe for prosecution.

Considering Expatriation, Lessons for Expatriates

Ver’s case underscores the long reach of U.S. tax laws, particularly for expatriates with significant assets. The IRS’ pursuit of Ver demonstrates its commitment to enforcing compliance, even years after alleged violations. Whether his constitutional challenge gains traction remains to be seen, but for now, the combination of tolling provisions and allegations of ongoing evasion leave Ver’s case squarely within the government’s reach.

As the trial unfolds, it could have wide-ranging implications for how expatriation tax laws are enforced and interpreted, potentially influencing future disputes between the IRS and former U.S. citizens.

It’s no secret, the U.S. government is looking more and more closely at expatriations. For those considering expatriation or navigating the complexities of international tax law, Ver’s case is a stark reminder: meticulous compliance is essential, and the passage of time offers no guaranteed protection from the taxman.

Expatriation is a complex area of law and demands the best tax advisors.

Listen to this fascinating podcast where I speak about the case with John Richardson, a US and Canadian attorney.

Posted  Dec. 11, 2024