Crypto Scams: What They Are and How To Avoid Them

The mainstream adoption of cryptocurrency means a corresponding increase in crypto scams and hacks.

This article will explore what scams look like, warning signs that you may have fallen for a cryptocurrency scam, and what options are available if you are a victim of a cryptocurrency scam. 

Example of a Crypto Scam

The cryptocurrency tax attorneys at Kugelman Law typically come across this scenario:

1. A scammer will reach out to a potential victim via phone call or social media app informing them they have a great opportunity to make money. WhatsApp and Instagram are currently the most common platforms, followed by Discord, and Telegram.   

2. The scammer will pose as a financial advisor, investor, or part of a large tech company (e.g., Google) who is an expert in cryptocurrency. 

3. The scammer will send screenshots of impressive profits to convince a potential victim that the scammer is very successful at investing or trading cryptocurrency. In some cases, the scammer will attempt to build trust with potential victims by giving free trading advice.

4. The scammer will convince the potential victim to "invest" a small-medium amount of money while promising large gains.

5. The scammer will send screenshots to the victim to convince them that their investment is paying off incredibly well. At this point, it will appear to the victim that things are going great and that it would be wise to "invest" more money. 

6. The scammer will continue to convince the victim that things are going well and continue to convince the victim to invest more money, including withdrawing from retirement accounts.

7. Eventually, the victim will want to reap their alleged profits, and they inform the scammer that they would like to withdraw their money. The scammer will likely say that you have to pay a large amount in taxes (an amount that cannot simply be taken from the "profits"). 

8. How it ends: The victim will attempt to “cash out” or withdraw their funds and they won’t be able to. The scammer will then disappear and be unreachable.

How To Avoid a Crypto Scam

A major red flag that indicates you have fallen for a scam may appear when someone decides to "withdraw" their funds or convert their funds into USD. If the "advisor" or "institution" tells you that you cannot withdraw your money unless you pay taxes or cites some other compliance issue preventing withdrawal, it is likely that you are being scammed. 

Being told that you need to pay taxes through their platform or that you must pay some sort of withdrawal fee is a scammer's last ditch effort to squeeze more money from you. 

The below are also red flags to be aware of as a warning of a potential crypto scam.

1. Being asked for your bank account information.
2. Encouraging you to visit a Bitcoin ATM.
3. A promise of huge investment winnings.
4. Communication only via WhatsApp or other semi-anonymous messaging platform.
5. The scammer is likely in a foreign country and may indicate this.
6. Unsolicited contact from a person claiming to work at a large tech company like Amazon. One-third of business-impostor fraud complaints involve scammers claiming they’re from Amazon, the Federal Trade Commission (FTC) reports.

What To Do if You’re a Crypto Scam Victim

The FBI’s Internet Crime Complaint Center (also known as IC3) allows victims to report Internet fraud and scams as well as filing on behalf of another person believed to have been a victim.

Report the crypto scam at ic3.gov and be sure to include emails, phone numbers, and bank accounts used, along with a thorough description of the incident.

While the Kugelman Law crypto attorneys are unable to assist in finding the scammer and bringing them to justice, it is still important to remember the tax implications.

Note that if you have capital gain income, then you are still liable to pay the tax owed to the IRS even if those funds are in scammer hands. Our California tax attorneys can provide defense to you to help stave off collections and explore alternative solutions, so contact us today.