How can Web3 enterprises use tax settlement systems to resolve tax disputes?
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How can Web3 enterprises use tax settlement systems to resolve tax disputes?
Take FTX and MicroStrategy as examples.
Navigating Web3 tides with focused insightsBy: TaxDAO
1. Introduction
With the rapid rise of crypto assets, they have become a core component of the global financial landscape. However, their unique characteristics—decentralization and anonymity—have introduced unprecedented tax challenges. As a global leader in financial technology, the United States has established a rigorous system for taxing crypto assets. According to the Internal Revenue Service (IRS), cryptocurrencies are treated as property. Therefore, buying, selling, or exchanging them may trigger capital gains or losses, which must be reported under capital gains tax rules. Additionally, income from mining, airdrops, and hard forks is also subject to taxation.
However, due to the fast-paced technological evolution of crypto assets, tax regulation often lags behind. In this emerging field, disputes frequently arise between taxpayers and tax authorities regarding tax liabilities or obligations. In such cases, tax settlement offers an efficient resolution mechanism. Through negotiation and compromise, taxpayers can reach agreements with tax authorities to resolve disputes and avoid harsher penalties.
2. Overview of the U.S. Tax Settlement System
2.1 Development of the U.S. Tax Settlement System
The U.S. tax settlement system is rooted in the Taxpayer Bill of Rights. Under U.S. law, while taxpayers bear tax obligations, they are protected by the Taxpayer Bill of Rights, which guarantees ten fundamental rights including the right to be informed, the right to quality service, the right to challenge IRS positions and appeal, and the right to finality. One key provision is the "right to a fair and just tax system," which ensures that the tax system considers facts and circumstances affecting a taxpayer’s potential liability, ability to pay, or capacity to provide timely information. If a taxpayer faces financial hardship or the IRS fails to properly and promptly address their tax issue through normal channels, they may receive assistance from the Taxpayer Advocate Service (TAS). Under this protection, individuals facing specific hardships—such as inability to fully repay tax debt or suffering economic distress if required to do so—may apply for an Offer in Compromise (OIC) to reduce outstanding tax liabilities, ensuring basic living expenses are preserved.
2.2 Conditions for Implementing Tax Settlements in the U.S.
The tax settlement system serves as a non-litigious method to resolve tax disputes when taxpayers and government agencies (e.g., IRS, state governments) encounter difficulties in determining accurate tax liabilities during audits. Alternative Dispute Resolution (ADR) was introduced into administrative procedures in the 1990s and later codified into permanent law by Congress, encouraging federal agencies to adopt informal processes like mediation and negotiation. Settlement remains one of the most commonly used tools.
The IRS’s Offer in Compromise (OIC) program allows taxpayers unable to meet full tax obligations to enter into a binding agreement with the IRS to settle their tax debt—including taxes, penalties, interest, and other assessments—for less than the full amount owed. However, eligibility requires meeting specific criteria:
a. The IRS may accept a compromise if there is genuine doubt about whether the tax debt exists or its correct amount.
b. The IRS may accept a compromise if it doubts full collection of the assessed amount, such as when the taxpayer's assets and income fall short of the total tax liability.
c. The IRS may accept a compromise if the tax is legally owed and collectible in full, but requiring full payment would cause economic hardship or result in unfairness under special circumstances.
To successfully obtain an OIC, individuals or businesses must complete the following steps and submit their application to the IRS for approval:
Step 1: Collect personal financial information (including cash, investments, personal assets, expenses, etc.)
Step 2: Complete Form 433-A (for individuals) or Form 433-B (for businesses), and calculate a reasonable tax liability estimate
Step 3: Attach copies of supporting documents verifying the information provided on Form 433-A/433-B
Step 4: Complete Form 656, select a settlement option, and ensure the proposed settlement amount meets or exceeds the calculated liability from Form 433
Step 5: Pay the initial payment and a $205 application fee
Step 6: Submit the application package to the IRS
Step 7: If the application is denied, the taxpayer may appeal to the IRS Independent Office within 30 days
In addition to OIC, the IRS offers other ADR mechanisms, such as Fast Track Mediation and Fast Track Settlement. When a taxpayer cannot reach agreement with the examining team, the examiner prepares Form 14717 along with statements of issues and valuation reports for appeal. Once accepted, a mediator is assigned to facilitate resolution through mediation meetings. If no agreement is reached at the appeals level, Post-Appeals Mediation may be initiated, where the case is reassigned to another Appeals Office for review.
2.3 Characteristics of the U.S. Tax Settlement System
Influenced by pragmatism and administrative democratization, although statutory limitations exist on the scope of settlements, U.S. Tax Courts generally encourage settlement. The Administrative Dispute Resolution Act (ADRA) of 1990 explicitly authorized and encouraged federal agencies to use mediation, negotiation, arbitration, or other informal procedures to swiftly resolve administrative disputes. In tax administration, approximately 80% of small tax litigation cases are resolved out of court before trial, effectively terminating legal proceedings.
3. Case Studies: FTX and MicroStrategy Tax Settlements
3.1 FTX Tax Settlement Case
FTX was once a prominent global digital asset spot and derivatives (crypto asset) exchange, founded in 2019 and quickly rising to become the world’s second-largest cryptocurrency trading platform.
In 2022, Sam Bankman-Fried, former CEO of FTX, and his affiliated trading firm Alameda Research were found to have engaged in financial fraud, leading to a collapse of FTX’s liquidity. FTX, Alameda Research, and over 134 related entities filed for bankruptcy in the United States, resulting in billions of dollars in investor losses.
During the bankruptcy process, the IRS initially filed a preliminary tax claim of $44 billion against FTX and its subsidiaries—including FLX Trading Ltd. and Alameda Research—which was later revised down to $24 billion. The IRS stated the claim related to unpaid income taxes, employment taxes, and penalties from 2018 to 2022. In December 2023, however, FTX’s legal team filed objections with the bankruptcy court, demanding documentation from the IRS to substantiate its claims and explain how the back-tax estimates were calculated. FTX’s attorneys argued that FTX “never received anywhere near the $24 billion claimed by the IRS” and had suffered massive losses. They rejected responsibility for income tax liabilities arising from Sam Bankman-Fried’s alleged misappropriation of customer funds, as well as associated employment tax obligations. Furthermore, FTX emphasized that “the only source from which the IRS could recover would be compensation taken from victims.” Based on these arguments, FTX proposed a settlement offer: $200 million in priority tax claims and $685 million in lower-priority claims.
In June 2024, FTX and the IRS reached a final settlement agreement. The IRS will receive $200 million in priority claims, payable within 60 days after the effective date of FTX’s proposed reorganization plan. Additionally, the agency will receive $685 million in lower-priority claims, to be distributed to customers and other creditors.
3.2 MicroStrategy Tax Settlement Case
In 2022, Washington D.C. Attorney General Karl Racine sued Michael Saylor, founder of MicroStrategy and a billionaire in the crypto space, alleging that he and his company failed to pay D.C. income taxes for at least 10 years while residing in the district. It was claimed that MicroStrategy submitted false W-2 forms, helping Saylor evade more than $25 million in local income taxes. On his tax filings, Saylor declared residency in Florida—a state without personal income tax—while actually living in a waterfront apartment in Washington D.C. Moreover, Saylor minimized taxable income by taking a $1 annual salary combined with extensive fringe benefits (including private jet travel, chauffeur services, and security teams). These benefits were paid for by the company, which covered federal taxes, while Saylor, claiming Florida residency, avoided treating such benefits as taxable compensation.
In August 2022, Saylor stepped down as CEO of MicroStrategy and transitioned to Executive Chairman amid the lawsuit.
This marked the largest income tax fraud recovery case in D.C. history and the first litigation under the district’s revised False Claims Act, which incentivizes whistleblowers to report residents who conceal their true domicile to evade taxes. Under the law, anyone who knowingly submits or causes submission of false claims to the government must pay triple the government’s damages plus inflation-adjusted fines. Experts estimated Saylor could face penalties exceeding $75 million. Nevertheless, Saylor maintained he had moved from Virginia to Florida over a decade ago, purchasing a home in Miami Beach, establishing his life center in Florida, voting there, and fulfilling jury duties. MicroStrategy clarified it had no authority over Saylor’s personal tax matters and thus refused to accept responsibility for any alleged tax misconduct. Amid conflicting claims, both parties expressed desire to avoid further time, cost, and inconvenience of protracted litigation and to resolve all disputes and potential legal claims arising from the conduct in question. On June 3, 2024, Saylor reached a $40 million settlement with the Washington D.C. Attorney General to resolve the tax fraud allegations.
4. Implications of the U.S. Tax Settlement System
4.1 Lessons from the FTX Case
FTX, once the world’s second-largest cryptocurrency exchange, collapsed dramatically, severely damaging market confidence in crypto assets. The tax settlement not only involved disputes between the IRS and FTX over tax amounts but also intersected with FTX’s bankruptcy and victim compensation issues. The settlement spared the debtor lengthy and costly litigation, allowing the estate to prioritize customer repayments and protect multiple stakeholder interests. Thus, U.S. companies facing high tax claims may have opportunities to negotiate reduced payments through comprehensive appeals and settlement discussions with the IRS.
4.2 Lessons from the MicroStrategy Case
The United States operates under a dual legal system of federal and state laws. While understanding federal regulations is essential, taxpayers must also remain vigilant about evolving state-level rules. Differences among states create certain advantages—for example, Florida does not impose personal income tax—and allow room for legitimate tax planning. However, falsely declaring residency to evade taxes carries significant risks, especially under strict legal frameworks like D.C.’s False Claims Act. Companies should assist employees in conducting lawful and transparent tax planning to ensure compliance.
Notably, in this case, Saylor avoided potential penalties of up to $75 million under the False Claims Act by settling for $40 million, thereby ending the D.C. government’s lawsuit. This demonstrates that tax settlements can prevent prolonged and expensive legal battles and help taxpayers significantly reduce penalty exposure.
5. Conclusion
Cryptocurrencies possess features such as decentralization, anonymity, and global liquidity, making them difficult for tax authorities to monitor and investigate. As a result, crypto assets are prone to being exploited as vehicles for tax avoidance.
In the cases discussed, the IRS initially demanded $24 billion in tax claims from FTX. However, faced with FTX’s challenge to the validity and calculation of the debt, the IRS did not conduct a more rigorous investigation or produce robust evidence. Instead, it accepted FTX’s legal team’s settlement proposal—agreeing to a payout nearly 100 times smaller than its original demand. Similarly, in the case of self-proclaimed “crypto billionaire” Michael Saylor, rather than proceeding through full judicial process, a tax settlement was reached to compensate the District of Columbia government. The outcomes of both cases demonstrate that the tax settlement system is both viable and effective within the crypto industry. Given the current immaturity of the crypto sector and the incomplete nature of crypto asset tax policies, the tax settlement framework proves highly practical. It enhances tax administration efficiency, resolves disputes effectively, reduces audit burdens, and provides taxpayers with a valuable tool to address compliance issues and rectify past tax shortcomings.
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