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An informative graphic for CryptoTaxAudit about staying safe from AI-Powered Crypto Scams in 2024. The image has a futuristic tone, with a dark, cybernetic theme. In the foreground, a humanoid robot in black armor runs towards the viewer over a pathway that appears to be made of electronic circuits. Surrounding the path are suspended cages with hearts and nets inside, labeled with words like 'INVESTMENT', 'SCAMS', and 'PHISHING'. Scattered on the pathway are money bags, coins, and documents, implying financial danger and deception. The text on the image reads: 'Keeping Safe from AI-Powered Crypto Scams in 2024. Explore key insights on avoiding AI-driven scams in 2024 with CoinStructive. Learn to spot romance scams, investment scams, and phishing, plus tax tips for victims.' The CryptoTaxAudit logo is in the upper left corner, branding the company as 'The Crypto Tax & IRS Audit Experts.

crypto news cryptocurrency taxes Feb 22, 2024

In the digital age, where technological advancements accelerate at an unprecedented rate, the introduction of easily accessible artificial intelligence (AI) has changed the landscape of many industries. While no one can deny the potential for good that AI brings, it has also breathed new life into old scams. Our partners at CoinStructive, a leading cryptocurrency investigations firm, shared with us key insights on the trends forming for 2024, and how you can make sure you’re not the next victim. If you suffer the unfortunate fate of being a victim to a scam, we will also explain your options in deducting such losses from your income tax return.

 

#3 Romance Scams

Romance scams, also known as Pig Butchering scams, are a form of online fraud where individuals create deceptive emotional connections with victims to exploit their trust and manipulate them for financial gain. These scams typically originate on online dating platforms, social media, or other online spaces where people seek companionship. The perpetrators, often operating under false identities, develop virtual relationships with unsuspecting individuals, taking advantage of their emotions and vulnerabilities.

As the relationship develops, the scammer introduces a fabricated crisis that requires financial help or recommends an investment platform they’ve successfully used to increase their wealth. Common scenarios include medical emergencies, business ventures, or family issues. The victim, who is emotionally invested in the relationship, becomes more susceptible to manipulation and may be persuaded to send money or provide sensitive financial information.

How AI is Used

A picture might be worth a thousand words, but a voice could be worth a million. Scammers will often steal pictures of attractive people from social media accounts to lure their victims in, but speaking with the right voice convincingly was always a hurdle to overcome. Now, scammers can use AI-generated voices to not only match the sex, but the age and region in which their victim resides. This goes well past voice calls as well. AI can generate live video to accompany the fake voice and carry full conversations, which only lowers the victim’s guard further and builds on the lie.

Spotting AI generated content

-Watch the mouth: While AI can create the appearance of live speech, there are often slips in the resolution of the mouth region while the scammer talks. The program is trying it’s best to approximate.

-Pay attention to timing and nuance in conversation: Scammers like to blame this on internet connection speeds, but oftentimes there are gaps in conversation because they are literally typing their text-to-speech answers. Additionally, the scammer may struggle with the grammar and slang native speakers incorporate, resulting in clunky and off-sounding dialogue.

How to Avoid  

The promise of true love and companionship can be exhilarating, but do not let it cloud your judgment. You may stick around to see if the person you met is the real deal, but the simplest way to stay safe is to follow common sense and not send them money. 

-Why are they asking someone they never met for financial help? 

-Couldn’t they ask their personal friends or family? 

-If they have none, isn’t it a little convenient they found you? 

-Would  YOU ever find yourself asking for thousands of dollars from strangers you’ve never met face to face?

#2 Investment Scams

Cryptocurrency investment scams have become increasingly prevalent in the digital age, targeting unsuspecting individuals eager to capitalize on the booming crypto market. These scams manifest in various forms, employing sophisticated tactics to deceive and defraud investors.

 

One common variation of the scam involves fraudulent Initial Coin Offerings (ICOs) or Airdrops, where scammers create fake tokens and promote them as the next big investment opportunity. These illegitimate ICOs and Airdrops attract investors with promises of high returns, only to disappear with the funds once a certain threshold is reached. Investors are left with worthless tokens and empty pockets. On the other hand, Airdrops entice the victim into signing unverified smart contracts with their web3 wallet to receive the Airdrop, inturn opening an attack vector to have all tokens in their wallet drained.

 

Another variant shares a lot of common ground with romance scams, but pivots towards investment rather than tragedy. Instead of a plea for help, fraudsters instead offer guidance to invest in crypto through them or a “guru” they are close with. Also similar to employment scams, they will try to move the conversation into private chat groups in order to manufacture false hype. Through fake platforms, victims are instructed to disclose sensitive personal information and deposit funds. Everything looks great until it’s time to withdraw the returns. From there, the platform will demand you owe taxes and fees to receive the balance you see on the screen. These scammers will persist until the victim gives up or runs out of money, at which point they sell your information to other scammers, so they can try their luck with you.

 

How AI is Used

The name of the game when it comes to crypto investment scams is the appearance of legitimacy. No matter the variant of the scam, the victim needs to feel like the website or advertisement they are directed to is the real deal. Before AI, scammers did their best to emulate the look and feel of a legitimate exchange. A keen observer, however, would still be able to spot inconsistencies and errors within the content. AI website generators can bypass this with immaculate and professional grade pages. Additionally, if a scammer hopes to impersonate an existing exchange, they can do so with relative ease to catch more victims off guard.

 

Advertisements and calls to action benefit heavily from AI generated content as well. With the use of deepfake technology, scammers can use existing content from big names and tailor it to their narrative (if you haven't seen an Elon Musk crypto scam video, you’re bound to sooner or later).

 

Spotting AI generated content

The problem with spotting AI generated fake exchanges is that they’re just too good. While a small error or inconsistency may be lurking in the website, they could be too small to pick up immediately. When it comes to deepfakes, however, a lot of the same principles from romance scams still apply. Watch the mouth movements and make sure the language matches the lips with clear resolution. 

 

How to Avoid

While the future of crypto is bright and potentially lucrative, it does not mean easy money. If it sounds too good to be true, it probably is. If someone contacts you and brings up crypto investing, don’t take them for their word. See if what they say passes the sniff test of friends, family, or colleagues. If you don’t know anyone familiar with crypto, take your question to threads like r/CryptoScams and see what they have to say.

 

Stay away from private groups. For all you know, every user could be part of a group who are carefully trying to lower your guard. It might even be the same person controlling multiple accounts. 

 

While you may not be able to readily spot an AI generated scam website, you can still pay attention to exchange domains. When it comes to imposter sites, don’t assume they are legitimate if there are similarities to the name.The simplest way to avoid this is to not click on the link someone sends you. Instead, find it independently. When it comes to exchanges you’ve never heard of but are recommended by the other person, simply turn tail and run. Bonus Tip: Exchanges mainly vary via simple metrics like fees, coin listings, and jurisdictions…If someone tells you that exchange x is the only way you can make high returns, they’re baiting you. 

 

#1 Phishing Attacks

Phishing attacks represent a pervasive and insidious form of cybercrime, designed to exploit human psychology rather than technical vulnerabilities. Typically carried out through deceptive emails, messages, or websites, phishing seeks to trick individuals into divulging sensitive information such as login credentials, financial details, or personal data. The term “phishing” is a play on the word “fishing,” reflecting the attacker’s use of bait to lure unsuspecting victims.

Thanks to countless data breaches, scammers may already have your phone number and/or email address, complete with knowledge of potential accounts you associate with it. From there, it’s just a simple poke and prod with misleading notices meant for you to take action…by clicking on the link they provide, of course. Once they gain access to your account, they can gather even more sensitive information or use the access they have to drain your balance. 

Spotting AI generated content

Just like the fake exchanges highlighted above, phishing emails and texts can be extremely deceptive when generated by AI. Scammers will often use official communications from platforms and mirror them perfectly. Your best bet is to spot any grammatical or spelling errors around portions of the message that relate to clicking on links or the given reason for reaching out to you in the first place. 

How to Avoid

It may be a sobering thought, but you cannot trust anything sent to you. Regardless of how legitimate that email or text message may look, you have to assume that it could be a trap.

Pay attention to the sending email address, and see if it matches earlier known official communications. If a company or service reaches out to you to give notice or instructs you to take action, it is best to contact the provider directly for confirmation. This means using publicly available contact information and NOT what is listed in the message.

Tax Deductions from Crypto Scams

Hopefully this article will help you stay safe and avoid losing your hard-earned satoshis to crypto scams. But if you do happen to be the victim of a scam, what can you do? Are you able to get a deduction in your tax return, and have the IRS subsidize your loss? While the answer has not been clearly provided for the IRS, there is some hope.

Changes to Deductibility of Losses by the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act of 2017 (TCJA), significantly changed the deductibility of losses arising from theft or scams of personal property. Casualty losses of personal property are currently limited to losses caused by a federally declared disaster until 2025.

Because of this change, there is a lot of confusion surrounding the question of whether crypto scams and theft losses are tax-deductible. As mentioned previously, casualty losses of personal property are currently limited to federally declared disasters, meaning that if we assume that cryptocurrencies are personal property, then none of those losses are deductible. The key question, is whether cryptocurrency is in fact personal property or business and income-producing property. 

Deducting Scams and Theft Losses

Depending on the circumstances of your loss, you have different options to report losses from scams or thefts. 

Rug pull losses

If the loss resulted from an investment in a scam coin or ‘rug pull’, you should be able to deduct such losses even if the asset has no liquidity and you can no longer sell (therefore realizing a taxable exchange). If you can sell the asset, even at a fraction of your cost, you would report this loss as any other crypto loss on Form 8949. In cases where you can no longer sell the tokens, it is possible to use a burn address, disposing of the tokens for $0; in this case, the loss would also be reported on From 8949.

Abandoned business property

In instances where you've abandoned a business or investment asset, you'd report this loss on Form 4797, line 10. This form is typically used to report the sale or exchange of property used in a trade or business (Section 1231 property), but it also has provisions for reporting the abandonment of property.

Theft of business or income-producing property

For losses due to the theft of business or income-producing property, you would use Form 4684, Section B. The term ‘business or income-producing property’ generally refers to property used in a trade or business or for the production of income. This would typically include business assets such as machinery and equipment, buildings, vehicles, other business property, and investment properties like rental real estate. Investments in cryptocurrencies could be considered income-producing property; however, no guidance has been provided by the IRS. Therefore, if you have sustained substantial losses, we recommend consulting with a tax professional to understand the options for deducting such losses. We welcome you to schedule a free consultation today with CryptoTaxAudit to learn about your options. It's important to note that the rules are more restrictive for personal property due to the TCJA changes, as highlighted earlier.

Ponzi scheme losses

Lastly, if you've been a victim of a Ponzi-type investment, the tax code offers a specific provision under Rev. Proc. 2009-20, which allows for a potential deduction. However, the safe-harbor rules require you to meet certain criteria, which typically include an indictment or formal complaint being filed against the scheme's perpetrators. These losses are reported on Form 4684, Section C.

Conclusion


While we can currently protect ourselves from many scams, regardless of their sophistication aided by AI, the scary truth is that they only have the potential to be more deceptive as technology advances. There may come a time when there are no inconsistencies to spot. Therefore, a healthy dose of base skepticism is going to be your best tool in keeping safe. Never take an unsolicited message at face value, and always consider what a bad actor stands to gain from clicking that link or answering that text. If you’ve been a victim of a crypto scam, or suspect that you might be, CoinStructive can help law enforcement efforts with industry-leading forensic reporting. Schedule a free consultation today to learn more.



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