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Crypto Law/Level VII · Loopholes worth understanding/7.3 Loopholes they sell you/Lesson 3

Sovereign-citizen arguments in court

Why claims that crypto, or the person holding it, stands outside the law fail in US courts, and what pressing them costs.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. What actually lowers the bill is a correct return using real reliefs: long-term rates, loss harvesting, specific identification and charitable gifts; pseudolegal arguments add penalties while the tax remains due.
  2. Dispute a tax through lawful channels: file the return, then contest the amount with IRS appeals or in the Tax Court; a frivolous return costs a $5,000 penalty under §6702, and frivolous Tax Court positions up to $25,000 under §6673.
  3. Crypto gains are income under §61 and Glenshaw Glass (1955) whatever the coin is called; Cheek (1991) excuses only genuine misunderstanding, never a belief that the tax laws are unconstitutional.
  4. Check any ‘crypto is not money’ theory free against the IRS document ‘The Truth About Frivolous Tax Arguments’; courts have near unanimously held bitcoin can be ‘funds’ under 18 U.S.C. §1960, as United States v. Freeman (2023) noted.

MaterialsThe IRS document ‘The Truth About Frivolous Tax Arguments’ (irs.gov)26 U.S.C. §6702 and §6673 on law.cornell.eduCheek v. United States, 498 U.S. 192 (1991)The memorandum order in United States v. Freeman (D.N.H., 22 August 2023), on govinfo.gov

Wonder

  1. What is a sovereign-citizen argument, and why does it attract some crypto holders?
  2. Can a sincere belief that a tax law does not apply to you protect you in court?
  3. What happens to people who file returns or court papers built on these theories?

Explore

  1. ‘Sovereign citizen’ is the usual name for a loose movement whose followers claim that they, or their property, stand outside government authority unless they consent. Its arguments are pseudolaw: they borrow legal words, seals and formats but have no footing in the law courts apply. Crypto draws such claims because it already sounds like a world beyond the state. Pitches say coins are not ‘money’, that a blockchain is a ‘private jurisdiction’, or that a ‘living man’ owes no tax. Lesson 1.1.1 explains why code is not outside the law; this lesson shows what happens when these arguments reach a US court or the IRS.
  2. The IRS publishes ‘The Truth About Frivolous Tax Arguments’, last updated in October 2025, which lists common contentions and the court decisions rejecting them. They include claims that filing a return or paying income tax is voluntary, that a ‘zero return’ can reduce liability, that wages are not income, and that a taxpayer is not a ‘citizen’ or a ‘person’ under the Internal Revenue Code. The document says it is not exhaustive and that an argument missing from it is not thereby valid. Crypto versions are mostly old claims in new clothes: ‘coins are not income’, ‘an IRS notice is not law’, ‘my wallet is a private trust’.
  3. The legal answer starts with section 61 of the Internal Revenue Code, which defines gross income as all income from whatever source derived. In Commissioner v. Glenshaw Glass Co., decided on 28 March 1955, the Supreme Court described taxable gains as ‘undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion’. A profit on selling crypto fits that description whatever the coin is called, and IRS Notice 2014-21 applies the ordinary property rules to it (lesson 2.1.1). Arguing that crypto is not ‘money’ does not help, because gains on property are taxable and the tax is simply computed in dollars.
  4. Courts have also rejected the claim that bitcoin is not ‘money’ or ‘funds’ under criminal statutes. Ian Freeman, a New Hampshire bitcoin seller who routed some business through a ‘church’ he founded, was tried for operating an unlicensed money transmitting business, money laundering and tax evasion, and a jury convicted him on all eight counts. In a memorandum order of 22 August 2023, Judge Joseph Laplante wrote that courts have ‘near unanimously’ found that bitcoin may be ‘funds’ under the unlicensed money transmitting and money laundering statutes. He upheld the other verdicts but acquitted Freeman on one money-laundering count for lack of evidence of his knowledge.
  5. Belief matters only in a narrow way. In Cheek v. United States, decided on 8 January 1991, the Supreme Court held that a genuine good-faith misunderstanding of the tax law can negate the ‘willfulness’ required for certain tax crimes, even if the belief is not objectively reasonable. But the Court also held that a claim that the tax laws are unconstitutional is not such a misunderstanding, and that a jury may be told not to consider it. Disagreeing with a law you know about is not ignorance of it. Repeated warnings from the IRS or a court can also make a claimed misunderstanding harder to believe.
  6. Pressing these arguments costs money as well as credibility. Under section 6702, a person who files a return based on a frivolous position, or a specified frivolous submission, owes a $5,000 civil penalty. Under section 6673, the Tax Court may require a taxpayer to pay up to $25,000 when proceedings were brought or kept going mainly for delay, or the taxpayer’s position is frivolous or groundless. The tax itself, interest and other penalties remain. A practical check: if a theory about crypto and tax appears in the IRS frivolous-arguments document, or turns on a word game about ‘persons’ or ‘money’, expect a court to treat it the same way.

Key facts

  • The IRS’s ‘The Truth About Frivolous Tax Arguments’ lists contentions such as that filing a return or paying income tax is voluntary and explains the authority rejecting them.
  • Section 61 of the Internal Revenue Code defines gross income as all income from whatever source derived.
  • In Commissioner v. Glenshaw Glass Co. (1955) the Supreme Court described taxable income as undeniable accessions to wealth, clearly realized, over which the taxpayer has complete dominion.
  • In Cheek v. United States (1991) the Supreme Court held that a claim that the tax laws are unconstitutional is not a good-faith misunderstanding of the law that negates willfulness.
  • In United States v. Freeman (D.N.H. 2023) the court wrote that courts have near unanimously found that bitcoin may be ‘funds’ under 18 U.S.C. §1960 and the money laundering statute.
  • Section 6702 imposes a $5,000 penalty for frivolous tax returns, and section 6673 lets the Tax Court impose a penalty of up to $25,000 for frivolous or delaying proceedings.

Exercise nine, six, three, one

9CollectList up to 9 arguments you have heard or read claiming that crypto, a wallet or a person is outside tax or financial law (some lists are shorter).
6ClusterSort them into 6 categories: ‘tax is voluntary’ claims, ‘not income’ or ‘not money’ claims, ‘not a person or citizen’ claims, private-jurisdiction or code-is-law claims, trust or entity wrappers, and claims you cannot classify yet.
3DistillReduce the 6 to 3 groups: arguments the IRS lists as frivolous, arguments courts have rejected in crypto cases, and arguments you would need to check against a statute or case.
1CrystallizeWrite 1 sentence explaining why sincerely believing a tax law is invalid is different, in court, from misunderstanding what the law requires.

Fact check

Dates, figures and claims checked against the published sources listed below.

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