correct, if the origin is illicit it is money laundering. If the origin is not illicit then its not money laundering.

the licit private transactions are indistinguishable from illicit

Illicit money that you pay taxes on is generally not problematic, at least to the IRS. You probably still need to worry about other three letter agencies, though, depending on how it is illicit.

Edited to add: I’ve heard of drug dealers doing it. Whether it’s true or not I can’t say.

how exactly would one do that (pay taxes on illicit $)? are there public examples of it?

According to the IRS[1] "income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Schedule 1 (Form 1040 or 1040-SR), line 8, or on Schedule C (Form 1040 or 1040-SR) if from your self-employment activity." So I guess you'd just count it as "other income" on your 1040.

[1] https://www.irs.gov/publications/p17

Thats a trap my guy, you are incriminating yourself when reporting that

That’s the point of criminalizing all options

Are you?

Or just avoiding an easy conviction under tax evasion laws?

paying taxes on illicit activities = relying on admitting the illicit activities either directly on the tax form or in an audit = FAIL

not paying taxes on illicit activities = tax evasion and likely discovery of illicit activity in criminal investigation = FAIL

money laundering = illegal if the government has determined the source is illicit = FAIL

those are the options and deterrents.

if you money launder with proper obfuscation, you wind up with money that you do pay taxes on and will never trigger an investigation.

Indeed. As the old saying goes, Al Capone got nailed on tax evasion. As I understand it, the IRS is more interested in the amount than where it came from.

Capone got nailed for evasion because his brother got nailed for evasion and he got scared so he tried to preemptively normalize his own tax situation but in doing so indirectly admitted that he hadn't paid taxes, so they busted him with no further evidence required.

But they also were trying to bust him for evasion because he declared zero income and lived a visibly lavish lifestyle. The government was gathering evidence on his spending to estimate his income and how much he evaded.

You can't sustainably solve that problem by simply paying lots of tax on magic illegal money, especially not in today's interconnected world. Laundering is core to the solution.

Isn’t that the purpose of money laundering, to create an income stream so that you can pay taxes on it? I don’t know tax law in depth, but it seems like if one could just report to the IRS anonymous money it would largely obviate the need for money laundering at all. Of course there’s the question of other gov agencies.

You can always cash out "Bitcoin you [allegedly] bought back in 2010", or Monero you mined back in the day so there's no way to even prove its source, and declare that to the IRS. With a cost basis of almost zero, you'll pay long term capital gains tax, 15% or 20%.

BTW when you declare your crypto gains, the IRS not only does not care about the source, there's not even a place on the forms to list the source.

That might change in the future though.

But also don’t do that

You want to unlink the transactions