The questionable anonymity of virtual currency transactions
The Justice Department issued a press release to strike terror in the hearts of anyone attempting to carry out cryptocurrency tax shenanigans. The Northern District of California Federal Court issued an order authorizing a subpoena by John Does against Payward Venture Inc and its d / b / a Kraken affiliates. The IRS wants to review the records of U.S. taxpayers who made at least the equivalent of $ 20,000 in cryptocurrency transactions during the years 2016 to 2020.
Cryptocurrency not dusted with fiscal fairy dust
One of the mistakes that circulate about cryptocurrencies is that they are a legitimate tool to avoid taxation. On a recent episode of the Game of Roses podcast, the host who goes through Bachelor Clues went into that a bit by noting that if you bought a Tesla
He continued a bit from there and I thought it was worth writing an article about it. Bachelor Clues is a classy and thoughtful guy, which prompted an invitation to do a podcast with him. By sacrificing over an hour of lifespan that you will never get back, you can find out a lot more about me than you probably want to know and a little more about the taxation of virtual currency, but there is a way more effective to obtain the latter.
Direct from the IRS
You can get the key information on the subject in IRS Notice 2014-21. Here are some key points
For federal tax purposes, virtual currency is considered property. The general tax principles applicable to real estate transactions apply to transactions using virtual currency.
A taxpayer who receives virtual currency as payment for goods or services must, in calculating gross income, include the fair market value of the virtual currency, measured in US dollars, on the date the virtual currency was received. .
The second point is the most critical. You don’t avoid recognizing income by getting paid in virtual currency. Bitopia is not a tax haven.
The idea that virtual currency is “property” makes it difficult to use it as a medium of exchange. Every time you spend bitcoin or dogecoin or whatever, you may see a gain or loss on the difference between what you paid for the coin and the fair market dollar value of what you receive. Thanks to the nature of the blockchain, which forever preserves every transaction, there are services that will do it all for you.
But who will know?
You and I are both scrupulous about tax compliance, but you might be shocked that not everyone is. There are amoral people who will shirk their obligations if they can get away with it. And there are people of principle who believe that taxation is theft or that paying taxes is immoral because of the use of resources by governments. So is cryptocurrency a tax solution for them thanks to its presumed anonymity?
Trying to answer this question can send you into a rabbit hole. I have spent time on Reddit and Youtube sifting through the material and applying my bs detector and combining it with forty years of tax experience which includes following up on a lot of tax disputes that get me the benefit of the experience of other people. The question is, can you use cryptocurrencies to cover up your tax shenanigans?
I should start off by saying don’t get into tax shenanigans because that’s not true, but this ship has been on the water before. The summary is that it seems like there is an opportunity to hide wealth and income using cryptocurrency, but it takes a lot more effort and expertise than most people will put in.
Avoid exchanges if you want anonymity
If you want to use exchanges to hold and trade your cryptocurrency, regardless of the “privacy” that currently exists, this is going to be quite short-lived. There’s no full reporting infrastructure in place, but there’s also the success of the DOJ in securing summons from John Doe for the IRS. It seems that in the long run, cryptocurrency exchanges will be like banks when it comes to hiding from the IRS. In some ways, they can be worse because the IRS devotes a lot of attention to them.
So, if you are looking to hide your financial mischief, you should do it yourself rather than using exchanges. With Bitcoin still by far the most popular virtual currency in terms of market capitalization, although it is not the volume of transactions, you have to face the fact that every transaction is preserved in the blockchain and accessible to everyone.
There are many techniques to alleviate the blockchain transparency problem, but that is way beyond the scope of this article. There are also cryptocurrencies that are structured differently, making them more privacy-focused. Monero currently appears to be at the top of these lists.
For what it’s worth in a January article on Forbes.com, Hailey Lennon indicated that criminal transactions with cryptocurrencies are on the decline. It seems that the hundred dollar bills may still be the preferred vehicle for this sort of thing.
What would repairman Jack do?
Almost everything I know about keeping your financial transactions, in fact your very existence, hidden from the authorities, I have learned from reading the stories of Repairman Jack through. F Paul Wilson. Jack is sort of an urban mercenary who has a very compelling reason for living off the grid. But he is not in the sticks. He’s in Manhattan. I have discussed some of these techniques here and here.
One of the really cool stuff was Jack’s retirement savings. He buys Krugerrands, for money of course, and records them on pipes in the wall so a metal detector can’t find them. Anyway, I was wondering what Jack and his mentor, friend and arms dealer Abe would think of Bitcoin. Fortunately their creator is quite accessible, so I was able to ask him,
My question was what repairman Jack and his mentor would think of Bitcoin. F Paul Wilson replied:
Abe is the latest to switch to Bitcoin – a man with immutable assets. And he’s been a big influence on Jack since he was in his twenties. So not of both.
I asked if Jack would consider it a method of payment. His response was brief – CASH!
It can be a generational question. Wilson is older than me and I am 69 years old. I would still love to read a Bitcoin discussion between Abe and Jack.
Bitcoin.com possesses Court allows IRS to invoke user records from Kraken cryptocurrency exchange.
Charlie Osborne has IRS secures order to serve Kraken with request for customer data on cryptocurrency traders at ZD Net. The story includes a response from Kraken:
“One of Kraken’s guiding principles is to maintain the security and confidentiality of its accounts receivable. We understand that the court has expressed concern about the scope of the proposed IRS summons. Although the status of this case does has not given Kraken a chance to speak, we share similar concerns. “
Aysha Bagchi has Kraken Crypto User Information May Be Requested By IRS In Tax Fight (1) behind the Bloomberg Tax paywall.
Oluwapelumi Adejmo a IRS AUTHORIZED TO CALL KRAKEN FOR USER INFORMATION at BITCOIN Magazine.
Jack Townsend a Court clears service of John Do’s subpoena on Payward Ventures d / b / a Kraken, a cryptocurrency service provider (5/4/21) at Federal tax crimes.
Ed Zollars a IRS Granted Authorization to Serve John Doe’s Invocations for Kraken Cryptocurrency Exchange Transaction Information at Current developments in federal taxation.