CrimProf Blog

Editor: Kevin Cole
Univ. of San Diego School of Law

Tuesday, January 23, 2018

"Why the I.R.S. Fears Bitcoin"

From The New York Times:

The core technology underlying cryptocurrencies, known as blockchain, is premised on anonymity: Transactions are public but linked only to an electronic address. This is a big part of what makes blockchain attractive.

. . .

If cryptocurrencies were to replace cash as the preferred anonymous medium of exchange, they could significantly expand the underground economy because they are so much more convenient than cash. There is no need to visit an A.T.M., and you can securely pay people regardless of their location. No wonder Steven Mnuchin, the Treasury secretary, expressed concerns recently that Bitcoin could become “the next Swiss bank account.”

. . .

Blockchain technologies can also make it difficult for the I.R.S. to tax cryptocurrency trading profits. Here is a simple tax dodge that would be hard for the I.R.S. to prove: Suppose A, B and C are electronic addresses you own. You let the I.R.S. know you own A, but not B and C. You buy one Bitcoin at $15,000 and park it at A, expecting the price to go up. Just a few hours later, when a Bitcoin is worth $15,500, you send that Bitcoin to B and then to C.

A few months later, when your Bitcoin is now worth $25,000, you send it from C to A and tell the I.R.S., “I sold a Bitcoin to an anonymous counterparty at B back at $15,500 and just now bought a Bitcoin from another anonymous counterparty at C for $25,000.” As a result, you owe taxes on capital gains of just $500 rather than $10,000.

The I.R.S. can observe all the transactions between A, B and C on the Bitcoin blockchain, but it cannot disprove that B and C are “arm’s length” counterparties (that is, independent and not colluding). Rules in the United States that require financial institutions to verify the identity of address holders do not solve the problem, because as far as the I.R.S. knows, B and C could have been set up by a foreign institution that does not comply with such rules.

| Permalink


Post a comment