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The IRS Is Coming for Crypto Investors Who Haven’t Paid Their Taxes

151 points by chollida1 5y ago

ddxxdd 5y ago
How long before someone comes up with a cryptographic approach to anonymizing bitcoin exchanges? Perhaps exchange #1 could hold a database with bitcoin addresses and PGP-encrypted information about the bank accounts/mailing addresses of cryptocurrency holders. Exchange #2 could hold the private keys of those bank/home details while receiving withdrawal requests and reimbursement for distributing bitcoin The bitcoin holder can then request exchange #1 give a withdrawal request to exchange #2 in such a way that no exchange has enough information to connect a person to a bitcoin wallet. Maybe I'm overthinking this; is there already a way that tech-savvy people can use Bitcoin in a way that's impossible to be tracked when converting to cash?
- rawtxapp 5y ago
  I mean, you can already use decentralized exchanges where you won't even have to give your name. I think for most people that are not doing anything illegal, there's no point in trying to evade taxes. The way I look at it, you either made lots of profits, so you'll have to explain where you got the money from anyways. Or you didn't make a lot of profit, why hide it? There won't be that much tax anyways.
  - ObserverNeutral 5y ago
    > so you'll have to explain where you got the money from anyways Explain to whom?
    - rawtxapp 5y ago
      To your bank? Presumably if you made a lot of money, you'll be buying some houses and maybe some cars or creating your own businesses or something. If you transfer large amounts, it might get frozen if you can't explain the origin (kyc/aml).
      - deleted 5y ago
        [deleted]
    - happytoexplain 5y ago
      Assuming you're being facetious, I have always wondered where the line is. If I discover ten thousand dollars in cash in a hole in the ground and deposit it, will the IRS notice? Will the bank require some kind of information? What about if it's a hundred thousand?
      - bluedino 5y ago
        The bank will have to report it to the IRS. They will cross-reference it with your taxes. They will also come talk to you if you have a pattern of doing it regularly. But you will probably not have an issue with it.
      - dsr_ 5y ago
        The bank will fill out a form about "structuring deposits" for any transaction around $10K. They will also report transactions in general over $10K. https://en.wikipedia.org/wiki/Structuring https://en.wikipedia.org/wiki/Structuring
      - je_bailey 5y ago
        Yes, When large amounts of money are deposited into an account there is an automatic notice sent to the government. A One time event shouldn't be an issue however if you have multiple events of large deposits then it's going to trigger algorithms and the government is going to start asking where you got the money from and they'll perform an audit. If you attempt to bypass the system they have systems in place to detect that and will perform an audit. Just pay your taxes
      - deleted 5y ago
        [deleted]
      - ObserverNeutral 5y ago
        > Will the bank require some kind of information Crypto doesn't go through the banking system. Miners for example can spend the mined crypto and for all practical purposes nobody will ever know.
      - Supermancho 5y ago
        Try depositing 50k at any US bank. Instant paperwork. Try depositing 10k. No questions asked.
    - TigeriusKirk 5y ago
      Coinbase, for one. There's a whole process under the KYC/AML regulations if you want to deposit large amounts of crypto with a legit exchange.
  - jhgb 5y ago
    I'm not from the US but my understanding is that even if you're doing illegal stuff there's still no point in trying to evade taxes, as IRS is not allowed to notify anyone about where you got the money from anyway. "Illegal activities: Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Schedule 1 (Form 1040), line 8, or on Schedule C (Form 1040) if from your self-employment activity" They thought of everything!
    - Pfhreak 5y ago
      This clause came from the era of Al Capone, who famously boasted, "They can't collect legal taxes from illegal money." (Which was true at the time.) They added this clause and then ended up catching Capone for tax evasion. https://www.forbes.com/sites/kellyphillipserb/2020/10/17/al-capone-convicted-on-this-day-in-1931-after-boasting-they-cant-collect-legal-taxes-from-illegal-money/?sh=32d97b381435 https://www.forbes.com/sites/kellyphillipserb/2020/10/17/al-...
    - ocdtrekkie 5y ago
      I think the point of this is less that the IRS won't report it to someone else, but that it adds tax evasion as a reason a criminal can be pursued. You are probably thinking it's like where contact tracers or census workers or whatever aren't supposed to report illegal immigrants because it's more important that they get accurate info than report people to ICE. I don't think that's the case with the IRS, they're probably more than happy to let other agencies know about your illegal activity.
      - jhgb 5y ago
        I got it from here (https://money.cnn.com/2013/02/28/news/economy/illegal-income-tax/index.html https://money.cnn.com/2013/02/28/news/economy/illegal-income...): "If you tell the IRS you made $1 million from stealing money or dealing drugs, does the agency tip off the cops? Legally, it can't, unless a law-enforcement agency gets a court order granting it access to a specific taxpayer's return. The IRS isn't supposed to proactively alert other agencies about misdeeds unless terrorism is involved. In that case, it still needs a court order to disclose anything, but the IRS can initiate the legal process on its own." I have no idea if it is still valid or not.
- mam3 5y ago
  It's called thorchain and it's on the way to the moon...
- OldHand2018 5y ago
  > Maybe I'm overthinking this Definitely. What you’re describing would certainly be a conspiracy to violate all sorts of American laws and is punishable by a lot of time in jail. Add one more layer to your process and you qualify to be prosecuted via RICO laws! Why do this on behalf of a bunch of random folks you’ve never met?
- MereInterest 5y ago
  I'm sorry, but I don't understand the mindset here. Having created something whose only advantage is in money laundering and paying for illegal products, having created something that by its nature has and always will have massively wasteful consumption and externalities, you're now looking for a way to avoid paying the taxes that support society?
  - ddxxdd 5y ago
    "Externalities" isn't the right word to use here; Bitcoin miners pay for the resources they use to mine Bitcoin. But there is a positive externality associated with Bitcoin, in that it serves as a check and a balance against authoritarian governments, present and future. Hence why it's important to ask these questions.
    - Emma_Goldman 5y ago
      >"Externalities" isn't the right word to use here; Bitcoin miners pay for the resources they use to mine Bitcoin. Yes it is, Bitcoin miners are overwhelmingly located in China and powered by highly carbon-intensive coal plants. The costs of those emissions are not borne by the transacting parties, because they are global and intergenerational. Regardless of whether Bitcoin miners pay for their coal-powered electricity, their revenue is effectively subsidised by externalities. The higher the demand for Bitcoin, the greater those externalities.
      - oceanplexian 5y ago
        I don’t get it, are you proposing that alternative currencies like USD are completely carbon neutral and have no externalities? Personally, I am not aware of any currency that does not have externalities, most currencies have a sizable body count from the wars required to preserve their value. Presumably, once Bitcoin is fully mined it may end up having the least externalities of any currency, past or present.
        MereInterest 5y ago
- roenxi 5y ago
  Almost the stupidest thing an investor can do is try to illegally evade taxes. It is pretty much all downside and no upside if you walk through the likely outcomes. Either double theoretical, paper wealth or lose actual time to a jail. One of those is realer than the other. Avoiding taxes is critical, but breaking the law is foolish.
- dubcanada 5y ago
  That doesn't matter, you still need a way of turning 50 USD into crypto. You can either give a random stranger 50 USD on the street for X crypto - some kind of a black market fee or you give coinbase 50 USD via credit card and it's in your account immediately and a reputable company backing it. The more "illegal"/gray crypto becomes the less it is worth, the worth (at least at todays scale) is due to the ease of use/popularity. It's super easy to buy 1 BTC right now, go back 5 years you basically needed to know someone who knew someone or be part of a forum and hope the other person didn't scam you.
prtkgpt 5y ago
sure. we love IRS.
rawtxapp 5y ago
I wish they had kept the like-kind treatment for crypto-to-crypto exchanges. Or that they had given very clear guidelines and rules on crypto taxation. Or that they had lowered crypto tax rates a little because it's highly risky anyways. Nowadays, I see a lot of people just borrowing against their holdings to avoid triggering taxes, especially for long term holders who might be up 1000+%, there's really no point in cashing out, since a significant chunk will just go to the gov (especially if you're in California or New York).
- Pfhreak 5y ago
  There's "really no point" in cashing out returns of 1000%? If I had put 100k in, my coins would be worth 1M. Even if my taxes were 30%, I'd be walking away with 730k. That's an astronomical gain.
  - zikduruqe 5y ago
    A fine is a tax for doing bad. A tax is a fine for doing well.
    - adriand 5y ago
      A tax is a subscription fee for the privileges of citizenship. There are many millions of people who would happily become "subscribers" in return for becoming US citizens.
      - TheGigaChad 5y ago
        Suck my dick.
      - Consultant32452 5y ago
        Failing/refusing to pay a subscription fee does not, generally, result in you getting thrown in a cage with rapists and murderers.
        5y ago
greyface- 5y ago
https://archive.is/wWgqP https://archive.is/wWgqP
bliteben 5y ago
I'm sure they'll come after them with the same fury they go after alleged billionaires paying $800 in taxes for a year.
- ashtonkem 5y ago
  The IRS stopped auditing those people a while ago, because they cost too much up front to audit and sue. It’s the middle tier where all the audits happen; rich enough to evade their taxes, but not so rich that they can afford good lawyers who make collecting difficult.
  - Terretta 5y ago
    In general, the word isn't evade. In general, it's "plan" or "structure". It's less worth pursuing the ultra wealthy because they implemented the actual tax algorithm and paid every penny the law actually requires -- often zero -- when the algorithm is executed flawlessly. For the disciplined tax planners to pay more, the code has to be debugged and simplified to eliminate these unintended but fully accurate results.
    - o___ 5y ago
      Spoken like a true thief. "How can this be stolen? What is possession, really?"
  - cryptica 5y ago
    That sounds like an excuse. The reality is that the government is controlled by rich crooks.
    - ashtonkem 5y ago
      More a consequence of the IRS being systemically underfunded for decades. They simply do not have the money required to audit everyone, so they’re pursuing a strategy of maximizing the return per audit dollar spent. Culturally, I’m sure that the IRS wants to catch every tax cheat; it’s just that they lack the resources to try.
motohagiography 5y ago
There may be a fundamental disconnect between what the currencies are (or how they are used) and how they are taxed. This issue of lots and being taxed as property: >For example, say that someone sold bitcoins at $22,000 each in December 2020 and had coins bought 2016 for $600 and 2017 for $16,000. Selling the 2016 coins would mean a taxable gain of $21,400 each, while selling the 2017 coins would mean a gain of $6,000 each—a big difference. This is not like a currency, where if I had a stack of Euros from an old holiday and then exchanged them for USD or even bought something with them, there is no concept of "lot" price in a currency. This US law definition appears to in effect destroy the fungibility property of cryptocurrencies by pinning the non-fungible identity of the coin to its spot price at the time of transaction. If US law doesn't treat it as currency, it's basically not currency. I sat on the sidelines on cryptocurrency from the beginning because of specific scenarios like this because of these very inevitable problems. What they really are is an exotic asset for getting portfolio exposure to the trillions of dollars in black and grey market economic activity and associated volatility properties, but with only arms length participation. Basically a way to particpate in a distributed bank that launders money while turning a blind eye just like the real banks. However, remote tech has changed work so much that if I were a betting man, I would be looking at real estate in non-extradition countries as thousands of new crypto millionaires weigh their options and just leave.
- gruez 5y ago
  >This is not like a currency, where if I had a stack of Euros from an old holiday and then exchanged them for USD or even bought something with them, there is no concept of "lot" price in a currency. But are they taxed? ie. if you sold your euros now, you'd probably realize a modest profit since USD went down recently. Are those gains tax-free?
  - xphilter 5y ago
    Effectively yes they are tax free because there’s no easy way for irs to enforce. By law though you need to pay taxes on those gains. If you use a trading platform for trading, there’s probably a better chance of getting caught if you don’t pay taxes. There’s really nothing different here.
je_bailey 5y ago
Just pay your taxes. Really it isn't that hard. If you've maintained the asset for several years you get a tax break, there are sites out there that are designed to assist with the tracking of crypto currencies. Yes you may be able to bypass all the algorithms and systems that the US has in place to track this stuff but why? Just pay your damn taxes.
- bagacrap 5y ago
  Actually it is pretty hard if you, y'know, buy stuff with a cryptocurrency, because every purchase is a taxable event! Also hard if you bought your crypto on a less well known and/or now-defunct exchange like Poloniex because the reports they generate are relatively hard to understand. My CPA couldn't understand the notation as there was no mention of USD and I had to break it down for them. In comparison, paying taxes on stock gains is pretty easy because the brokerage generates a 1099 with all the calcs done for you.
- christiansakai 5y ago
  What is this? "If you've maintained the asset for several years you get a tax break" Just capital gain?
  - je_bailey 5y ago
    There is both short term and long term capital gain taxes in the US. For some reason I was thinking you had to hold it for more than one year but apparently it's one. If you hold the asset for longer than a year the tax rate on it is either 0%, 15%, or 20% depending on your tax bracket
ridethebike 5y ago
I bought bitcoins for two or three hundred bucks. Then price went a bit down, I got spooked and sold it at a loss. So who's laughing now, IRS? Come a get me. P.s. needless to say - sarcasm
- Pfhreak 5y ago
  Well, in your case you'd be able to claim that loss against the taxes you paid from other gains, right? So really, maybe the IRS owes you money. :D
  - ridethebike 5y ago
    It's only couple of $ so I'll let it slide this time
- goblinux 5y ago
  Paper hands paid off
- bagacrap 5y ago
  you laugh, but this happened to me, I reported a loss of a couple thousand bucks and now I'm petrified of an audit.
cableshaft 5y ago
So I buy a small amount of crypto with every paycheck, and this year is the first year I had to report selling some of those transactions that had those tiny purchases as a cost basis. It's very annoying to do it manually, as you apparently are supposed to report every single one of those weeks, and calculate what portion is from which cost basis, etc. I was feeling very overwhelmed with the thought of doing it manually. But I tried one of those bitcoin tax websites this year, and was pleasantly surprised how seamless they made it. After paying and importing my data I had the full tax forms in minutes. Thankfully I didn't owe anything for it last year because it was a temporary panic sell during the big dip from the pandemic happened last March or April, so I basically broke even for taxes, but thankfully I came to my senses a week later and bought back in again, so I still got to fully benefit from the bull run this past year. But yeah, it's not worth taking the risk of getting audited, imo. I still wish it weren't a taxable event just for switching which crypto you're in though, especially if it's on the same exchange, and only got taxed when you buy goods or services take it out to USD, but oh well.
- klodolph 5y ago
  > I still wish it weren't a taxable event just for switching which crypto you're in though, especially if it's on the same exchange, and only got taxed when you buy goods or services take it out to USD, but oh well. You're describing section 1031 "like-kind" exchanges. Not available for crypto, and not available for stocks either, so it's not like crypto's getting unfair treatment here (compared to stocks). You have to do the same detailed reporting you describe for stocks.
  - cableshaft 5y ago
    I understand it's not available for crypto (and for stocks), I just wish that weren't the case. Also if I have to report every single 401k purchase I ever made when I'm in my 70s when I finally cash some of it out, that's going to be a pain in the butt (I assume 401k is an exception to the rules). I basically treat my crypto purchases as another form of 401k right now (without the penalties).
    - 5y ago
annoyingnoob 5y ago
I find it interesting how the IRS picks its targets. Facts shows the the most wealthy skip the most taxes. Yet the IRS has a hard time going after the most wealthy because they have the resources to fight it. The more recent crop of folks that have made money in crypto don't tend to be among those ready to fight the IRS hard, they are softer targets. They are targeting the little guy on purpose.
- syops 5y ago
  That’s a disturbing trend in the U.S. that is getting worse as time goes on. It’s disturbingly true in criminal matters. If crime isn’t too egregious you can avoid just punishment by having the resources to tie up the DA’s office.
  - throwaway0a5e 5y ago
    This is just how things work when there's so many laws and they're so broad that the scope of "prosecutable criminal behavior" exceeds enforcement resources. Of course the DA's are gonna pick the easy wins with good optics and avoid hard targets and/or rocking the boat. That's just rational decision making. You can either increase resources and create a police state or decrease the amount of prosecutable criminal behavior and have people complain that "there ought to be a law" about <pet issue goes here>.
- deleted 5y ago
  [deleted]
- basseq 5y ago
  This is true, but it's philosophical. The IRS has finite resources, so it has a fundamental choice: 1. Maximize collections. This is what they're doing: spending their resources on cases with the best expected ROI. If you have $1T in net tax misses, chase the easiest 75% and expect a 90% collection rate. 2. Deter high absolute tax avoidance. This is what you're suggesting: spend their resources to make a statement, even if the ROI isn't there. If you have $1T in net tax misses, chase the hardest 25% and expect a 5% collection rate. I don't think you're wrong, as there's value in deterrence (i.e., sue the hell out of rich tax evaders, and even if you lose, maybe the next one will be less likely to push it).
polytronic 5y ago
The mob would not miss such an opportunity!
TheGigaChad 5y ago
Not a big surprise, the state doesnt want any competitors.
deleted 5y ago
[deleted]
tldrthelaw 5y ago
Hate to be this guy all the time, but if your case is anything other than straightforward, and there are large amounts at stake, talk to a tax attorney (grain of salt: I am one). Form websites and tutorials are all well and good, and will probably work out for more people than they don't, but you super don't want to screw up your taxes. When the bill comes due, it'll be years down the line, and for an unrecognizable sum. Your state bar can put you in touch with one. Avoid folks marketing themselves as something like "tHe CrYpTo LaWyER."
- rawtxapp 5y ago
  Out of curiosity, what's your recommendation on how to differentiate a very competent tax lawyer from one that's merely good? Also, what's wrong with "crypto lawyer" people?
  - tldrthelaw 5y ago
    Domain-specific knowledge. You can't go point to point with even a marginally competent lawyer on the law (probably), but you know a lot about your issue. Can they hang? In the case of crypto, do their eyes glaze over if you refer to an altcoin? Do they use "bitcoin" and "blockchain" interchangeably? Use same process for whatever your issue is -- SaaS contracts, tech trans, etc. The crypto lawyer folks are, by and large, claiming to be experts in a practice that is so new and so without firm guidance as to be practically the tax wild west. Right now we are in the metaphor stage, we're defining everything involved with cryptocurrency (from a tax perspective) with metaphors to other things: currency, stock, digital goods, etc. The cases that will be cited forever to define crypto for tax purposes are going to be litigated in the next few years, don't be one of them. TLDR: Look for a tax attorney that knows the tech behind cryptocurrency well enough and doesn't make any promises or guarantees. Edit: One additional point, merely competent attorneys won't be published in their field. If you're looking for an expert find someone who is contributing to the discussion in their area.
    - t0mbstone 5y ago
      TL;DR: Find a good crypto lawyer
throwkeep 5y ago
"And if Margaret pays for a car—or dinner for friends—with cryptocurrency, she likely owes tax on the transfer, much as if she paid for the car or the dinner with shares of Apple stock. The transfer is probably also taxable income to the recipient." Does this mean crypto will never be able to compete with USD as a currency? Since it has this added tax on transfers?
- adabyron 5y ago
  This is probably a better read than WSJ - https://www.investopedia.com/tech/taxes-and-crypto/ https://www.investopedia.com/tech/taxes-and-crypto/ Scroll down to personal purchases. "Currently, tax code allows taxpayers to exclude up to $200 per transaction for foreign currency exchange rate gain, if the gain was derived from a personal purchase, like a cup of coffee. This is known as a de minimis election. But there is no “de minimis” clause that exempts small transactions, which can create a very tangled tax problem if one is constantly trading crypto and also using it to buy goods and services." Of course keep reading & note the part where you can't deduct a loss either if you buy BTC at $60,000 & then it goes down to $50,000 because Elon Musk tweeted while you were buying a coffee or pair of jeans with your BTC.
- SCUSKU 5y ago
  The US government is incentivized to keep Bitcoin and others from going mainstream. Simply because removing the US dollar hegemony means the US can no longer continue to print money for deficit spending, and that sanctions would lose their teeth. I recall a TV show or movie where the Federal Reserve launched its own cryptocurrency, in which it was used for more surveillance. I could see that happening, I think the Chinese are already onto it.
  - tablespoon 5y ago
    The US government has nothing to fear from Bitcoin, despite grandiose conspiracy theories to the contrary.
- sickygnar 5y ago
  Curious as well, especially with USDC and USDT. They are so convenient for sending arbitrarily large amounts of USD with instant settlement.
minikites 5y ago
I'm glad the IRS is doing this, but I wish they would also go after wealthy people dodging taxes. The IRS has been deliberately underfunded to protect wealthy people, who have the resources to fight the IRS. Paying taxes should be celebrated, not vilified, and I hope Biden's proposal (https://www.cnbc.com/2021/05/05/bidens-80-billion-plan-to-beef-up-irs-audits-may-target-wealthy-small-business-owners.html https://www.cnbc.com/2021/05/05/bidens-80-billion-plan-to-be...) or something similar to that takes effect soon.
- adabyron 5y ago
  My random 2 cents.. It's super hard to get the very wealth $1 million plus to pay direct taxes. There are to many loop holes & they have to many opportunities available to avoid the taxes. I think the best option is types of indirect taxes. I just don't have a great idea for this.
logicalmonster 5y ago
Despite Bitcoin being around for a decade, it's going to take computer experts, economists, and philosophers much more time to really start to understand what crypto actually is. In my opinion, crypto is something very new in human history and most people still haven't really wrapped their minds around what it actually is. Most people are still calling it "crypto-currency" and I think that's a very bad label. Crypto was invented as a digital currency and that's how most people conceptualize it, and the system taxes it as a security, but IMO it's better thought of as a technology platform. The biggest value of crypto isn't so much as a medium of exchange (though that's still very important) but as a distributed technology platform that enables things like smart contracts to run and the natural consequences of that like oracles. I don't expect the current generation of politicians to understand what this means. Even a lot of very smart nerds are really just starting to understand what smart contracts can be used for and why that might be so important and the societal implications of oracles and other things like that. To me, taxing every single crypto movement is as foolish and destructive as taxing every HTTP request would be during the formation of the Internet.
- plank_time 5y ago
  It’s not new at all. It’s the exact equivalent of tulip bulbs in the 1600s. We’ve totally seen this before.
  - rawtxapp 5y ago
    I don't know why people keep bringing this up every time, tulip mania lasted from 1634 to 1637 (just 3 years), Bitcoin has been in existence since 2009 and it's pretty clear it's here to stay now. Bitcoin's goal is to offer an alternative to government controlled currencies that's dependent on the whims of a few central bankers/politicians. It's not even remotely close.
    - adabyron 5y ago
      As assets go up, the more people scream bubble or tulips. As assets go down, the more people scream crash. I've found these to be great signals of who to avoid getting investment advice from.
bruiseralmighty 5y ago
Isn't this just a better reason to switch to decentralized anonymous exchanges like Bisq or used anonymized transaction technologies like ring signatures and zero knowledge proofs (Monero/ZChash)? I've used Coinbase so far to learn about crypto, and I fully intend on paying all taxes owed, but Bisq seems like the next best on-ramp if it can help avoid the headache of treating crypto transactions like stocks rather than currencies. Of course I understand the sentiment that people should pay their taxes to society, but I wonder if this is not just going to result in an escalating arms race. This was prevented with dollars since most dollars earned by the populace can be traced back to a paystub, but once you've earned crypto in an anonymous transaction, it seems like a losing battle to try and tax any aspect of that. I can't help but feel the IRS would be better served by taxing at the off-ramp like a sales tax at a POS rather than trying to fold this into an existing income tax structure. A government can kind of control a brick and mortar retailer or Amazon more so than an individual person who say sold a book direct to consuers for Monero or sold their car for ZCash. Is the federal government prevented from creating a national sales tax for some reason?
- muttled 5y ago
  Property you pay sales tax on is still another taxable event if you sell it for more than you paid. Sales tax does not remove the requirement to report income.
- jl2718 5y ago
  It’s not a reason to, but it might be a motivation. Unfortunately the technology is well ahead of the law, which is the perfect storm for punishing honesty. The US is well ahead of the rest of the world in enforcement. But also unfortunately, this means that the costs and risks of participation in this new financial system is massively greater for US citizens. There is some international pressure for other countries to tax crypto trades instead of just fiat gains. Indonesia and Korea are considering it. France has clarified that they will not. Switzerland doesn’t tax capital gains at all. The differences between countries will unfortunately have consequences for which economies and citizens lead or get left behind - unless it’s all bollocks and national fiat with dollar reserve is the future.
subsaharancoder 5y ago
I used bitcoin.tax way back in 2018 and it was pretty smooth filing crypto related transactions

151 points by chollida1 5y ago

How long before someone comes up with a cryptographic approach to anonymizing bitcoin exchanges? Perhaps exchange #1 could hold a database with bitcoin addresses and PGP-encrypted information about the bank accounts/mailing addresses of cryptocurrency holders. Exchange #2 could hold the private keys of those bank/home details while receiving withdrawal requests and reimbursement for distributing bitcoin The bitcoin holder can then request exchange #1 give a withdrawal request to exchange #2 in such a way that no exchange has enough information to connect a person to a bitcoin wallet. Maybe I'm overthinking this; is there already a way that tech-savvy people can use Bitcoin in a way that's impossible to be tracked when converting to cash?

rawtxapp 5y ago
I mean, you can already use decentralized exchanges where you won't even have to give your name. I think for most people that are not doing anything illegal, there's no point in trying to evade taxes. The way I look at it, you either made lots of profits, so you'll have to explain where you got the money from anyways. Or you didn't make a lot of profit, why hide it? There won't be that much tax anyways.
- ObserverNeutral 5y ago
  > so you'll have to explain where you got the money from anyways Explain to whom?
  - rawtxapp 5y ago
    To your bank? Presumably if you made a lot of money, you'll be buying some houses and maybe some cars or creating your own businesses or something. If you transfer large amounts, it might get frozen if you can't explain the origin (kyc/aml).
    - deleted 5y ago
      [deleted]
  - happytoexplain 5y ago
    Assuming you're being facetious, I have always wondered where the line is. If I discover ten thousand dollars in cash in a hole in the ground and deposit it, will the IRS notice? Will the bank require some kind of information? What about if it's a hundred thousand?
    - bluedino 5y ago
      The bank will have to report it to the IRS. They will cross-reference it with your taxes. They will also come talk to you if you have a pattern of doing it regularly. But you will probably not have an issue with it.
    - dsr_ 5y ago
      The bank will fill out a form about "structuring deposits" for any transaction around $10K. They will also report transactions in general over $10K. https://en.wikipedia.org/wiki/Structuring https://en.wikipedia.org/wiki/Structuring
    - je_bailey 5y ago
      Yes, When large amounts of money are deposited into an account there is an automatic notice sent to the government. A One time event shouldn't be an issue however if you have multiple events of large deposits then it's going to trigger algorithms and the government is going to start asking where you got the money from and they'll perform an audit. If you attempt to bypass the system they have systems in place to detect that and will perform an audit. Just pay your taxes
    - deleted 5y ago
      [deleted]
    - ObserverNeutral 5y ago
      > Will the bank require some kind of information Crypto doesn't go through the banking system. Miners for example can spend the mined crypto and for all practical purposes nobody will ever know.
    - Supermancho 5y ago
      Try depositing 50k at any US bank. Instant paperwork. Try depositing 10k. No questions asked.
  - TigeriusKirk 5y ago
    Coinbase, for one. There's a whole process under the KYC/AML regulations if you want to deposit large amounts of crypto with a legit exchange.
- jhgb 5y ago
  I'm not from the US but my understanding is that even if you're doing illegal stuff there's still no point in trying to evade taxes, as IRS is not allowed to notify anyone about where you got the money from anyway. "Illegal activities: Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Schedule 1 (Form 1040), line 8, or on Schedule C (Form 1040) if from your self-employment activity" They thought of everything!
  - Pfhreak 5y ago
    This clause came from the era of Al Capone, who famously boasted, "They can't collect legal taxes from illegal money." (Which was true at the time.) They added this clause and then ended up catching Capone for tax evasion. https://www.forbes.com/sites/kellyphillipserb/2020/10/17/al-capone-convicted-on-this-day-in-1931-after-boasting-they-cant-collect-legal-taxes-from-illegal-money/?sh=32d97b381435 https://www.forbes.com/sites/kellyphillipserb/2020/10/17/al-...
  - ocdtrekkie 5y ago
    I think the point of this is less that the IRS won't report it to someone else, but that it adds tax evasion as a reason a criminal can be pursued. You are probably thinking it's like where contact tracers or census workers or whatever aren't supposed to report illegal immigrants because it's more important that they get accurate info than report people to ICE. I don't think that's the case with the IRS, they're probably more than happy to let other agencies know about your illegal activity.
    - jhgb 5y ago
      I got it from here (https://money.cnn.com/2013/02/28/news/economy/illegal-income-tax/index.html https://money.cnn.com/2013/02/28/news/economy/illegal-income...): "If you tell the IRS you made $1 million from stealing money or dealing drugs, does the agency tip off the cops? Legally, it can't, unless a law-enforcement agency gets a court order granting it access to a specific taxpayer's return. The IRS isn't supposed to proactively alert other agencies about misdeeds unless terrorism is involved. In that case, it still needs a court order to disclose anything, but the IRS can initiate the legal process on its own." I have no idea if it is still valid or not.
mam3 5y ago
It's called thorchain and it's on the way to the moon...
OldHand2018 5y ago
> Maybe I'm overthinking this Definitely. What you’re describing would certainly be a conspiracy to violate all sorts of American laws and is punishable by a lot of time in jail. Add one more layer to your process and you qualify to be prosecuted via RICO laws! Why do this on behalf of a bunch of random folks you’ve never met?
MereInterest 5y ago
I'm sorry, but I don't understand the mindset here. Having created something whose only advantage is in money laundering and paying for illegal products, having created something that by its nature has and always will have massively wasteful consumption and externalities, you're now looking for a way to avoid paying the taxes that support society?
- ddxxdd 5y ago
  "Externalities" isn't the right word to use here; Bitcoin miners pay for the resources they use to mine Bitcoin. But there is a positive externality associated with Bitcoin, in that it serves as a check and a balance against authoritarian governments, present and future. Hence why it's important to ask these questions.
  - Emma_Goldman 5y ago
    >"Externalities" isn't the right word to use here; Bitcoin miners pay for the resources they use to mine Bitcoin. Yes it is, Bitcoin miners are overwhelmingly located in China and powered by highly carbon-intensive coal plants. The costs of those emissions are not borne by the transacting parties, because they are global and intergenerational. Regardless of whether Bitcoin miners pay for their coal-powered electricity, their revenue is effectively subsidised by externalities. The higher the demand for Bitcoin, the greater those externalities.
    - oceanplexian 5y ago
      I don’t get it, are you proposing that alternative currencies like USD are completely carbon neutral and have no externalities? Personally, I am not aware of any currency that does not have externalities, most currencies have a sizable body count from the wars required to preserve their value. Presumably, once Bitcoin is fully mined it may end up having the least externalities of any currency, past or present.
      - MereInterest 5y ago
roenxi 5y ago
Almost the stupidest thing an investor can do is try to illegally evade taxes. It is pretty much all downside and no upside if you walk through the likely outcomes. Either double theoretical, paper wealth or lose actual time to a jail. One of those is realer than the other. Avoiding taxes is critical, but breaking the law is foolish.
dubcanada 5y ago
That doesn't matter, you still need a way of turning 50 USD into crypto. You can either give a random stranger 50 USD on the street for X crypto - some kind of a black market fee or you give coinbase 50 USD via credit card and it's in your account immediately and a reputable company backing it. The more "illegal"/gray crypto becomes the less it is worth, the worth (at least at todays scale) is due to the ease of use/popularity. It's super easy to buy 1 BTC right now, go back 5 years you basically needed to know someone who knew someone or be part of a forum and hope the other person didn't scam you.

prtkgpt 5y ago

sure. we love IRS.

rawtxapp 5y ago

I wish they had kept the like-kind treatment for crypto-to-crypto exchanges. Or that they had given very clear guidelines and rules on crypto taxation. Or that they had lowered crypto tax rates a little because it's highly risky anyways. Nowadays, I see a lot of people just borrowing against their holdings to avoid triggering taxes, especially for long term holders who might be up 1000+%, there's really no point in cashing out, since a significant chunk will just go to the gov (especially if you're in California or New York).

Pfhreak 5y ago
There's "really no point" in cashing out returns of 1000%? If I had put 100k in, my coins would be worth 1M. Even if my taxes were 30%, I'd be walking away with 730k. That's an astronomical gain.
- zikduruqe 5y ago
  A fine is a tax for doing bad. A tax is a fine for doing well.
  - adriand 5y ago
    A tax is a subscription fee for the privileges of citizenship. There are many millions of people who would happily become "subscribers" in return for becoming US citizens.
    - TheGigaChad 5y ago
      Suck my dick.
    - Consultant32452 5y ago
      Failing/refusing to pay a subscription fee does not, generally, result in you getting thrown in a cage with rapists and murderers.
      - 5y ago

greyface- 5y ago

https://archive.is/wWgqP https://archive.is/wWgqP

bliteben 5y ago

I'm sure they'll come after them with the same fury they go after alleged billionaires paying $800 in taxes for a year.

ashtonkem 5y ago
The IRS stopped auditing those people a while ago, because they cost too much up front to audit and sue. It’s the middle tier where all the audits happen; rich enough to evade their taxes, but not so rich that they can afford good lawyers who make collecting difficult.
- Terretta 5y ago
  In general, the word isn't evade. In general, it's "plan" or "structure". It's less worth pursuing the ultra wealthy because they implemented the actual tax algorithm and paid every penny the law actually requires -- often zero -- when the algorithm is executed flawlessly. For the disciplined tax planners to pay more, the code has to be debugged and simplified to eliminate these unintended but fully accurate results.
  - o___ 5y ago
    Spoken like a true thief. "How can this be stolen? What is possession, really?"
- cryptica 5y ago
  That sounds like an excuse. The reality is that the government is controlled by rich crooks.
  - ashtonkem 5y ago
    More a consequence of the IRS being systemically underfunded for decades. They simply do not have the money required to audit everyone, so they’re pursuing a strategy of maximizing the return per audit dollar spent. Culturally, I’m sure that the IRS wants to catch every tax cheat; it’s just that they lack the resources to try.

motohagiography 5y ago

There may be a fundamental disconnect between what the currencies are (or how they are used) and how they are taxed. This issue of lots and being taxed as property: >For example, say that someone sold bitcoins at $22,000 each in December 2020 and had coins bought 2016 for $600 and 2017 for $16,000. Selling the 2016 coins would mean a taxable gain of $21,400 each, while selling the 2017 coins would mean a gain of $6,000 each—a big difference. This is not like a currency, where if I had a stack of Euros from an old holiday and then exchanged them for USD or even bought something with them, there is no concept of "lot" price in a currency. This US law definition appears to in effect destroy the fungibility property of cryptocurrencies by pinning the non-fungible identity of the coin to its spot price at the time of transaction. If US law doesn't treat it as currency, it's basically not currency. I sat on the sidelines on cryptocurrency from the beginning because of specific scenarios like this because of these very inevitable problems. What they really are is an exotic asset for getting portfolio exposure to the trillions of dollars in black and grey market economic activity and associated volatility properties, but with only arms length participation. Basically a way to particpate in a distributed bank that launders money while turning a blind eye just like the real banks. However, remote tech has changed work so much that if I were a betting man, I would be looking at real estate in non-extradition countries as thousands of new crypto millionaires weigh their options and just leave.

gruez 5y ago
>This is not like a currency, where if I had a stack of Euros from an old holiday and then exchanged them for USD or even bought something with them, there is no concept of "lot" price in a currency. But are they taxed? ie. if you sold your euros now, you'd probably realize a modest profit since USD went down recently. Are those gains tax-free?
- xphilter 5y ago
  Effectively yes they are tax free because there’s no easy way for irs to enforce. By law though you need to pay taxes on those gains. If you use a trading platform for trading, there’s probably a better chance of getting caught if you don’t pay taxes. There’s really nothing different here.

je_bailey 5y ago

Just pay your taxes. Really it isn't that hard. If you've maintained the asset for several years you get a tax break, there are sites out there that are designed to assist with the tracking of crypto currencies. Yes you may be able to bypass all the algorithms and systems that the US has in place to track this stuff but why? Just pay your damn taxes.

bagacrap 5y ago
Actually it is pretty hard if you, y'know, buy stuff with a cryptocurrency, because every purchase is a taxable event! Also hard if you bought your crypto on a less well known and/or now-defunct exchange like Poloniex because the reports they generate are relatively hard to understand. My CPA couldn't understand the notation as there was no mention of USD and I had to break it down for them. In comparison, paying taxes on stock gains is pretty easy because the brokerage generates a 1099 with all the calcs done for you.
christiansakai 5y ago
What is this? "If you've maintained the asset for several years you get a tax break" Just capital gain?
- je_bailey 5y ago
  There is both short term and long term capital gain taxes in the US. For some reason I was thinking you had to hold it for more than one year but apparently it's one. If you hold the asset for longer than a year the tax rate on it is either 0%, 15%, or 20% depending on your tax bracket

ridethebike 5y ago

I bought bitcoins for two or three hundred bucks. Then price went a bit down, I got spooked and sold it at a loss. So who's laughing now, IRS? Come a get me. P.s. needless to say - sarcasm

Pfhreak 5y ago
Well, in your case you'd be able to claim that loss against the taxes you paid from other gains, right? So really, maybe the IRS owes you money. :D
- ridethebike 5y ago
  It's only couple of $ so I'll let it slide this time
goblinux 5y ago
Paper hands paid off
bagacrap 5y ago
you laugh, but this happened to me, I reported a loss of a couple thousand bucks and now I'm petrified of an audit.

cableshaft 5y ago

So I buy a small amount of crypto with every paycheck, and this year is the first year I had to report selling some of those transactions that had those tiny purchases as a cost basis. It's very annoying to do it manually, as you apparently are supposed to report every single one of those weeks, and calculate what portion is from which cost basis, etc. I was feeling very overwhelmed with the thought of doing it manually. But I tried one of those bitcoin tax websites this year, and was pleasantly surprised how seamless they made it. After paying and importing my data I had the full tax forms in minutes. Thankfully I didn't owe anything for it last year because it was a temporary panic sell during the big dip from the pandemic happened last March or April, so I basically broke even for taxes, but thankfully I came to my senses a week later and bought back in again, so I still got to fully benefit from the bull run this past year. But yeah, it's not worth taking the risk of getting audited, imo. I still wish it weren't a taxable event just for switching which crypto you're in though, especially if it's on the same exchange, and only got taxed when you buy goods or services take it out to USD, but oh well.

klodolph 5y ago
> I still wish it weren't a taxable event just for switching which crypto you're in though, especially if it's on the same exchange, and only got taxed when you buy goods or services take it out to USD, but oh well. You're describing section 1031 "like-kind" exchanges. Not available for crypto, and not available for stocks either, so it's not like crypto's getting unfair treatment here (compared to stocks). You have to do the same detailed reporting you describe for stocks.
- cableshaft 5y ago
  I understand it's not available for crypto (and for stocks), I just wish that weren't the case. Also if I have to report every single 401k purchase I ever made when I'm in my 70s when I finally cash some of it out, that's going to be a pain in the butt (I assume 401k is an exception to the rules). I basically treat my crypto purchases as another form of 401k right now (without the penalties).
  - 5y ago

annoyingnoob 5y ago

I find it interesting how the IRS picks its targets. Facts shows the the most wealthy skip the most taxes. Yet the IRS has a hard time going after the most wealthy because they have the resources to fight it. The more recent crop of folks that have made money in crypto don't tend to be among those ready to fight the IRS hard, they are softer targets. They are targeting the little guy on purpose.

syops 5y ago
That’s a disturbing trend in the U.S. that is getting worse as time goes on. It’s disturbingly true in criminal matters. If crime isn’t too egregious you can avoid just punishment by having the resources to tie up the DA’s office.
- throwaway0a5e 5y ago
  This is just how things work when there's so many laws and they're so broad that the scope of "prosecutable criminal behavior" exceeds enforcement resources. Of course the DA's are gonna pick the easy wins with good optics and avoid hard targets and/or rocking the boat. That's just rational decision making. You can either increase resources and create a police state or decrease the amount of prosecutable criminal behavior and have people complain that "there ought to be a law" about <pet issue goes here>.
deleted 5y ago
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basseq 5y ago
This is true, but it's philosophical. The IRS has finite resources, so it has a fundamental choice: 1. Maximize collections. This is what they're doing: spending their resources on cases with the best expected ROI. If you have $1T in net tax misses, chase the easiest 75% and expect a 90% collection rate. 2. Deter high absolute tax avoidance. This is what you're suggesting: spend their resources to make a statement, even if the ROI isn't there. If you have $1T in net tax misses, chase the hardest 25% and expect a 5% collection rate. I don't think you're wrong, as there's value in deterrence (i.e., sue the hell out of rich tax evaders, and even if you lose, maybe the next one will be less likely to push it).

polytronic 5y ago

The mob would not miss such an opportunity!

TheGigaChad 5y ago

Not a big surprise, the state doesnt want any competitors.

deleted 5y ago

[deleted]

tldrthelaw 5y ago

Hate to be this guy all the time, but if your case is anything other than straightforward, and there are large amounts at stake, talk to a tax attorney (grain of salt: I am one). Form websites and tutorials are all well and good, and will probably work out for more people than they don't, but you super don't want to screw up your taxes. When the bill comes due, it'll be years down the line, and for an unrecognizable sum. Your state bar can put you in touch with one. Avoid folks marketing themselves as something like "tHe CrYpTo LaWyER."

rawtxapp 5y ago
Out of curiosity, what's your recommendation on how to differentiate a very competent tax lawyer from one that's merely good? Also, what's wrong with "crypto lawyer" people?
- tldrthelaw 5y ago
  Domain-specific knowledge. You can't go point to point with even a marginally competent lawyer on the law (probably), but you know a lot about your issue. Can they hang? In the case of crypto, do their eyes glaze over if you refer to an altcoin? Do they use "bitcoin" and "blockchain" interchangeably? Use same process for whatever your issue is -- SaaS contracts, tech trans, etc. The crypto lawyer folks are, by and large, claiming to be experts in a practice that is so new and so without firm guidance as to be practically the tax wild west. Right now we are in the metaphor stage, we're defining everything involved with cryptocurrency (from a tax perspective) with metaphors to other things: currency, stock, digital goods, etc. The cases that will be cited forever to define crypto for tax purposes are going to be litigated in the next few years, don't be one of them. TLDR: Look for a tax attorney that knows the tech behind cryptocurrency well enough and doesn't make any promises or guarantees. Edit: One additional point, merely competent attorneys won't be published in their field. If you're looking for an expert find someone who is contributing to the discussion in their area.
  - t0mbstone 5y ago
    TL;DR: Find a good crypto lawyer

throwkeep 5y ago

"And if Margaret pays for a car—or dinner for friends—with cryptocurrency, she likely owes tax on the transfer, much as if she paid for the car or the dinner with shares of Apple stock. The transfer is probably also taxable income to the recipient." Does this mean crypto will never be able to compete with USD as a currency? Since it has this added tax on transfers?

adabyron 5y ago
This is probably a better read than WSJ - https://www.investopedia.com/tech/taxes-and-crypto/ https://www.investopedia.com/tech/taxes-and-crypto/ Scroll down to personal purchases. "Currently, tax code allows taxpayers to exclude up to $200 per transaction for foreign currency exchange rate gain, if the gain was derived from a personal purchase, like a cup of coffee. This is known as a de minimis election. But there is no “de minimis” clause that exempts small transactions, which can create a very tangled tax problem if one is constantly trading crypto and also using it to buy goods and services." Of course keep reading & note the part where you can't deduct a loss either if you buy BTC at $60,000 & then it goes down to $50,000 because Elon Musk tweeted while you were buying a coffee or pair of jeans with your BTC.
SCUSKU 5y ago
The US government is incentivized to keep Bitcoin and others from going mainstream. Simply because removing the US dollar hegemony means the US can no longer continue to print money for deficit spending, and that sanctions would lose their teeth. I recall a TV show or movie where the Federal Reserve launched its own cryptocurrency, in which it was used for more surveillance. I could see that happening, I think the Chinese are already onto it.
- tablespoon 5y ago
  The US government has nothing to fear from Bitcoin, despite grandiose conspiracy theories to the contrary.
sickygnar 5y ago
Curious as well, especially with USDC and USDT. They are so convenient for sending arbitrarily large amounts of USD with instant settlement.

minikites 5y ago

I'm glad the IRS is doing this, but I wish they would also go after wealthy people dodging taxes. The IRS has been deliberately underfunded to protect wealthy people, who have the resources to fight the IRS. Paying taxes should be celebrated, not vilified, and I hope Biden's proposal (https://www.cnbc.com/2021/05/05/bidens-80-billion-plan-to-beef-up-irs-audits-may-target-wealthy-small-business-owners.html https://www.cnbc.com/2021/05/05/bidens-80-billion-plan-to-be...) or something similar to that takes effect soon.

adabyron 5y ago
My random 2 cents.. It's super hard to get the very wealth $1 million plus to pay direct taxes. There are to many loop holes & they have to many opportunities available to avoid the taxes. I think the best option is types of indirect taxes. I just don't have a great idea for this.

logicalmonster 5y ago

Despite Bitcoin being around for a decade, it's going to take computer experts, economists, and philosophers much more time to really start to understand what crypto actually is. In my opinion, crypto is something very new in human history and most people still haven't really wrapped their minds around what it actually is. Most people are still calling it "crypto-currency" and I think that's a very bad label. Crypto was invented as a digital currency and that's how most people conceptualize it, and the system taxes it as a security, but IMO it's better thought of as a technology platform. The biggest value of crypto isn't so much as a medium of exchange (though that's still very important) but as a distributed technology platform that enables things like smart contracts to run and the natural consequences of that like oracles. I don't expect the current generation of politicians to understand what this means. Even a lot of very smart nerds are really just starting to understand what smart contracts can be used for and why that might be so important and the societal implications of oracles and other things like that. To me, taxing every single crypto movement is as foolish and destructive as taxing every HTTP request would be during the formation of the Internet.

plank_time 5y ago
It’s not new at all. It’s the exact equivalent of tulip bulbs in the 1600s. We’ve totally seen this before.
- rawtxapp 5y ago
  I don't know why people keep bringing this up every time, tulip mania lasted from 1634 to 1637 (just 3 years), Bitcoin has been in existence since 2009 and it's pretty clear it's here to stay now. Bitcoin's goal is to offer an alternative to government controlled currencies that's dependent on the whims of a few central bankers/politicians. It's not even remotely close.
  - adabyron 5y ago
    As assets go up, the more people scream bubble or tulips. As assets go down, the more people scream crash. I've found these to be great signals of who to avoid getting investment advice from.

bruiseralmighty 5y ago

Isn't this just a better reason to switch to decentralized anonymous exchanges like Bisq or used anonymized transaction technologies like ring signatures and zero knowledge proofs (Monero/ZChash)? I've used Coinbase so far to learn about crypto, and I fully intend on paying all taxes owed, but Bisq seems like the next best on-ramp if it can help avoid the headache of treating crypto transactions like stocks rather than currencies. Of course I understand the sentiment that people should pay their taxes to society, but I wonder if this is not just going to result in an escalating arms race. This was prevented with dollars since most dollars earned by the populace can be traced back to a paystub, but once you've earned crypto in an anonymous transaction, it seems like a losing battle to try and tax any aspect of that. I can't help but feel the IRS would be better served by taxing at the off-ramp like a sales tax at a POS rather than trying to fold this into an existing income tax structure. A government can kind of control a brick and mortar retailer or Amazon more so than an individual person who say sold a book direct to consuers for Monero or sold their car for ZCash. Is the federal government prevented from creating a national sales tax for some reason?

muttled 5y ago
Property you pay sales tax on is still another taxable event if you sell it for more than you paid. Sales tax does not remove the requirement to report income.
jl2718 5y ago
It’s not a reason to, but it might be a motivation. Unfortunately the technology is well ahead of the law, which is the perfect storm for punishing honesty. The US is well ahead of the rest of the world in enforcement. But also unfortunately, this means that the costs and risks of participation in this new financial system is massively greater for US citizens. There is some international pressure for other countries to tax crypto trades instead of just fiat gains. Indonesia and Korea are considering it. France has clarified that they will not. Switzerland doesn’t tax capital gains at all. The differences between countries will unfortunately have consequences for which economies and citizens lead or get left behind - unless it’s all bollocks and national fiat with dollar reserve is the future.

subsaharancoder 5y ago

I used bitcoin.tax way back in 2018 and it was pretty smooth filing crypto related transactions