[CLAG requests your input] Interview w/ Tax Notes International

[JDBound]

I will be doing an interview with the Washington, D.C. based, Tax Notes International (http://www.taxanalysts.com/) magazine tomorrow afternoon. This is basically all the reporter is giving me to work with until then:

Given the continuing evolution of Bitcoin, this story poses the question: Do tax authorities need to start worrying about it? How likely is it that Bitcoin will evolve into a significant alternative currency? Because of its anonymous, peer-to-peer nature, how likely will it be used for tax evasion and other nefarious purposes? How difficult is it for tax administrators to track these kinds of transactions?

Any thoughts?

I am not going to respond directly to anyone's comments immediately. Instead, I will read over everything posted prior to the interview, and then post a synopsis of how it went after it is complete.


Thanks

[1715056077]

1715056077

[1715056077]

1715056077

[1715056077]

1715056077

[Atlas]

Over a million dollars in profit is made on the Silk Road every single day, in Bitcoins. What is the likelihood taxes are paid on all of this income?

[LegalEagle]

I take it you're the one being interviewed, correct?  Are you looking for input to help you answer the questions?

[Kontakt]

I'd say that, at the moment, it isn't a viable tax evasion maneuver. The bitcoin is too volatile at the moment. I wouldn't hide too much asset in a highly fluctuating, young currency like bitcoins. In five years, yes. With bitcoin prices coming to my personal conservative estimate of $25 per coin and stabilizing slowly, bitcoins will be a useful way to obfuscate your holdings and income. Due to the fairly anonymous transfers allowed by bitcoin's unique system, it's easy to play a shell game with your money.

I foresee a future request by the government that you register your accounts, or even just a straight up recording of accounts and ips, to watch for statistical outliers or large transfers. I picture the system more being watched for large transfers to known addresses (those associated with known underground figures) to try and predict transfers of material. Tracking for tax purposes will be difficult, unless the government creates regulation concerning the conversion of fiat to bitcoin, and that will be very hard to enforce. Bitcoin movement is easy to trace, but hard to pin on the bearer.

I see the future of bitcoins splitting into two divergent paths.

Path A: The bitcoin falls by the wayside as huge difficulties and high capital investment make small time miners obsolete, and the coins devalue as less people have a vested interest in their value. Many people like bitcoins because they can mine for them at a relatively high return. Without that option, many people would drift away from the currency.

Path B: Bitcoins continue to gain in value on a roughly logarithmic scale, and become a viable and practical currency. The point that I believe will make this future a reality is the bit-card. A card much like a debit card is loaded with a private key, and corresponds to an account with an institution that provides the same credit-protection as a normal card does. I'm not sure about exactly how it would be implemented, but this would be the way that bitcoins would become easily ubiquitous.

Of course, I've only been having fun with bitcoins for about 6 months, so my handle on things isn't rock solid like the old-timers. Feel free to correct or comment on anything I said.

[Bitcoin Oz]

I will be doing an interview with the Washington, D.C. based, Tax Notes International (http://www.taxanalysts.com/) magazine tomorrow afternoon. This is basically all the reporter is giving me to work with until then:

Given the continuing evolution of Bitcoin, this story poses the question: Do tax authorities need to start worrying about it? How likely is it that Bitcoin will evolve into a significant alternative currency? Because of its anonymous, peer-to-peer nature, how likely will it be used for tax evasion and other nefarious purposes? How difficult is it for tax administrators to track these kinds of transactions?

Any thoughts?

I am not going to respond directly to anyone's comments immediately. Instead, I will read over everything posted prior to the interview, and then post a synopsis of how it went after it is complete.


Thanks

Thats some loaded questions.

[sunnankar]

I will be doing an interview with the Washington, D.C. based, Tax Notes International (http://www.taxanalysts.com/) magazine tomorrow afternoon. This is basically all the reporter is giving me to work with until then:

Given the continuing evolution of Bitcoin, this story poses the question: Do tax authorities need to start worrying about it? How likely is it that Bitcoin will evolve into a significant alternative currency? Because of its anonymous, peer-to-peer nature, how likely will it be used for tax evasion and other nefarious purposes? How difficult is it for tax administrators to track these kinds of transactions?

Any thoughts?

I am not going to respond directly to anyone's comments immediately. Instead, I will read over everything posted prior to the interview, and then post a synopsis of how it went after it is complete.


Thanks

Thats some loaded questions.

No kidding. I would extremely downplay the ability to engage in tax evasion, etc. and assert it poses no threat to tax administrators because it is a form of triple entry bookkeeping where all transactions are verified by the network so there is a perfect and publicly available audit trail for tax investigators to follow.

But there are some creative uses for Bitcoin and Taxes.

[Mike Hearn]

Bitcoin doesn't make taxation impossible by any means, but adoption of it in a country would require changes to the balance of taxes and how they are managed.

The most problematic tax to enforce in a Bitcoin-heavy world is obviously the income tax, but income taxes are already very hard to enforce fairly. We hear about unfairness in income tax application almost every week thanks to, eg, the disparity between "income" and "capital gains" - a distinction that makes no economic sense and results in rich people paying less effective tax than poorer people. There are about a million different ways to hide or recast income even in todays system that offers almost no privacy at all.

So if a society adopts Bitcoin, does that mean calling time on the income tax? Quite possibly. Does it mean shrinking the tax revenue? Not necessarily. Whilst some taxes are harder to collect with Bitcoin others would be easier, for example, sales taxes. You can incentivize citizens to report transactions to the tax authority to get a rebate against the collected tax. When your own customers are automatically reporting all transactions and are incentivized to do so financially it becomes a lot harder to avoid reporting all your sales, and a lot of expensive tax collectors could be replaced with software.

There are probably a variety of other ways you could come up with to innovate in the tax space. Governments will instinctively fear financial privacy of any kind because they are typically run by lawyers whose first idea for "stop people breaking the rules" is more laws and more monitoring. People with knowledge of software and cryptography need to help them see ways to both preserve citizens privacy and still collect a stable tax base.

[Kontakt]

So if a society adopts Bitcoin, does that mean calling time on the income tax? Quite possibly. Does it mean shrinking the tax revenue? Not necessarily. Whilst some taxes are harder to collect with Bitcoin others would be easier, for example, sales taxes. You can incentivize citizens to report transactions to the tax authority to get a rebate against the collected tax. When your own customers are automatically reporting all transactions and are incentivized to do so financially it becomes a lot harder to avoid reporting all your sales, and a lot of expensive tax collectors could be replaced with software.

Clever.

[sebicas]

I think people needs to stop relating bitcoin to tax avoidance or ilegal ventures... there is a lot more people in the world that get paid in cash (us dollars bills or any currency) and do not pay any taxes... and seams like nobody relates this activities with the regular currencies.

The most accepted currency for crimes is the US Dollar, and it would be stupid to think: "should be ban the US Dollar then?"

Governments should prosecute crime, but not confuse bitcoin with a fraudulent scheme. I think is important to notice this. 

[niko]

Bitcoin can work great for governments and legal businesses: a business would register their wallet, and government - or whoever else it is registered with - would be able to clearly and reliably monitor all the transactions in real time.

There is nothing about Bitcoin that makes it anonymous other than the fact that it is still new, obscure, and perhaps technically hard to grasp for an average politician or a bureaucrat.

[Bitcoin Oz]

Bitcoin doesn't make taxation impossible by any means, but adoption of it in a country would require changes to the balance of taxes and how they are managed.

The most problematic tax to enforce in a Bitcoin-heavy world is obviously the income tax, but income taxes are already very hard to enforce fairly. We hear about unfairness in income tax application almost every weak thanks to, eg, the disparity between "income" and "capital gains" - a distinction that makes no economic sense and results in rich people paying less effective tax than poorer people. There are about a million different ways to hide or recast income even in todays system that offers almost no privacy at all.

So if a society adopts Bitcoin, does that mean calling time on the income tax? Quite possibly. Does it mean shrinking the tax revenue? Not necessarily. Whilst some taxes are harder to collect with Bitcoin others would be easier, for example, sales taxes. You can incentivize citizens to report transactions to the tax authority to get a rebate against the collected tax. When your own customers are automatically reporting all transactions and are incentivized to do so financially it becomes a lot harder to avoid reporting all your sales, and a lot of expensive tax collectors could be replaced with software.

There are probably a variety of other ways you could come up with to innovate in the tax space. Governments will instinctively fear financial privacy of any kind because they are typically run by lawyers whose first idea for "stop people breaking the rules" is more laws and more monitoring. People with knowledge of software and cryptography need to help them see ways to both preserve citizens privacy and still collect a stable tax base.

You can replace most income tax with a goods and services tax. Merchants collect it at point of sale and anyone offering services like a plumber collects the tax when they provide the service. Consumption axes are a lot fairer than income taxes. So are land taxes btw. So if you buy something with btc the merchant collects the extra in the price.