How to leave KYC for good

[o_e_l_e_o]

-snip-

I suppose it depends in your jurisdiction. If you have been evading a wealth tax, then of course you will have to face the consequences as and when your tax authority finds out. But if your jurisdiction only requires tax to be paid when you cash out, such as with capital gains tax in the US, then I'm not sure what else you should do. The IRS have specifically said that if you have only bought bitcoin, and not sold/spent/traded it, then you do not need to declare it. I struggle to see how they could prosecute you for not declaring your holdings when they have specifically said you don't need to (although that's not to say they wouldn't try).

[1715658234]

1715658234

[LoyceV]

The IRS have specifically said that if you have only bought bitcoin, and not sold/spent/traded it, then you do not need to declare it.

I get the feeling many Americans don't realize how good a deal that is!

[n0nce]

If you keep the receipt, you risk compromising your privacy, which is why you used a mixer in the first place. If you want all traces to be gone, you should not keep the receipt.

Wait, didn't you recommend to keep the receipt so you have a paper trail and can prove when you bought the coin? Or are you saying it's fine to trash the receipt, but keep original keys, so you can prove e.g. you possessed 100BTC in 2012 and possess 100BTC now, so those are equal amounts, and you're good, even though there is no connection between them?

Because without mixing receipts, the 2012 coins could have been lost or gambled to 0 and the 'new' 100BTC could have been acquired through illegal activities in the mean time.

I'm wondering (iirc in NL) how do you 'declare' your holdings? When filling out tax stuff, you put in the BTC amount that you hold? Or public keys? Or the EUR amount?

They ask for the total amount, in euro, on the first day of the previous year.
Short translation: miscellaneous possessions, such as Bitcoin and other investments. This also includes for instance the 8 tonnes of gold you have in your basement.

Interesting, so this means NL would be worse than DE for HODLing, but better for traders, right? Since they don't care about your stash growing or shrinking, just about its total value at a given point in time.. Interesting.

-snip-

I suppose it depends in your jurisdiction. If you have been evading a wealth tax, then of course you will have to face the consequences as and when your tax authority finds out. But if your jurisdiction only requires tax to be paid when you cash out, such as with capital gains tax in the US, then I'm not sure what else you should do. The IRS have specifically said that if you have only bought bitcoin, and not sold/spent/traded it, then you do not need to declare it. I struggle to see how they could prosecute you for not declaring your holdings when they have specifically said you don't need to (although that's not to say they wouldn't try).

Yeah, I have to admit: right now it seems to me that if you just buy to long-term HODL, it's not really too bad to have KYC coin, since:
1) If you live in a place with wealth tax, you have to declare holdings annually anyway, so you can't be 'anonymous' in a way that nobody knows how much you own. However, if you hold non-KYC coin at least there's no company (exchange) knowing your holdings, just the government.
2) If you live in a place with capital gains tax, it would be possible to keep verifiable evidence of the purchase for non-KYC coins of course, but it's easier to prove you bought on an exchange. And if you don't spend the coins until a very long time in the future, nobody can use your Bitcoin info to track your purchases etc. Maybe just exchange a small fraction for LN-BTC and spend that on stuff if you need.

I see one major point for holding non-KYC Bitcoin, which is if you also spend a little from time to time and want those transactions to be anonymous.

Also, reading more through all the laws lately (hence less activity on the forum lol): Germany so far looks very good. If you can prove that you bought your Bitcoin more than 1 year ago, you can sell (or trade for a property, car, etc.) without taxes.
Still be careful on the aspect of 'where did the money to buy your BTC come from' though. Let's say you transferred funds from an old wallet to a new one (yesterday) and threw the old one away (we already established in this thread not to ever trash pk's but let's assume this can happen): you must be able to prove you bought the Bitcoin yesterday, since you have no way to prove you bought them a long time ago, by destroying the old keys. So if you acquired tons of Bitcoins yesterday, but are atm homeless, things won't add up in the future and you might get into trouble about 'where does the money come from', even though there won't be a tax evasion issue in Germany due to +1yr holding.

[LoyceV]

If you keep the receipt, you risk compromising your privacy, which is why you used a mixer in the first place. If you want all traces to be gone, you should not keep the receipt.

Wait, didn't you recommend to keep the receipt so you have a paper trail and can prove when you bought the coin? Or are you saying it's fine to trash the receipt, but keep original keys, so you can prove e.g. you possessed 100BTC in 2012 and possess 100BTC now, so those are equal amounts, and you're good, even though there is no connection between them?

I'm saying: "it depends" For tax records and credibility with authorities, it's probably best to keep as many paper trails as possible. But for privacy, it's best to completely get rid of all of it.
So it depends on the reason you're using a mixer, and who you're trying to hide your trail from.

Because without mixing receipts, the 2012 coins could have been lost or gambled to 0 and the 'new' 100BTC could have been acquired through illegal activities in the mean time.

Exactly!

Interesting, so this means NL would be worse than DE for HODLing, but better for traders, right? Since they don't care about your stash growing or shrinking

If you're an active trader making a living out of trading, you'll have to pay income tax on your profit. But there's quite a large gray area between "active trader for a living" and "trading once in a while".

I see one major point for holding non-KYC Bitcoin, which is if you also spend a little from time to time and want those transactions to be anonymous.

For most people, the creditcard company knows all their darkest secrets

[n0nce]

I'm saying: "it depends" For tax records and credibility with authorities, it's probably best to keep as many paper trails as possible. But for privacy, it's best to completely get rid of all of it.
So it depends on the reason you're using a mixer, and who you're trying to hide your trail from.

Gotcha! So I guess it’s not very clear cut what authorities accept as proof of buy time of Bitcoin.

Interesting, so this means NL would be worse than DE for HODLing, but better for traders, right? Since they don't care about your stash growing or shrinking

If you're an active trader making a living out of trading, you'll have to pay income tax on your profit. But there's quite a large gray area between "active trader for a living" and "trading once in a while".

I see! Here’s another point though: from my research, in most countries buying stuff with Bitcoin is considered a trade. So if you e.g. live on bitcoin (transfer all your salary into BTC and swap back to € via Bitcoin-cards and bitrefill or buy in shops that accept bitcoin) you’re essentially a high frequency trader
So people doing this I feel need to be extra cautious about their legislation and if it’s not gonna bite them in the ass in the long run. Like, it will be super hard to keep track on when you ‘bought’ and ‘sold’ how much BTC for how much fiat. So if a good amount in BTC accumulates by just spending less than what you earn, and Bitcoin price goes to the moon, a person can really get in trouble. I feel this is talked about way too little.

For most people, the creditcard company knows all their darkest secrets

I know right! That’s always been one of the arguments for Bitcoin though, but I think being pseudonymous in your Bitcoin purchases ist most practical through LN. It proves to be very tricky to hold apart various addresses e.g. when using one to order something to your home, all anonymous purchases linked to that address get deanonymized and stuff. Lightning makes it much easier.

[Poker Player]

The IRS have specifically said that if you have only bought bitcoin, and not sold/spent/traded it, then you do not need to declare it.

I get the feeling many Americans don't realize how good a deal that is!

Yes, it's kind of like the fish that's in the water and doesn't even realize it's in the water because it's its normal environment.

Anyway, we are talking about in theory having bought and never spent without KYC.

It's one thing if you bought Bitcoin years ago, they're at one address, and you've never touched them. Even if you bought from a decentralized exchange, or Localbitcoins in person, it's easy to prove they are yours and you won't have a problem.

Another case would be if you have made transactions, but they are traceable, and you can sign messages.

But then we have the other case in which you supposedly bought Bitcoins years ago but they have passed through a thousand places, maybe you mined them but you can't prove it and they have passed through mixers and crypto casinos (which also help to lose track) and you declare this year that you have X Bitcoins for a long time.

I still think that if you can't trace the steps you can face a problem especially depending on the amount. If we're talking about $1k, you're not going to get in trouble anywhere. At a bad one they will apply 0 purchase cost but they are not going to start a criminal investigation.

I say this because if you declare say $1M saying that you bought 20 bitcoin cheap 8 years ago, but the only thing you can justify are the last transaction that was made from a mixer to the current address or addresses a month ago, that the treasury of a country let you declare for the price you say and the date of purchase that you say without being able to justify it, what they are doing is opening the door to money laundering everywhere.

Any mobster who wants to launder drug or arms money, could buy Bitcoin, run it through a mixer or several, casinos etc. and say he bought it a long time ago for $200.

I don't think the US or any other country's treasury will tolerate this.

The best thing to do, no matter which country you are in, is to consult a specialized tax advisor.

[n0nce]

I say this because if you declare say $1M saying that you bought 20 bitcoin cheap 8 years ago, but the only thing you can justify are the last transaction that was made from a mixer to the current address or addresses a month ago, that the treasury of a country let you declare for the price you say and the date of purchase that you say without being able to justify it, what they are doing is opening the door to money laundering everywhere.

I agree, but I like to believe that they would accept a signature from an address that held 20BTC 8 years ago as proof that you acquired it 8 years ago, even if there is no trace to a current funded wallet.

The best thing to do, no matter which country you are in, is to consult a specialized tax advisor.

That's good advice, since we established in this thread that how it will be handled, varies heavily by country. I didn't expect it to be this vastly different depending where one lives, but it makes total sense. Also any of the info I gathered could easily be wrong / outdated in 1 or 2 years time as laws change all the times. Sigh.

[o_e_l_e_o]

It proves to be very tricky to hold apart various addresses e.g. when using one to order something to your home, all anonymous purchases linked to that address get deanonymized and stuff. Lightning makes it much easier.

Which is part of the reason why you should only ever use addresses once and be very careful about creating and consolidating change inputs, as I've discussed above.

Lightning can be better, but if you are not running your own Lightning node over Tor (which I would guess the majority of people are not doing), then you are either broadcasting your IP or you are revealing everything to your third party node provider.

Any mobster who wants to launder drug or arms money, could buy Bitcoin, run it through a mixer or several, casinos etc. and say he bought it a long time ago for $200.

Sure, but that is also a very ineffective way for a criminal to launder money due to taxation. If I buy 20 bitcoin at $50k each and sell them tomorrow at $50k each, I have realized no capitals gains and therefore owe no tax. If I claim that I mined my 20 bitcoin ten years ago, then I have now realized $1 million in capitals gains and owe whatever the tax rate set by jurisdiction, usually somewhere around 20%.

[LoyceV]

Sure, but that is also a very ineffective way for a criminal to launder money due to taxation. If I buy 20 bitcoin at $50k each and sell them tomorrow at $50k each, I have realized no capitals gains and therefore owe no tax. If I claim that I mined my 20 bitcoin ten years ago, then I have now realized $1 million in capitals gains and owe whatever the tax rate set by jurisdiction, usually somewhere around 20%.

As far as I understand money laundering, paying taxes isn't what they're concerned about. Let's say you've earned $206 million as a drug smuggler:

You'll be like this:

(source)

I'm pretty sure paying 20% on tax would be a very good deal to be able to legally spend $165 million.

[Easteregg69]

Would you apply for KYC at a company that has no office?

[n0nce]

you are revealing everything to your third party node provider.

How this? The node provider (like the Breez node that all little Breez app nodes connect to) can't look inside the payment and see the destination. They just see the next hop; it's like onion routing.

[o_e_l_e_o]

I'm pretty sure paying 20% on tax would be a very good deal to be able to legally spend $165 million.

My point was that if you are laundering money, you can do so at rates far below 20%.

How this? The node provider (like the Breez node that all little Breez app nodes connect to) can't look inside the payment and see the destination. They just see the next hop; it's like onion routing.

Because if I'm not running my own Lightning node, then I'm relying on someone else to open my channels, generate and broadcast my payments, generate invoices for any incoming payments, monitor and close my channels. An individual Lightning node in the route my payment takes might not be able to see the final destination, sure, but the person or service hosting my wallet for me will.

[n0nce]

How this? The node provider (like the Breez node that all little Breez app nodes connect to) can't look inside the payment and see the destination. They just see the next hop; it's like onion routing.

Because if I'm not running my own Lightning node, then I'm relying on someone else to open my channels, generate and broadcast my payments, generate invoices for any incoming payments, monitor and close my channels. An individual Lightning node in the route my payment takes might not be able to see the final destination, sure, but the person or service hosting my wallet for me will.

Oh, I'm sorry! We're talking about different things You're right, a custodial provider that generates your invoices and pays invoices for you etc., does know who you're doing business with. But I'm talking about the various non-custodial solutions like Breez and Phoenix.

[LoyceV]

Would you apply for KYC at a company that has no office?

That sounds like a scam, some anonymous exchangers have demanded KYC after a large deposit. They use the privacy risk to deter people from getting back their money.

I'm pretty sure paying 20% on tax would be a very good deal to be able to legally spend $165 million.

My point was that if you are laundering money, you can do so at rates far below 20%.

I searched a bit, and indeed that seems possible for small amounts, but not for large amounts. I don't think authorities will easily believe you though, if you claim you own $200 million in Bitcoin which came straight from a mixer.

I'm talking about the various non-custodial solutions like Breez and Phoenix.

How is that different? I'm using Phoenix Wallet, and as far as I know they know exactly when I funded my wallet, and which transactions I made. It has to be: I can use my 12 word mnemonic to restore my wallet, which means all the information comes from their server (note that I haven't actually tested this).

[n0nce]

I'm talking about the various non-custodial solutions like Breez and Phoenix.

How is that different? I'm using Phoenix Wallet, and as far as I know they know exactly when I funded my wallet, and which transactions I made. It has to be: I can use my 12 word mnemonic to restore my wallet, which means all the information comes from their server (note that I haven't actually tested this).

How can they know which transactions you do? You just send sats within your channel towards Phoenix, which then routes them to the next hop, which routes to the next hop, etc., all the way to the destination.
However if they're the only node between you and destination, then they know, that's true!

[LoyceV]

How can they know which transactions you do? You just send sats within your channel towards Phoenix, which then routes them to the next hop, which routes to the next hop, etc., all the way to the destination.

I didn't know this part:

Onion-style routing: payment routing information can be encrypted in a nested fashion so that intermediary nodes only know who they received a routable payment from and who to send it to next, preventing those intermediary nodes from knowing who the originator or destination is (provided the intermediaries didn't compare records).

Now I'm curious if Phoenix keeps track for the purpose of restoring my wallet from mnemonic. I'll test it when my kid is done with his tablet.

[n0nce]

How can they know which transactions you do? You just send sats within your channel towards Phoenix, which then routes them to the next hop, which routes to the next hop, etc., all the way to the destination.

I didn't know this part:

Onion-style routing: payment routing information can be encrypted in a nested fashion so that intermediary nodes only know who they received a routable payment from and who to send it to next, preventing those intermediary nodes from knowing who the originator or destination is (provided the intermediaries didn't compare records).

That's why I mentioned it a few times It's really great, but if you send a payment with just 2 hops and only have 1 routing node, your privacy will be compromised. However, I can imagine that you could e.g. specify that you want to use at least 2 hops if you know you have just 1 routing node.
Additionally, in Breez at least, you can manually create further channels with other routing nodes, so it won't always take the Breez node.

Now I'm curious if Phoenix keeps track for the purpose of restoring my wallet from mnemonic. I'll test it when my kid is done with his tablet.

You can't restore channel states from the mnemonic!
There is no real way to restore channels without backups (Breez does backups to cloud if you want). They will be force closed (force close) if nodes are offline for too long though, then through the HTLC, the funds will eventually land back into your on-chain wallet, that is recoverable through the mnemonics.

But right now, your Phoenix 'mnemonic wallet' will most probably be just empty.

[LoyceV]

Now I'm curious if Phoenix keeps track for the purpose of restoring my wallet from mnemonic.

You can't restore channel states from the mnemonic!

Result from my test: Phoenix restored my 4 channels from mnemonic. The LN transaction history is gone, but my LN-balance is correct.

There is no real way to restore channels without backups

So I guess Phoenix keeps a backup of the channels for me.

But right now, your Phoenix 'mnemonic wallet' will most probably be just empty.

Nope. This is exactly what I expected from the wallet, as a user this is very user friendly.

[n0nce]

Now I'm curious if Phoenix keeps track for the purpose of restoring my wallet from mnemonic.

You can't restore channel states from the mnemonic!

Result from my test: Phoenix restored my 4 channels from mnemonic. The LN transaction history is gone, but my LN-balance is correct.

There is no real way to restore channels without backups

So I guess Phoenix keeps a backup of the channels for me.

But right now, your Phoenix 'mnemonic wallet' will most probably be just empty.

Nope. This is exactly what I expected from the wallet, as a user this is very user friendly.

Ohh, you restored Phoenix with Phoenix. Since it's a LN wallet, and you restored it shortly after deleting it, it makes sense from a LN point of view that the channels still exist.
Instead, if you'd import the seed into Electrum or Bitcoin Core, there would be no funds

[Poker Player]

Sure, but that is also a very ineffective way for a criminal to launder money due to taxation. If I buy 20 bitcoin at $50k each and sell them tomorrow at $50k each, I have realized no capitals gains and therefore owe no tax. If I claim that I mined my 20 bitcoin ten years ago, then I have now realized $1 million in capitals gains and owe whatever the tax rate set by jurisdiction, usually somewhere around 20%.

Yes well, I gave that example, but the criminal could claim it was in 2017 at the peak or whenever suits him best for tax purposes.

I'm pretty sure paying 20% on tax would be a very good deal to be able to legally spend $165 million.

My point was that if you are laundering money, you can do so at rates far below 20%.

That is not clear to me. If you would just say "below", but when you say "far below" I would like to know what you are thinking of.

To launder money you would normally have to set up a company/business and declare more income than you actually have (if you have any income at all). Money laundering with Bitcoin in the mentioned case would definitely be much more comfortable, especially if we compare it with setting up a physical business, but even if we are talking about an online one you will have to set up a website, you will have to keep fictitious accounting, you will have to pass fake payments through the payment gateway etc.

Maybe you're thinking of buying winning lottery tickets, or something like that, but it's also difficult.

I searched a bit, and indeed that seems possible for small amounts, but not for large amounts. I don't think authorities will easily believe you though, if you claim you own $200 million in Bitcoin which came straight from a mixer.

That's what I've been repeating ad nauseam, in this and other threads.

I would like to see the face of the tax official if someone goes there to declare that he has $50M, saying that he bought it a long time ago and can not justify more than the movements of the last year (although nowadays the normal thing that the tax return comes to him by internet, but still, I would like to see his face).