Proof of source of funds requirements and bitcoin privacy

[btc-freedom-money]

How do you handle situations where proof of source of funds (POSOF) is required if you have btc that have come out from one or more privacy tools. Later in this post I will mention privacy tools like Tornado Cash and Samourai Wallet among others, those are the kind of privacy tools I'm talking about.

If you use these privacy tools then it won't be possible to give POSOF afterwards. It doesn't matter if the btc was clean if you can't prove that it was yours. And even if you could POSOF then it means you lose your privacy and you negate the benefits of using the privacy tool in the first place.

I think what everyone reading this wants is to be able to use BTC as money. To be able to pay rent or mortgage or food or buy cars and so on. The only country in the world that has made great progress on that which I know of is El Salvador. There you can be free and use your BTC with privacy in the decentralized way it was meant to be. But how do you get residency in El Salvador? You have to show POSOF for the money you will support yourself with. That means you can't go to El Salvador if you have used a privacy tool. It's actually funny to think that maybe you have 100 BTC in your wallet but you can't give POSOF because maybe you used Tornado Cash before it was sanctioned and after that you used other mixers. Your money is clean but you can't prove it. You are guilty until proven innocent, the reverse of how it is supposed to be. Residency to El Salvador denied. So you could have 100 BTC but you will have to go get a job earning $5/hour for 5 years to get residency because you can't give POSOF.

So El Salvador is a great country if you are born there but for anyone else we can cross El Salvador out of the picture I guess. Where else can we go and live a normal life with bitcoin without POSOF requirement? I don't think there is any place but please tell me if there is.

I think everyone who loves crypto wants to leave EU because of crypto regulations becoming worse there. Canada is also a place everyone is fleeing from. Maybe USA is going to get better now but overall it seems latin america and especially el salvador is the place to go to for freedom. But is it possible when you can't POSOF because you used a privacy tool before?

I will also share some notes I've taken from research on this subject below and at the bottom are the sources.

AML and KYC, based on surveillance and the presumption of guilt shows from several independent studies that AML and KYC policies enable the authorities to recover less than 0.1% of criminal funds. AML efforts cost a hundred times these amounts, but more importantly, they take away our basic right to privacy. This suggests that sacrificing our right to privacy may not be justified by the results.

Few people dare to question the effectiveness of the current AML-KYC policies: no one wants to appear on the “criminal” side of the debate. However, this debate is worth having, for our societies appear to be spending an indecent amount of money and effort on something that just does not work as intended.

This reality is not simply frustrating; in a broader historical and political context, it reveals worrisome trends. The increasingly intrusive regulations have set up a framework allowing to efficiently filter people. This means that under the pretext of fighting terrorism, different groups can be cut off from the financial system. This includes politically exposed people, dissenting voices, homeless, non-conformists… or those involved in the crypto space.

Transferring crypto falls under the prerogative of FATF, and most countries tend to implement this organization’s recommendations sooner or later. These recommendations include the “travel rule”, which implies that the data about the funds must “travel” together with them. Currently, FATF recommends that any fiat transfer over $1000 must be accompanied by the information on the sender and the beneficiary.

The European Parliament adopted a new AML law package which increases the reporting requirements of crypto asset service providers (CASPs) when sending and receiving ‘anonymous’ payments between self-hosted wallets and custodial service providers, in addition to limits on cash transactions and the establishment of a ‘central watchdog’ agency, which will develop regulatory technical standards. Under the new laws, EU CASPs will need to perform customer due diligence on transactions originating from self-custodial wallets for transactions below 1000 EUR, and implement additional KYC measures for transactions above 1000 EUR. The laws further regulate the operation of no-KYC custodial software service providers and the use of privacy coins, effectively banning CASPs from offering privacy assets. Self-custodial software and hardware providers are exempt from the regulations.

By controlling our day-to-day transactions, any government, even the best-intentioned, could manipulate our lives and effectively “obliterate any views but their own”. That’s why we buy Bitcoin, and that’s why we want to do so without KYC.

Cybersecurity experts warn of the risks of cryptocurrency deanonymization tactics in relation to established fundamental rights, finding that future regulatory concepts may collide with fundamental rights such as the right to freedom of association, the right to privacy and the right to informational self-determination, the right to freedom of expression, and the right to freedom of information.

In August 2022, the US Treasury’s Office of Foreign Assets Control (OFAC) added Tornado Cash, a smart contract on the Ethereum blockchain, to its OFAC list. It made interacting with the smart contract illegal under US law. Anyone could send an amount of ETH to the smart contract, which—utilizing a cryptographic trick called zero-knowledge proofs—enabled them to withdraw that same amount from the smart contract, but to a different account. Here, too, there was no way to link the ETH going into Tornado Cash to the ETH going out, thus the smart contract essentially functioned as a “mixing” service.

Samourai Wallet was marketed as a privacy wallet, and its main privacy feature—Whirlpool—did fully depend on the Samourai server. Specifically, Samourai Wallet users could, coordinated through this central server, collaborate to make CoinJoin transactions. In groups of five, users would contribute an equal amount of bitcoin (for example 0.01 BTC) to a transaction, which sent back the same amount to each of them.

Just one day after the indictment of Samourai Wallet's developers, Sparrow Wallet, which had been compatible with Samourai Wallet’s Whirlpool, for example released a new version of its software that disabled this feature.

Bitcoin privacy wallet Wasabi Wallet, in March of 2022 decided to implement AML checks in their mixing software, and reject coins that were suspected to have been used for illicit activity, probably out of fear of all the attacks against crypto privacy tools and their developers. Wasabi Wallet soon after announced to discontinue its mixing service altogether.

Sources:
https://bitcoinmagazine.com/culture/kyc-bitcoin-and-the-failed-hopes-of-aml-policies-preserving-individual-freedom
https://bitcoinmagazine.com/legal/eu-parliament-adopts-aml-laws-regulating-bitcoin-based-on-questionable-assumptions
https://bitcoinmagazine.com/print/the-fight-for-bitcoin-privacy-has-truly-begun

[btc-freedom-money]

The problem with paying taxes for bitcoin capital gains if you have privacy.

AML and KYC laws are getting worse and worse and more enforced and enforced. The operation Choke point 2 is getting more chokey. DEFI is almost completely banned in EU.

If you use any kind of privacy tool for crypto such as mixer, coinjoin, tornado cash, zk network, whatever it is, it will lead to your bitcoin becoming useless because laws enforce anyone who you send the crypto to must do a KYC check on you and AML proof of source of funds. But because you used a privacy tool you will fail the proof of source of funds check. Then your bitcoin will either be returned to you or confiscated. The bitcoin is useless.

But you still have to pay taxes on this useless bitcoin? The bitcoin you can't do anything with, can't buy anything with? can't withdraw to fiat? You have to pay taxes on it or you will go to prison. Is that right?

This means you have to just go ahead and send all the bitcoin to an exchange and let them confiscate it. Now you have no more bitcoin, you are broke and all savings are gone and now you don't need to pay taxes because you have nothing.

Is this how the system works?

Also just in case someone will reply and say they have used a coinjoin but didn't get problems withdrawing to fiat. This only means you send a small amount of money or it means you don't have privacy because you don't know the basics of bitcoin. You probably use a light SPV wallet and use public nodes who track you and see your IP and all the addresses you have in your private key. Mixing your UTXO together and so on which you shouldn't. Bitcoin is very very trackable and there is much you need to do to get some privacy. You need to use whonix, bitcoin core full node and then your wallet need to use your own full node, not someone else full node. If you do everything right to get your privacy, and you send larger amount of money then you will have it all confiscated and become useless.

What is your solution to this problem? are you revolutionary and hodling uselss bitcoin which government want to confiscate from you? are you evading paying taxes on your useless bitcoin? Or are you using bitcoin without any privacy? you have 90% of all your wealth without privacy, easily tracked by everyone who wants to know? And then you only use coinjoin on small amounts of spending money? That is barely any privacy and not satoshis vision for bitcoin.

[zeuner]

As long as you did not more out of the mixer as you sent into it before, you might be able to prove (that part of) where the funds came from by providing the input and output transaction(s).

Of course, if everyone did this and these records would be collected centrally, this would at some point defeat the purpose of mixers.

[Saint-loup]

Are you sure administration ask you to explain precisely how you've acquired those specific Bitcoins? Because what happens if you've just bought them with other cryptocurrencies? After having asked you how and when you've bought your BTCs, they ask you how and when you've bought the cryptos you've used to buy your BTCs? So where does it end? If you're a crypto user since several years and you are using them regularly, you can't know or retrieve all the transaction paths of each satoshi you own, that's not possible it's like asking the historic of the banknotes and coins you've in your wallet IRL. You make transactions with your BTCs, you exchange them against other cryptos, you deposit them and withdraw them on platforms(exchanges, casinos, staking or lending services, liquidity pools...) etc.

[zasad@]

Buy a collection of NFTs on Ethereum or any L2 blockchain.
Then put that collection up for 100 times its value. Change your bitcoin to etherium on no KYC exchanger and buy your collection.
WOW, you are a successful NFT crypto trader. Declare your profits, pay your taxes

[btcinfo891]

Buy a collection of NFTs on Ethereum or any L2 blockchain.

Or create new NFT(s) from scratch.

[zasad@]

Buy a collection of NFTs on Ethereum or any L2 blockchain.

Or create new NFT(s) from scratch.

It doesn't make sense. It is better to find an analogue of cryptopunks or any other project from https://www.cryptoslam.io/.

Then the tax authorities will not be able to accuse you of having made an NFT token on your own.

And the fact that someone bought your 10 dollar token for 10000 dollars is a very common practice on the NFT token market

[btcinfo891]

Then the tax authorities will not be able to accuse you of having made an NFT token on your own.

Making your own NFT tokens is not illegal. Nor is selling a new token for $10,000 more suspicious than selling a $10 token for $10,000.

[zasad@]

Then the tax authorities will not be able to accuse you of having made an NFT token on your own.

Making your own NFT tokens is not illegal. Nor is selling a new token for $10,000 more suspicious than selling a $10 token for $10,000.

First of all, creating tokens and placing them on NFT trading platforms has a commission, and in most cases it is easier to buy someone else's token for $10 than to make your own tokens.

Selling new tokens is always suspicious, because your tokens will have nothing (ecosystem, project and so on). If you are a famous artist or designer, I agree with you, but in other cases I would use ready-made NFT projects.

[Soft Crem]

Then the tax authorities will not be able to accuse you of having made an NFT token on your own.

Making your own NFT tokens is not illegal. Nor is selling a new token for $10,000 more suspicious than selling a $10 token for $10,000.

First of all, creating tokens and placing them on NFT trading platforms has a commission, and in most cases it is easier to buy someone else's token for $10 than to make your own tokens.

Selling new tokens is always suspicious, because your tokens will have nothing (ecosystem, project and so on). If you are a famous artist or designer, I agree with you, but in other cases I would use ready-made NFT projects.

There are many rules to follow when selling tokens.  On the other hand, if you have your own resources, you can generate and use a NET token yourself by following the correct rules.  Again you can use someone else's NET token instead of using your own NET token.  Hope you use NET projects all the time.

[mindrust]

Isn’t it self explanatory? If they ask kyc amc posof or whatever the fuck they call it nowadays, you just don’t do business with them. I think it is still possible to spend crypto anonymously but the govs are taking them businesses one by one.

When/if all go down, we’ll have to do p2p purchases only. Just like how it was in 2012 and before.

Crypto won’t die but the businesses that take crypto without doing kyc checks will die certainly.

And what difference does it make if you choose to use crypto or credit card then? It won’t. That’s how the govs will try to “kill” crypto.

[btcinfo891]

First of all, creating tokens and placing them on NFT trading platforms has a commission, and in most cases it is easier to buy someone else's token for $10 than to make your own tokens.

For expensive token sales most of the associates costs are the platform fees. For OpenSea it is pretty much the sales fee which starts from 2.5%, regardless of whether it is a new token or an existing one. For an existing token there is also the gas fee, but it is negligible compared to the sales fee, especially if the token is placed on a cheap network.

Selling new tokens is always suspicious, because your tokens will have nothing (ecosystem, project and so on). If you are a famous artist or designer, I agree with you, but in other cases I would use ready-made NFT projects.

An existing NFT already has a market price which in this case should be low (e.g. $10). So there is a sudden jump in the price that will look suspicious. It would be even more suspicious if it is a cheap token that is mass-produced (and cheap tokens are mass-produced quite often), because in this case there is an established low market price for this token.

A new NFT on the other hand does not have a price, so there is no need to explain any big price change.

Then again, in most cases the government would just take the taxes and not bother to ask for too many questions. As long as it is money earned through legal means (not from drugs, arms traffic, or any other crimes) and the person just wants to pay the taxes and put the money in his bank account, it would probably be OK, regardless of the NFT type.

[Solosanz]

Buy a collection of NFTs on Ethereum or any L2 blockchain.
Then put that collection up for 100 times its value. Change your bitcoin to etherium on no KYC exchanger and buy your collection.
WOW, you are a successful NFT crypto trader. Declare your profits, pay your taxes

That's not enough, you have to read on other thread where EU are asking to provide the full name with someone you trade your coins, Binance changes terms of service

Using no KYC exchange is pretty sure illegal in EU.

Trade with yourself and declare it you bought from other people is obviously broke their regulations.

What is your solution to this problem? are you revolutionary and hodling uselss bitcoin which government want to confiscate from you? are you evading paying taxes on your useless bitcoin? Or are you using bitcoin without any privacy? you have 90% of all your wealth without privacy, easily tracked by everyone who wants to know? And then you only use coinjoin on small amounts of spending money? That is barely any privacy and not satoshis vision for bitcoin.

Sad to say, but I think people will choose to lost their privacy over their money.

The only way to protect privacy is by trade face to face, but I'm sure people are discouraged to do it because it's not secure.

[zasad@]

Buy a collection of NFTs on Ethereum or any L2 blockchain.
Then put that collection up for 100 times its value. Change your bitcoin to etherium on no KYC exchanger and buy your collection.
WOW, you are a successful NFT crypto trader. Declare your profits, pay your taxes

That's not enough, you have to read on other thread where EU are asking to provide the full name with someone you trade your coins, Binance changes terms of service

Using no KYC exchange is pretty sure illegal in EU.

Trade with yourself and declare it you bought from other people is obviously broke their regulations.

Trump and his wife's tokens are traded on centralised exchanges as well as decentralised exchanges without KYC. Laws are becoming more complex and it is difficult to find universal solutions for all countries, but in many countries this method is still relevant.

[drosx]

The only way to protect privacy is by trade face to face, but I'm sure people are discouraged to do it because it's not secure.

I said the same thing to myself; unless I'm mistaken, even if you trade face to face or OTC, there's no guarantee that the bitcoins you buy don't come from coinjoin or other tools. On the other hand, even in OTC, someone has to acquire them first, and I think that most of the bitcoins traded in recent years have come from CEX.

[zasad@]

The only way to protect privacy is by trade face to face, but I'm sure people are discouraged to do it because it's not secure.

I said the same thing to myself; unless I'm mistaken, even if you trade face to face or OTC, there's no guarantee that the bitcoins you buy don't come from coinjoin or other tools. On the other hand, even in OTC, someone has to acquire them first, and I think that most of the bitcoins traded in recent years have come from CEX.

Basically, if bitcoins are transferred from an exchange wallet, they are already legal. The exchange does a great job as a mixer If the bitcoins have an AML tag, they are first blocked on a third-party wallet and then transferred to the exchange's shared wallet. The exchange explains this by the complexity of storage on different wallets.

[drosx]

The only way to protect privacy is by trade face to face, but I'm sure people are discouraged to do it because it's not secure.

I said the same thing to myself; unless I'm mistaken, even if you trade face to face or OTC, there's no guarantee that the bitcoins you buy don't come from coinjoin or other tools. On the other hand, even in OTC, someone has to acquire them first, and I think that most of the bitcoins traded in recent years have come from CEX.

Basically, if bitcoins are transferred from an exchange wallet, they are already legal. The exchange does a great job as a mixer If the bitcoins have an AML tag, they are first blocked on a third-party wallet and then transferred to the exchange's shared wallet. The exchange explains this by the complexity of storage on different wallets.

Even it is legal, someone can trace you because it comes from CEX.
 I was speaking about privacy because zazad@ said "The only way to protect privacy is by trade face to face," . 

[zasad@]

The only way to protect privacy is by trade face to face, but I'm sure people are discouraged to do it because it's not secure.

I said the same thing to myself; unless I'm mistaken, even if you trade face to face or OTC, there's no guarantee that the bitcoins you buy don't come from coinjoin or other tools. On the other hand, even in OTC, someone has to acquire them first, and I think that most of the bitcoins traded in recent years have come from CEX.

Basically, if bitcoins are transferred from an exchange wallet, they are already legal. The exchange does a great job as a mixer If the bitcoins have an AML tag, they are first blocked on a third-party wallet and then transferred to the exchange's shared wallet. The exchange explains this by the complexity of storage on different wallets.

Even it is legal, someone can trace you because it comes from CEX.
 I was speaking about privacy because zazad@ said "The only way to protect privacy is by trade face to face," . 

We live in different countries. If you promise confidentiality of exchange in Russia, provided that the coins are not criminal, but then transfer the information to third parties, then you will have to be afraid of suspicious people near your home, shady noises, etc. for the rest of your life. In my country, no one likes people who do not keep agreements regarding finances.