Bitcoin and Tax Evasion: Bringing ‘Under the Table’ Income Online

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NEW YORK (InsideBitcoins) — While bureaucrats and venture capitalists are embracing the idea of a regulated, controlled Bitcoin industry where money laundering and other forms of financial crime can be limited, there is an undercurrent in the Bitcoin economy that wants no part of this so-called “mainstream adoption.” As more centralized Bitcoin services, such as Circle and Coinbase, continue to bring greater transparency to the blockchain, other projects, such as Zerocash and Dark Wallet, are working to preserve the original implications of Satoshi Nakamoto’s invention.

At its core, Bitcoin is about privacy and censorship-resistance, and it becomes difficult to enforce certain financial regulations and laws when you can’t track every online transaction. It’s possible that the cypherpunks were right when they predicted the idea that untraceable cash could lead to a society where taxation becomes nearly voluntary.

Why do people evade taxes?

In reality, you don’t need to be an anarchist to understand the benefits of tax evasion. When you don’t get caught, evading taxes allows one to enjoy the fruits of their labor without having to pay for public roads, education, national defense, and all of the other services currently provided by various governments around the world. Tax evaders don’t avoid paying taxes because they’re anarchists, they avoid paying taxes because they don’t want to give away money without much say in what they get in return.

This is similar to the case of Silk Road. Many Silk Road users were not anarchists who used Bitcoin and Tor for political reasons. They simply wanted to buy some pot off the Internet without having to deal with some sketchy dealer in their local town.

Tax evasion increases when income is not tracked

If you think that people pay their taxes because it’s the right thing to do, then you should take a look at the statistics related to tax evasion on cash income. In other words, how often do people pay taxes when they know there is a good chance that they could get away with their “criminal activity.”

Income on cash tips is supposed to be reported to the IRS. Of course, there’s no trace of actually receiving a tip when cash is used. Although many people are now using credit or debit cards to leave their tips for meals, drinks, or deliveries these days, the transactions we want to look at here are strictly cash based.

According to an IRS estimate from 1998, a time when the use of cash was much more prevalent in American society, more than 60% of all tips went unreported. In a 2013 study by economist Edgar Feige, he estimated that nannies, construction workers, waitresses, website developers, and other contract workers had underreported $2 trillion in taxes.

If you don’t believe the estimates, just think about a time when you, a friend, or a family member were being paid cash under the table for a job. How often was that income reported to the IRS? Now, what happens when these cash-based arrangements are brought to the Internet through the use of Bitcoin and various privacy-enhancing technologies?

Were the cypherpunks right?

In the near future, all someone will need to avoid taxation for the sale of goods or services is a Bitcoin wallet and an OpenBazaar node. Is it possible that, after all this time, the cypherpunks prophesying about crypto anarchy were right? It has been well-known that electronic cash would eventually cause problems for governments if a proper digital cash system were ever implemented. As Timothy C. May noted in The Cyphernomicon in 1994:

“Concerns will be raised about the anonymity aspects, the usefulness for evading taxes and reporting requirements, etc.”

The cypherpunks knew that this day would eventually come. There are already users of various darknet marketplaces undoubtedly using Bitcoin, Tor, and PGP to avoid taxation. The question now seems to be to what extent the cypherpunks were right about crypto anarchy. At the very least, it seems that technologies such as Bitcoin and OpenBazaar could eventually persuade governments to change their point of attack when it comes to the collection of taxes.

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