Why the IRS Fears Bitcoin
nytimes.com
nytimes.com
In practice, this means that if you use coinbase, or any large web merchant, that merchant can link your identity to the wallet you use, and then to almost every other transaction you spend.
The bitcoin UTXO transaction graph adds in some anonymity, because it's hard to be sure which part of a transaction's output is going to the merchant, and which is coming back to the user in the form of change. However, in practice, forensics are quite good, and are certainly good enough for the government (if they hired any decent tech person) to figure out.
On the other hand, coins like Zcash and Monero are anonymous, and the IRS might have reason to actually fear those.
This is true and massive mistake on the reporters part.
However the overall concept of the article could be easily applied to coins such as Zcash and Monero that do have anonymous transaction methods.
In my comment [1] I argue that even then, these types of trades are not a concern for the IRS.
When reading articles like this I substitute "Bitcoin" for "Cryptocurrency" and it makes more sense. The public has just recently normalized Bitcoin and so that's what they write about. Give it a year or so and they'll catch on.
I get what you're saying, and I've been saying the same myself. Then again, maybe it is anonymous in the literal sense that transactions don't include your name. Without outside information, you can't look at a transaction, or a history of transactions, and tell to whom they belong.
PS: Never mind. I don't think I am making an important point.
Why would you do this? Why would anybody ever accept a private key in a transaction. Now the key is no longer private!
For tax purposes one of the key concepts in mining Bitcoin and trading Bitcoin is the use of a third party. If you have moved coin to a third party to execute a trade and the IRS audits you, it's up to you to prove that these addresses are owned by third parties.
So then you need to supply the entities individual or corporate name. If you're lying and cannot produce the identity of the exchanger, then you're going to be a world of trouble. Even if it's a decentralized exchange, you're going to need to show the transaction that execute the trade.
Even if you're doing these trades with shielded Zcash transactions (these are completely anonymous transactions) once you supply addresses A, B, C, etc... to the IRS (or the ATO in my case) and you get audited, you need to show who these third parties are.
Honestly, cryptocurrency is not an issue for the tax office, even cryptocurrency such as Zcash and Monero are not an issue.
The IRS budget is limited. If enough people try to flout the law, it could become burdensome. We may require a tweak to the Code making individuals who seem to go out of their way to make life for the IRS difficult liable for the investigation cost they foist upon the public (if it is found they evaded taxes).
No, just no.
This article is pure conjecture.
If the government has an opportunity to collect tax revenue, it will. Collecting tax on cryptocurrencies is theoretically straightforward: Require exchanges to report in the same way stock brokers do, or they're banned from operating in the US. As an investor, you get taxed on your realized capital gains / losses.
On top of that, for Bitcoin itself the scheme would be especially clear, if you don't make good use of mixers, since it'd be the same identifiable coin moving around.
Still, if someday we're running a large part of the economy on strongly-anonymous cryptocurrencies, we could always tax things we can track more easily. There are all sorts of options, and some, like carbon taxes, would be more beneficial anyway.
In any case, these types of transactions are extraneous to those tax authorities tax now, so I don't see tax revenue declining as a result of these going untaxed.
Any gains you can't prove are capital gains (or more specifically, are long-term capital gains, or collectibles gains) are treated as ordinary income.
Moreover, the government doesn't need to track your initial purchase price. You do. If you can't, you are treated as having paid $0 for the cryptos and are taxable on all gains.
Could you provide a source on this? It was my understanding that this was not the case. See https://www.reddit.com/r/CryptoCurrency/comments/7nzqky/2017...