FTA: Taxation: How do governments collect taxes on transactions in Bitcoin? The answer is they don't, and they can't.
Though many Bitcoin fans don't quite realize it, Bitcoin's radical transparency could in fact be a tax-collector's wet dream. Every public-key, balance, and transaction is public.
A government that wants to coopt and efficiently tax Bitcoin could announce the following policy, based on the idea of 'tainted' or 'clean' balances:
"You can make your Bitcoin legal inside our jurisdiction by registering your public keys. (No, we don't need your private keys.) All transactions between registered keys are great, just make sure they match up with your tax filings, because we can see the endpoints.
"You should not receive money to your registered address(es) from an unregistered address. If you do, you can file a disclosure with 30 days, identifying the origin and nature of the transaction, paying all applicable taxes, and then the balance is yours to keep."
"If you do not, the entire amount that's mixed with the unregistered-origin balance is subject to forfeit. Your registered keys with any such balance will be blacklisted, making your previously-registered balances unspendable until you come back into compliance."
Any above-ground business would then stick with clean balances. Both clean and tainted coins could circulate in the same blockchain, but rarely mix... and would have different de facto values. (Would a clean or dirty satoshi be worth more? I'm not sure!) Trying to buy above-ground things with dirty money would face the same 'laundering challenge' as today: making it look like legitimate income via front operations.
Except, the blockchain would be a perfect record of earlier related transactions. That means big-data traffic analysis, and occasional meatspace busts discovering the identities of unregistered keys, would create a very strong map of unsanctioned economic activity -- much better than is possible with physical cash.
It's even more simple than that: There's nothing about paper money that enables tax collection either. And yet somehow, taxes continue to exist.
Bitcoin is only a currency, not an entire financial system. It is a replacement for pieces of paper or shiny metal with doodles of George Washington stamped on them. It is not a replacement for banks, or credit cards, most other ephemera that people have constructed on top of currency. In point of fact, people are having to re-invent financial institutions in order to make Bitcoin more useful. And it's those institutions, not the underlying currency, where government attaches taxation.
It may become more feasible in the Bitcoin era to run a financial institution that plays entirely outside the US's jurisdiction. Nonetheless, there would be a large market for legitimized (and taxed) financial institutions, to provide services to the large number of entities that the government would take a hard look at anyways. My gut is that two parallel economies is an unstable situation, and the shadow-economy would not receive must traction compared to the legitimized one.
> My gut is that two parallel economies is an unstable situation
Parallel economies are not only inevitable, they can be long-term stable whenever you can't deal in some (desirable) goods in the legitimate economy. Black markets are very difficult to root out and always have been.
> the shadow-economy would not receive must traction compared to the legitimized one.
Depends on how essential the black market is to getting what people view as the essentials of life. In middle-class First World countries, it's pretty marginal, because most salarymen don't really want heroin that badly. In the 1970s Soviet Union, if you didn't trade on the black market you simply could not get certain goods Americans would regard as utterly mundane, such as bananas. The USSR had a horrible time with black markets and goods disappearing from store shelves and being hoarded in peoples' apartments.
This would, of course, lead to any individual, or entity, simply keeping 2 sets of keys. One legit, taxed, & one gray/untracked. That way, they could play either the clean or dirty markets.
But, they still couldn't launder, or cross between dirty & clean easily. They'd still need a collaborative cleaner in between... Such cleaners are easily built in the model you mention. (Out of country, with hands in both clean/dirty channels.)
They'd still need a collaborative cleaner in between... Such cleaners are easily built in the model you mention. (Out of country, with hands in both clean/dirty channels.)
Not really, the government could just say any out of country transfer needs to be done through a registered service. So if your aunt wants to give you money, has to go through "Bit Western Union" or whatever.
Shame, because then its destroying almost free transfers as well. Essentially nothing is gained, but the government can easily track everything.
Bitcoin is not, practically speaking, going to replace the dollar or euro. This ambition projected onto it by anarchist promoters and alarmist detractors does not have a practical base. Instead, it is competing to be the floating alternative currency of choice. The question of a state taxing on the basis of Bitcoin is thus mis-placed.
The best case for Bitcoin would be inheriting the transactional characteristics of cash, i.e. facilitating transactions that one wishes to keep anonymous (or at least pseudonymous), and asset characteristics of gold, i.e. a fixed supply store of value. It competes solidly as a lightweight and comparatively secure alternative to both.
>The best case for Bitcoin would be inheriting the transactional characteristics of cash, i.e. facilitating transactions that one wishes to keep anonymous (or at least pseudonymous), and asset characteristics of gold
It definitely already has the first, but whether its volatility reduces to a level comparable with national currencies remains to be seen.
Even if it never achieves relative price stability, it could still make a good global money transmission system. People will continue to save in national currencies, and just convert to BTC to send money overseas, or use buy other currencies with lower fees, or buy stuff from global BTC merchant sites.
Your client/wallet detects it and offers a pop-up with registration or forfeiture options. Up to a certain amount (per person, per year) you can probably just pay a small excise tax (less than 100% forfeiture) to 'clean' it. Larger amounts without explanation would mean a visit from the taxman or Justice Department, however.
Genuine question, what happens then? And would the IRS necessarily see these regular deposits as inherently dirty, or merely unknown? If I were to make structured payments over a long period of time, low enough that they were unnoticed each time, how much pleading of ignorance would it take before the IRS decided that the person really did not intend for that to happen?
And could not someone disposit dirty money into their own account and plead the same? Even if you have to forfiet the money (if you haven't already accidentally spent it...) simply holding on to money temporarily can be avantageous.
>And would the IRS necessarily see these regular deposits as inherently dirty, or merely unknown?
Well, the logical thing is that would be perceive those as potentially dirty and have an inquiry. They might act legally as thinking they are "merely unknown", but they would be suspect of them nonetheless.
>If I were to make structured payments over a long period of time, low enough that they were unnoticed each time, how much pleading of ignorance would it take before the IRS decided that the person really did not intend for that to happen?
Well, if that was the case, why didn't the person protest the sudden influx of money over that "long period of time"?
That law would fail because there's no way to prove the transaction didn't come from someone who wants to cause trouble for the registered person but whom the person doesn't actually know. Suppose you are angry at a merchant who takes bitcoin:
If it's money they're not expecting, no problem: they just declare and forfeit it to the tax authorities, like a bag of cocaine-drenched cash that was found in their store.
If it's money given to them in payment for goods/services, they reject it as non-legal tender. "I'm sorry, sir, we can't take that form of payment, do you have another?"
Wouldn't this open up the possibility of a DDoS-type attack performed by having millions of transactions of 1 satoshi (0.00000001 BTC) in dirty coins flung at the merchant by someone's botnet? It would force the merchant to reject each one at a computational cost, whether by giving the money back or by transferring it to the government.
Interesting problem, but I don't think it will actually be that big of an issue. The merchant could generate a new wallet for every customer, and simply "dump" any wallet under attack by said customer.
This must be why hackers never write these kind of polemics. If they take such a strong position on something like this, they end up seeing other perspectives which falsifies that position. They would have to tack on a "...Maybe" at the end of their title, rework their premise or otherwise end up sabotaging their article's readership.
public keys are only available after you make a transaction and usually the bitcoin clients create a new address for each new transaction such that the public key for the account which actually holds the coins is never revealed.
The constant generation of new balnace-holding addresses on demand, that are not typically shown to the user unless they dig, is an arbitrary choice of the Bitcoin-QT software, not a requirement of the protocol. In the protocol/blockchain, you can see every public key that has ever received any balance. You can have all your 'change' returned to a small set of pregenerated/registered addresses.
So the government just says, "Here, use one of these 12 wallet programs, they are certified as automatically compliant by the IRS. Using other software makes compliance your own headache."
again, that's not true.
Only addresses from which transfer have been made from have their public key revealed in the blockchain, until then, there is no need for it.
Though many Bitcoin fans don't quite realize it, Bitcoin's radical transparency could in fact be a tax-collector's wet dream. Every public-key, balance, and transaction is public.
A government that wants to coopt and efficiently tax Bitcoin could announce the following policy, based on the idea of 'tainted' or 'clean' balances:
"You can make your Bitcoin legal inside our jurisdiction by registering your public keys. (No, we don't need your private keys.) All transactions between registered keys are great, just make sure they match up with your tax filings, because we can see the endpoints.
"You should not receive money to your registered address(es) from an unregistered address. If you do, you can file a disclosure with 30 days, identifying the origin and nature of the transaction, paying all applicable taxes, and then the balance is yours to keep."
"If you do not, the entire amount that's mixed with the unregistered-origin balance is subject to forfeit. Your registered keys with any such balance will be blacklisted, making your previously-registered balances unspendable until you come back into compliance."
Any above-ground business would then stick with clean balances. Both clean and tainted coins could circulate in the same blockchain, but rarely mix... and would have different de facto values. (Would a clean or dirty satoshi be worth more? I'm not sure!) Trying to buy above-ground things with dirty money would face the same 'laundering challenge' as today: making it look like legitimate income via front operations.
Except, the blockchain would be a perfect record of earlier related transactions. That means big-data traffic analysis, and occasional meatspace busts discovering the identities of unregistered keys, would create a very strong map of unsanctioned economic activity -- much better than is possible with physical cash.