Tax Evasion: Bitcoin Better Than An Offshore Bank Account

Tax Evasion: Bitcoin Better Than An Offshore Bank Account
Bitcoin Better Than An Offshore Bank AccountBitjuice Editor’s Note: Today, on Bloomberg News’ “In The Loop,” University of Florida Assistant Law Professor Omri Marian said bitcoin could be a better tax dodge than an offshore bank account. He encouraged compliance of bitcoin enthusiasts to IRS tax guidance as a way of legitimizing and encouraging wider adoption by the public. Watch the video or read the transcript below. You can also read his Michigan Law Review article “Are Cryptocurrencies Super Tax Havens? “Q How do you use bitcoin as a tax haven? A. Bitcoin has all the necessary qualifications of a tax haven:1. Jurisdiction doesn’t impose taxes. “No one imposes taxes in cyberspace. “2. Maintains anonymity of tax payers, so you can use bitcoin to hide your profits from the IRS if you choose to do so. This is how you can evade taxes using bitcoins. Q So anyone who has a bitcoin is not paying taxes on their profits? A I believe most people prefer to comply with tax rules, or at least I hope so. But if you choose to do so [evade taxes], currently there is little the IRS can do to come after you. Q Is the IRS or are regulators doing anything about it? A The IRS is looking into it, they recently issued guidance that made it clear that bitcoin is subject to regular reporting requirements, like any other transaction. Whether taxpayers choose to comply with that is left to be seen. I suspect that most taxpayers will choose to comply, but I think it’s a great weapon in the hands of tax evaders. Q Right, anyone who wants to hide out clearly, because it’s such a nascent market right now. If you own bitcoin, do you even know how to have it taxed, are their accountants who even know how to calculate the taxes on this? A The IRS recently released guidance how current tax law applies to bitcoins, and I think the guidance addressed most of the issues. For example, bitcoin is treated as property rather than currency, which means that every time you dispose of it you have to account for gains and losses as a result of change in the exchange rate since the time you first purchased the bitcoin you disposed of. Yes, the rules are there, there are some issues left unresolved, but if taxpayers want to comply with tax rules, even if they use bitcoin, they can do so. It’s burdensome, but it’s possible. Q Whats the biggest unresolved issue? A What to do with taxpayers who choose not to comply. The interesting thing about bitcoin is that it is better than an offshore bank account. What governments have recently started to do inorder to fight offshore tax evasion is to shine lights on bank accounts by regulating the banks rather than the jurisdiction or the taxpayer. In the bitcoin world, there are no banks, it is a peer to peer exchange system, so it can work without banks, so basically the withholding and reporting agents, the banks, are taken out of the picture. This is why it is better, to a certain extent, than banks. Q Professor, of course we hope that most people would volunteer to pay their taxes. But are their any estimates of the number or percentage of bitcoin tax evaders? A Not yet, and frankly right now it’s not a big issue due to the estimated loss to the Treasure every year from offshore tax evasion is between USD $40 and $70 Billion. The entire bitcoin economy is a few billion dollars, so it’s hardly a major financial revenue issue now, but it might become a major issue as bitcoin becomes more widely adopted. Q If most decide to not pay taxes on their bitcoin earnings, could that undermine the credibility of bitcoin as a currency? A That is correct. In order to become a widely adopted payment system, it needs to have some legitimacy. I think that people who are enthusiastic about bitcoin should actually embrace some regulation, not a whole lot of regulation, but some minimal regulation in order to make it legit, to make it easily used by people who chose to comply with the law. If it’s just about anonymity, I don’t think it’s going to be widely adopted, because as a user of bitcoin, I want to make sure that someone enforces the other part of the obligations in bitcoin, that there’s transparency.