February 22, 2024

Cryptocurrency - a Publicly Available Way to Avoid Taxes

Loopholes in Lending Laws Allow Crypto Users to Dodgetaxes, andthe government does not have time to take appropriate action.


Wealthy families and trading companies first decideduse offshore banking in the 19th century in Europe. They were looking for a way to keep funds away from governments hunting for taxes after the Napoleonic Wars. Since then, this race has been downward. Over the past two centuries, state control has been gradually abolished and flexible financial laws have been issued that allow the rich to balance between legal avoidance of taxation and illegal tax evasion.

But in 2008, a blockchain appeared and offered thosethe same opportunities for ordinary people. Using cryptocurrency, anyone with a little technical knowledge can open a full-fledged analogue of an offshore account, albeit virtual.

The primary block is the first mined block onBitcoin blockchain - contains an ominous message: “The time of January 3, 2009, the Chancellor is on the verge (edge ​​of the abyss) for the second salvation of banks” (from the English “The Times 03 / Jan / 2009 Chancellor on brink of second bailout for banks”). This phrase has become a harbinger of an alternative to centralized banks. Some time later, Bitcoin really became a darknet currency, in any case, until the merchants realized that every transaction in the open blockchain is tied to a public address and cryptocurrency is even less suitable for illegal operations than ordinary portfolios with anonymous gangster money.

In 2014, competing friends appeared on the market.with other cryptocurrencies with improved privacy, including Monero and Verge. In 2016, Zcash was created. These blockchain-based cryptocurrencies were not only decentralized, but also invisible, they left no trace of transactions. Many considered these anonymous cryptocurrencies to be an antidote to capitalism with widespread surveillance, similar to what developed in China.

In this future development scenarios, suchplatforms like WeChat, or even Facebook, will be able to get direct access to your financial data, track your spending habits and use this information for marketing. People will be deprived of the privilege to pay for goods and services, and also removed from the platforms only for objectionable views.

However, set aside the grim future. Confidential cryptocurrencies now offer users instant benefits. Thanks to them, organizations can not unknowingly compromise customers by providing financial information to advertising companies, criminals or jealous former partners of customers.

Using cryptocurrency, anyone with a little technical knowledge can open a full-fledged analogue of an offshore account, albeit virtual.

"A lot of nonprofits accept donations in Zcash," says Zuko Wilcox-O'Hearn, an American specialistin the field of computer security, creator and CEO of Zcash.— One of the reasons is that donors often prefer to remain unknown.In addition, if companies want to use blockchain or cryptocurrency for business transactions, they preferIt is important for them not to disseminate information about transactions around the world from a legal and business point of view."

Confidential Cryptocurrencies May Becomethe main alternative to capitalism with widespread surveillance. They also allow you to hide funds for illegal purposes. Proponents of cryptocurrencies are increasingly learning about how to effectively hide funds in the event of a divorce, recovery from collectors and tax systems.

Boat crash

Judging by the crypto posts on Twitter at the end of 2017,it can be concluded that cryptocurrency fans love water sports. Monero founder Ricardo Spagni tweeted that he had lost all his cryptocurrency due to “terrible boat accidents”. From this tweet, a meme was born, which gained even more popularity when other famous personalities in the cryptosphere stated that they also lost their funds in similar dubious incidents.

Who will argue? It is very easy to lose complex codes from digital assets. According to the forensic science company Chainalysis, since the advent of the cryptocurrency, about 4 million bitcoins have been accidentally sent to the unknown. While “scammers” are still looking for ways to protect digital assets from theft and loss, governments are creating laws to help fight and prevent the use of cryptocurrencies for dishonest purposes. But in this rush, they miss a loophole that allows investors to completely legally evade taxes.

According to the U.S. Internal Revenue Service, transactionsbetween cryptocurrencies and buying / selling cryptocurrencies for cash should be taxed, which is an unpleasant expense for many traders and investors. The same taxes that apply to real estate, furniture and collectible coins are levied not only on scammers who are involved in long-term investments, but also on traders involved in short-term investments. They also have to pay tax every time they exchange a virtual asset for another.

In the bear market in 2018, when the price ofBitcoin fell by almost 80%, for many such expenses became too high, which provoked the growth of a new sphere of the cryptocurrency ecosystem: lending.

Instead of selling cryptocurrency andpay taxes, investors are collaborating with a rapidly growing number of cryptocurrency lenders. They transfer bitcoins or ether to them for safekeeping, use them as collateral to buy even more cryptocurrency or borrow cash. The idea is not new, but before this way of lending assets was available only to large companies. Regulators have untied the hands of cryptocurrency lenders, and now they give instant loans of as little as $ 500, thereby significantly lowering the barrier for borrowers.

Untouched Territories

It is not known how long this financial period will last.Wild West. The tax administration has not yet taken up cryptocurrency lending, and while regulators around the world are turning a blind eye to offshore accounts, confidential coins offer increasingly proactive approaches.

Cryptocurrency-friendly Japan, whichturned Bitcoin into legal tender in 2017, takes a tough position on this subject. Authorities are exerting pressure on exchanges to reduce the use of confidential cryptocurrencies and are actively pursuing dodgers who have not declared income in cryptocurrencies by 10 billion yen (more than $ 90 million) over the past few years.

In other parts of the world, regulatory authorities alsogather strength. In 2018, at a meeting of the Big Twenty, US Treasury Secretary Stephen Mnuchin announced the need to ban anonymous financial transactions and called on the largest economies in the world to work together to prevent the spread of confidential currencies, which could become a new “Swiss bank account”. Since then, the tax authorities have been working together against unlimited cryptocurrencies, and the five countries with the strongest economies in the world have joined forces and formed the J5 group to study this method of tax evasion.

But while regulators are trying to find a way outfrom this situation, technology will inevitably step forward. Today, authorities are moving to a new level of interaction with exchanges and forensic firms in order to more deeply explore the ecosystem of cryptocurrencies.

Proponents of cryptocurrencies are increasingly learning about how to effectively hide funds in the event of a divorce, recovery from collectors and tax systems.

Last year Coinbase, whichconsidered the first entry point for beginners in the field of cryptocurrencies, it has disclosed to the Tax Office information about 13,000 users who evade taxes. But even if you buy bitcoins on the exchange, you can "transfer" them through third-party services to eliminate the connection between the seller and the buyer, and then cash out in jurisdictions with weak anti-money laundering laws, or buy confidential cryptocurrency that is harder to track.

Dave Jevans, Detective CEOCipherTrace says it’s possible to track currencies with optional privacy, but with money with “built-in privacy properties” it’s “a lot harder.” Everyone who can crack the code and track such a currency has a huge reward. In a desperate search for a way out, the US Department of Homeland Security has published a preliminary tender for a technology that can track sensitive currencies like Monero and Zcash.

However, while the authorities eliminate some loopholes,many others appear. The next generation of confidential cryptocurrencies based on the Mimblewimble protocol, named after the language-binding spell from the Harry Potter series of books, already offers faster transactions, higher privacy and resilience to scalability issues that have slowed Bitcoin's development.

But the battle for privacy has just begun. Some, for example, John McAfee, a controversial security engineer, who has turned into an active supporter of cryptocurrencies, believe that the outcome of this battle is predetermined. In January, he announced that he had not been paying taxes for eight years, and published the following tweet from his yacht: “My cryptocurrency ambitions are just driving the Revenue Agency crazy. Confidential currencies will leave income taxes in the past. ”