Bitcoin: Why Does Our Government even care?
Bitcoin. It is a word that has been thrown around all over the news the past month, but what is it and why does our government care so much? Bitcoin is a type of digital currency that uses encryption techniques in order to regulate generation of the units of currency as well as to verify the transfer of funds. The key feature of the cryptocurrencies such as Bitcoin is the anonymity that they offer. This is exactly what attracted many early users of Bitcoin. It was a way to make transactions (often illegal in nature) anonymously. Before cryptocurrencies such as Bitcoin and Tor, this was simply not possible. The same feature that attracts many of Bitcoin owners, anonymity, is attracting the attention of the US government.
One of the biggest concerns of the US government, as well as international governments, regarding cryptocurrencies in the news recently is tax evasion. According to TheStreet a government file records that only 1,000 US citizens have reported cryptocurrency holdings on their taxes. Cryptocurrencies have essentially been a part of the underground economy, which accounts for about 8.4 percent of output according to the NewYorkTimes. Bitcoin owners have made considerable profits in recent years as Bitcoin's value has soured leading to the I.R.S. taking notice and discussing how to regulate it.
The biggest challenge the I.R.S. faces regarding regulating cryptocurrency is the anonymity, which led to a court case that ultimately forced Coinbase, a popular Bitcoin exchange, to reveal the identity of more than 14,000 accounts. But this didn't win the war, just one battle. Blockchain technologies, the technologies behind cryptocurrencies, make it very easy to misrepresent profits when filing taxes. The New York Times provides an excellent explanation of just one way cryptocurrency profits could be misrepresented when filing taxes. Suppose you own three electronic addresses A, B, and C. You would only inform the I.R.S. that you own A, but not B and C. Then you could buy Bitcoin worth $1000, for example, and store it in electronic address A. When the price goes up to say $1100 you can trade it to B and then to C. Now you would leave it at C until the price increases to say $2000. Then at that point you would trade it back to A. Then when you have to file taxes you tell the I.R.S. that you made a profit of $100 off your $1000 investment and sold it to an anonymous person at electronic address B. Then you bought $2000 worth of Bitcoin from an anonymous person at electronic address C. The I.R.S. would be unable to prove that electronic A, B, and C are dependent and colluding with each other. In this example, the person only pays taxes on $100 in profit when in reality he made $900 in profit.
This alone makes the I.R.S. fear cryptocurrency. The future of cryptocurrency's relationship with the US government will most likely be largely shaped in 2018 as it becomes more and more well known.
This is a very interesting post on the background of Bitcoin in terms of cryptocurrency. This blog post actually helped me a lot with understanding the word Bitcoin on a much deeper level. On twitter and other platforms of social media, I have always heard about the word Bitcoin but never really knew what exactly it was or why it was such a big deal. I would also see so many different memes about Bitcoin, but never quite fully understood the jokes. But after reading this post, I have a lot better understanding of the idea of Bitcoin now, which is super helpful due to the real relevance and popularity of Bitcoin at the moment.
ReplyDeleteI appreciate that you simplified this entire situation for me. The idea of Bitcoin has always been sort of an enigma to me. All I knew if you have it, you've got a lot of money on your hands. I actually find it slightly amusing that the IRS fears Bitcoin. I say this because I think that people who are exploiting tax evasion not only enjoy the extra money, but also enjoy frustrating the federal government. I'm interested to see what you discuss in the future.
ReplyDeleteFor months now I have heard about Bitcoin in the media and my cousin even debated about investing in it. I on the other hand had no clue what Bitcoin was and no matter how many people tried to explain it to me I still didn't get it. After reading this post, I have a little bit of a better understanding as to how people can utilize Bitcoin (and potentially other cryptocurrencies) to their advantage with regards to taxes, which who knows how that's going to effect our economy and everything else in the long run.
ReplyDeleteKevin, I like this point a lot. I have read about bit coin before but I did not know anything about its implications for tax evasion--thank you. Is there any information about how many people are predicted to have bit coin holdings or any way to know the extent of the tax evasion through bit coin? I wonder whether some of it is due to there not being an easy way to report it.
ReplyDeleteYou really made it a lot easier to undersrand how bitcoin works and what it is used for. I never really understood what the hype was all about, all I knew was that it got very popular very fast. I asked someone to explain it to me once and they just said it was a type of online currency. But I had no idea of the type of problems it could create regarding tax evasion and other issues with the IRS.
ReplyDeleteI really appreciate this blog, because I have been hearing a lot about bitcoin and I had really no idea what it was. I can definitely see why the government is skeptical about this new currency since it is so hard to regulate and tax. I can't help but wonder if this will be a short lived phenomenon or if it will actually stick and become even more popular.
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