Bitcoin: Tax Collector’s Dream?

Posted on 19.9.2014 by Jan Andrš

Bill Ready recently announced that eBay is experimenting with Bitcoin transactions. That’s awesome news for anybody who owns at least a small part of one Bitcoin. Another important piece of news is that the price of the new digital currency has remained almost unmoved, suggesting that the crazy days of ups and downs are gone, hopefully forever. Bitcoins are recognized more and more by the general public, and also more businesses are accepting digital payments every day. “It is not a currency until you can pay taxes with it,” argue many critics. The U.S. Internal Revenue Service ruled in March that Bitcoins are to be treated as property, not a currency. From the SVAT team’s point of view “the myth of anonymity” is more important. Even though theoretically anonymous, most Bitcoin transactions are searchable, and with some additional data almost every wallet owner can be unveiled. So is Bitcoin actually a tax collector’s dream? Imagine an eBay merchant. The IRS can check his wallet and see if there are any suspicious transactions. If there are, there is nothing easier than following them through the system and getting some additional information. In an earlier Forbes article, where writer Andy Greenberg purchased a gram of marijuana from the Bitcoin-based marketplace Silk Road, computer researcher Sarah Meiklejohn from the University of California explained that Bitcoin are actually far less anonymous than many people think: “Bitcoin users seeking privacy should be careful about revealing their addresses in public or using a subpoenable Bitcoin service like Coinbase that might connect their Bitcoin addresses and real names. If we had taken the extra consideration of shuffling our bitcoin expenditures through other addresses created with desktop-based wallet software, or gone to the further effort of sending them through a bitcoin “laundry service” such as Bitlaundry, Bitmix or Bitcoinlaundry, tracing them would have become much harder or even impossible.” And concludes: ”If you’re an amateur Bitcoin user and you don’t want to mess with complicated Bitcoin clients and just use an online service, your anonymity is quite a lot less than what you might imagine.” So, basically, since every Bitcoin transaction can be traced, it is hard to hide that you’ve done business with somebody and even long chains of transactions are relatively easily traced. But it is possible to avoid detection by simply using some place where a lot of transactions are happening and are purposefully mixed together. You can also use a desktop Bitcoin client to avoid detection. Then, you are almost undetectable, but it hardly will be a solution big companies will choose, because they would want to keep their credibility.