Crypto Myths – Debunked! Part 3: The Myth of Crypto Being Used For Tax Evasion
In this edition of our Crypto Mythbuster series we continue our conversation on blockchain and crypto - in part three we learn about bitcoin and tax evasion. With blockchain still a relatively new technology, there are many misconceptions about crypto. This week we take a look at some of the common crypto FUD (fear, uncertainty, and doubt) fuelling narratives and continue to sort fact from fiction.
Binance is dedicated to improving the global understanding of blockchain and cryptocurrencies by making Web3 education accessible to all. Despite the excitement surrounding the subject, many people only have a superficial or non-existent understanding, which leads to many misconceptions and false beliefs.
Some of these beliefs can be harmless, but others can fuel fear and uncertainty, making people suspicious of digital assets for no good reason. Therefore, Binance is actively identifying and debunking the most common misconceptions to promote crypto literacy. While the crypto ecosystem is not flawless and requires critical thinking and research, it is essential to base your research on a sound understanding of the fundamentals rather than popular myths and common fallacies.
Myth: Crypto Is a Tool For Tax Evasion
The decentralized nature of crypto means that these assets can operate outside the control of a central authority, such as a government or a bank. While this feature provides benefits such as increased security, it also leads to the misconception that this creates a loophole for tax evaders.
Transactions made using cryptocurrencies are recorded on a public ledger, but the identities of the users remain (somewhat) anonymous. And so, the argument goes, this anonymity makes it difficult for tax authorities to track down individuals using crypto to hide their income or assets. In line with the myth, a 2021 article by CNBC even went so far as to run with the headline: “Cryptocurrency poses a significant risk of tax evasion.”
Reality: Blockchain Is The Ultimate Paper Trail
The reality, however, is very different. Blockchain networks are designed as publicly available, accessible, and viewable digital ledgers of cryptocurrency transactions. The transaction records are inherently transparent and immutable. Compare this with traditional financial services, where tax havens are easily established via offshore bank accounts and complex corporate structures.
Anyone at any time can examine the entire blockchain codebase using a block explorer, which is an online tool that enables you to see, among other data, all transactions ever made and their associated addresses. A new type of investigative discipline now sits at the intersection of computer science, economics, and forensics (sometimes referred to as “blockchain analytics”).
This emergent field makes it possible to trace financial activity across multiple transactions to specific public, pseudonymous blockchain addresses, and from there link those addresses to a user’s true identity through their IP address and exchange accounts, amongst other things.
It’s a persistent misconception that crypto is primarily used for tax evasion when, in fact, blockchain tech creates a detailed and transparent record of your transactions, making it one of the worst ways to hide financial activity from the government.
Cracking Down on Tax Evasion
In the US, the Internal Revenue Service (IRS) has issued guidance on the tax treatment of crypto and has stepped up its enforcement efforts. Similarly, other countries are also taking steps to regulate cryptocurrencies and prevent their use for illicit activities. Resources and enforcement capabilities of tax authorities globally vary significantly, but the coming years will certainly show a broad increase in on-chain auditing.
Since transactions are permanent in blockchain public ledgers, tax inspectors will have the ability to look backward for any unlawful or unreported transactions in previous years.
The IRS Cyber Crimes Unit (CCU) – a five-year-old division of its larger Criminal Investigation (CI) wing and the force behind the tax collector’s cryptocurrency crimes investigations – is a major client of one of the most prominent blockchain analytics firms in the world: Chainalysis. Together they are proactively tracing, fining, and prosecuting those that seek to use crypto to evade their tax obligations.
Furthermore, cryptocurrency exchanges are required to comply with anti-money laundering (AML) and know-your-customer (KYC) regulations, which require them to collect identifying information from users and report suspicious activity to the authorities. Specific crypto-reporting obligations are also being designed and implemented globally, such as the Crypto-Asset Reporting Framework (CARF), which provides for the reporting of tax information on digital asset transactions in a standardized manner, and was approved by the OECD in August 2022.
In short, you’re unlikely to use crypto for tax evasion without getting caught.
Why People Paying Their Crypto Taxes Is a Good Thing
At Binance, we think users complying with tax regulations is not only about following the law. It’s about helping the future success of the blockchain industry. People paying their crypto taxes increase the legitimacy of the entire ecosystem, which, in turn, attracts more users, investors, and businesses.
Compliance with tax laws is crucial for the mass adoption and overall legitimacy of the entire crypto and Web3 ecosystem. The false belief that crypto is a tool for tax evasion hinders the industry’s progress, and it’s important for more crypto users to comply with tax laws and regulations to change this perception.
Compliance also means a better overall experience with crypto, as non-compliance can lead to financial penalties and legal action. Legitimacy brings stability, innovation, growth, and potentially more favorable government policies and regulatory environments for the crypto industry.
Fact: While some people may attempt to use cryptocurrency for tax evasion, the truth is that blockchain technology actually makes it easier for authorities to track down and prosecute financial criminals. DM
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