TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, January 24, 2018

Why The IRS Fears Bitcoin

Bitcoin IRSNew York Times op-ed:  Why the I.R.S. Fears Bitcoin, by Richard Holden (New South Wales) & Anup Malani (Chicago):

The extraordinary rise in the value of Bitcoin and other cryptocurrencies has led many people to worry that this market is a giant bubble. Many, including the Federal Reserve chairwoman Janet Yellen and the billionaire investor Warren Buffett, have warned about a “Bitcoin bust” that could rival the dot-com crash of 2000 and wipe out speculators.

But the bigger concern about cryptocurrencies may be the damage they could do, in the long run, to government finances through lost tax revenue.

The core technology underlying cryptocurrencies, known as blockchain, is premised on anonymity: Transactions are public but linked only to an electronic address. This is a big part of what makes blockchain attractive.

But anonymity is also the main fuel for the underground economy, which is now conducted largely via cash. The underground economy is a significant source of lost tax revenue. The Internal Revenue Service estimates that it loses around $500 billion annually because of unreported wages alone. And the underground economy in the United States — estimated at 8.4 percent of output — is relatively small compared with those of other countries.

If cryptocurrencies were to replace cash as the preferred anonymous medium of exchange, they could significantly expand the underground economy because they are so much more convenient than cash. ...

The prospect of substantial government revenue losses is not just a problem for the United States government; it is also a problem for the cryptocurrencies themselves. For cryptocurrencies to survive long enough to be an effective means of performing everyday transactions, the cryptocurrency community will need to find a way to prevent tax evasion. This will involve a tricky balancing act, preserving anonymity while providing the I.R.S. with sufficient information to prevent tax evasion.

More generally, cracking down on tax evasion will require that the community learn to trust government. Since this goes against the very ethos of the cryptocurrency movement, it poses the most difficult — but no less necessary — challenge.

https://taxprof.typepad.com/taxprof_blog/2018/01/why-the-irs-fears-bitcoin.html

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Comments

Worry about a cryptocurrency bubble-seriously!.It pales in comparison the fake stock market that Bernanke and Yellen created by interest rate manipulation and of "printing" monopoly money.

Posted by: Larry | Jan 25, 2018 5:58:48 AM

@ Larry - Nailed it.

Posted by: Dale Spradling | Jan 26, 2018 4:26:51 AM

I suspect that the kinds of people who buy bitcoin are the same kinds of people who buy gold--ideologically extreme, anti-government, avid consumers of conspiracy theories.

They always end up getting ripped off by their ideological compatriots in affinity fraud, which is unfortunate.

Bitcoin is worthless. Unlike stocks or bonds or real estate, Bitcoin generates no cash flow, therefore under a DCF analysis, it literally has no value.

Gold has some value, but really only as a conductor that is slightly better than copper (and needed for a few applications) and as a raw material used in jewelry.

Stocks and real estate may be overvalued, but at least you can plausibly believe you'll get a decent real rate of return over the long run.

Posted by: Gold and Bitcoin | Jan 26, 2018 3:13:13 PM