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UC Law Professor Sees Bitcoin Becoming a Tax Haven for the Gig Economy

Last Updated March 4, 2021 4:49 PM
Lester Coleman
Last Updated March 4, 2021 4:49 PM

Tax evaders stunned by the Panama Papers leak are likely to see bitcoin as a tax haven, according to a California law professor reported. Bitcoin wallets have no physical presence, and they do not require expensive assistance to create and maintain.

Bitcoin is especially attractive to workers in the gig economy who exchange skills for money. So far there is no effective enforcement method for tracking bitcoin.

‘Super Tax Havens’

Omri Marian, a law professor at the University of California Irvine, notes that  even as governments have started to cooperate on nabbing tax cheats, bitcoin wallets could become “super tax havens.”

Bitcoin offers disenfranchised workers an easy alternative to traditional income reporting required for independent contractors and employees, Marian says. People who engage in secretive activities like completing homework assignments for students or selling drugs illegally are asking for payment in bitcoin. Such individuals use encrypted email networks like Tutanota.

No ‘Paper Trail’

A computer programmer who does computer science homework for college students says getting paid in bitcoin is an easy way to optimize one’s wealth. His customers tell him what they need, he delivers the service, and there is no paper trail created. The programmer says he could quit his regular job and do the homework full time.

Bitcoin could also enable wealthy speculators to conduct complex commercial transactions like gold swapping and tax-exempt stock trades involving buying agents serving as “straw men” by using local currencies to facilitate the exchanges.

Trace Mayer, a cryptocurrency advocate, estimated that if only 1% of funds sitting in offshore accounts transferred to bitcoin, its value would increase substantially.

Since the number of bitcoins is capped currently at 21 million, if billions of offshore dollars converted to bitcoin, the value of a single bitcoin could jump from $580 to close to $3 million.

Underreporting Can Draw Scrutiny

Some might view stockpiling bitcoins as a shrewd strategy, but underreporting income and living beyond one’s means can bring a tax audit, tax attorney Aaron Richter says. He says it would not be easy for big corporations to invest in bitcoin without drawing government scrutiny.

Richter says IRS treatment of bitcoin is not favorable if one is reporting it as income and paying income tax and payroll tax, which is required of persons receiving bitcoin in exchange for work.

The IRS regards bitcoin as a capital asset, which means it is subject to the same rules governing barter transactions and stock when exchanged for dollars. Someone being paid in bitcoin and reporting it as income could be taxed on $500 of income only to have the bitcoin received depreciate significantly before redeeming it.

Also read: IRS virtual currency guidance: bitcoin is treated as property for U.S. federal tax purposes

Black Market Traders Don’t Care

The IRS’s position is irrelevant for those who trade bitcoin on the black market. A personal trainer who accepts bitcoin as payment for pharmaceutical services and is influenced by objectivists Mike Mentzer and Ayn Rand says he thinks of bitcoin as a solution to illegal tender, or the so-called “paper money” economy.

The personal trainer said he doesn’t believe in the 16th Amendment that allows the federal government to tax all income from whatever source it comes from.

Featured image from Shutterstock.