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No, Karen. Bitcoin Won't Protect You From the IRS

Written by Alex Koyfman
Posted January 21, 2021

Not a day goes by that I don't hear some variation of this: "Buy Bitcoin. The dollar is dead," or "Bitcoin is how we stop government overreach," or "Bitcoin is the key to free transactions," or, my absolute favorite, "Wanna tell the IRS to go screw itself? Buy Bitcoin."

These, along with their infinite variations, make up the tapestry of misconceptions, half-truths, and bold-faced lies that characterize the public's understanding of cryptocurrencies.

The reality, of course, is much more complicated.

In attempting to dispel some of the myths concerning this decade's most controversial and least understood technological trend, let's start by getting the biggest, and potentially most dangerous, lie out of the way.

Bitcoin will not save you from the IRS. No cryptocurrency will. Not yet. Not in their present form. Not in the present state of global economics.

Believing that cryptos will somehow shelter you from paying the taxman come April will lead to three possible outcomes (or a combination thereof):

  • 1. You will get billed by the IRS for whatever gains you realized when you sold your cryptos.
  • 2. You will get audited.
  • 3. You will get fined and/or charged with tax evasion (the IRS has a better than 90% prosecution rate).

Now that the cold water has been administered, let's address your first likely points of resistance.

No, I'm not kidding. No, I'm not working for the government. No, I have nothing against cryptos.

Buying Bitcoin Doesn't Make You Meyer Lansky

The IRS is the world's biggest, most powerful, most intrusive, best-funded, best-staffed collection agency.

As of this morning, the total market capitalization of all cryptos was $943 billion — with Bitcoin accounting for almost two-thirds of that figure.

The weekly trading volume of Bitcoin by Americans is currently around 4 million BTC — valued at around $140 billion at this morning's price.

If treated like any other appreciating asset, that's enough to generate billions in income tax revenue.

Knowing what you know about the IRS, does this sound like an opportunity that the world's scariest collection agency might pass up?

The answer is no, and the IRS isn't shy about admitting it either.

Click on the IRS's own FAQ and scroll to the second question. Here's a screenshot for convenience:

BTC

So while you were busy figuring out which mansion to buy with your recent Bitcoin winnings, the IRS seems to have already figured out how to extract its pound of flesh.

Bitcoin, you see, like every other crypto out there, is, in fact, an asset.

And as an asset, it will indeed be taxed. But how will this happen, you might ask? Aren't bitcoins stored on electronic ledgers and therefore totally separate from government scrutiny?

Well, yes, they are, until you do what every crypto investor will one day do: convert BTC to some other form of wealth.

Whether you're selling them for dollars, some other fiat currency, or objects, the IRS can and will detect that activity — provided the transaction satisfies some basic conditions.

As of today, those basic conditions come in the form of value thresholds. Most of us know that depositing $10,000 or more in your bank, regardless of origin, triggers an automatic notification to the IRS.

What many don't know is that transactions of $3,000 or more trigger the same notification — and not just from a bank, but from many vendors as well.

That means if you buy a car, a house, a piece of jewelry, your activity will become public knowledge whether you use dollars, BTC, gold dust, or unicorn teeth.

You Might Be Willing to Lie to the IRS... but What About the Other Guy?

Sadly, it's precisely these big-ticket transactions that make wealth worthwhile to most people.

And because most vendors want to be fined or prosecuted by the IRS even less than you do, your bitcoins, even if they're accepted by your local Ferrari dealership, will not go undetected by Uncle Sam.

In fact, these days, you can't even buy a car or a house with stacks of greenbacks. Most reputable vendors are too scared of being an unwitting party to money laundering to do true cash transactions.

As I already mentioned, bank deposits are thoroughly covered as well.

So you withdrew $10,000 to buy two bitcoins last year, and now you've cashed them out and are depositing $70,000 back into your account... guess what? Somebody's going to want to know where that extra $60,000 came from.

Your other choice is to leave those coins on your ledger, where they'll buy you absolutely nothing.

Or you can convert it all to gold using that shady private precious metals dealer you met in Calgary, but that just delays the inevitable until you choose to buy something with that gold.

Of course, with more and more businesses accepting cryptos as currency, you will find more luck with smaller ticket items.

Eventually, your groceries, your toys, your clothing, even your Amazon wish list will be purchasable using cryptos, and you will be tempted to use cryptos, which may have appreciated in value, to pay for these things.

The vendors accepting these payments, unless they want to risk their own dance with the auditors, will be reporting every single transaction on their financial statements. That means if you are audited, the IRS will have a paper trail leading right back to you, which it'll use to get a subpoena. Sooner or later, it'll figure how much you spent and where and, by deduction, how much you didn't report as income in your previous tax return.

It'll sue you for back taxes. It'll fine you. It'll press criminal charges. And with the likes of Kamala "Potassium Chloride" Harris in power now, it might even label you a digital terrorist just for the hell of it. Who knows?

So what can you do with Bitcoin then?

Want to Be a Real Bitcoin Millionaire? Look Abroad

Well, once you leave the jurisdiction of the IRS, the promise of cryptocurrencies does begin to approach reality.

Another quick search yields a list of nations where the most crypto transactions are taking place on a daily basis.

Russia, Venezuela, China, Kenya, South Africa, Nigeria, Colombia, and Vietnam.

Not exactly your top ten vacation destinations, right?

In these countries (though I'd be very careful about doing this in China), it might still be possible to buy a house or a car using Bitcoin and not have the government send you a certified letter — but how long that will last is anybody's guess.

So where does that leave us? What's the point of all this? Is this all just a big scam designed to separate naive investors from their cash?

Well, not exactly.

Cryptos are still an excellent way to execute transactions where neither party is interested in adhering to the law. Vendors that have no interest in operating a legal business will gladly sell you products on the dark web for bitcoins. You can get drugs, weapons, maybe even a kidney with your bitcoins provided that the seller is just as shady as you are.

You can, I'm happy to say, blow any amount of Bitcoin gains, right up to and including the billions of dollars, on illicit products.

That much is completely true, so reward yourself for all of your "holdings," enjoy those 8-balls and illegally harvested organs.

You've earned them.

But that invariably leads us to another question: Can cryptos be considered currency at all?

Back to Square One: What Is Bitcoin?

By the barest definition, yes, they can be. Cryptos have a market value, which people are readily willing to accept in exchange for goods, services, or other forms of currency. The main problem is volatility.

Bitcoin has more than doubled in value in the last month alone.

In the last three months, its tripled.

That's great if you're a speculator, but if you're just looking for a secure, readily accessible, infinitely fungible store of value, then it's nerve-racking.

Just imagine buying a house for 20 bitcoins only to watch BTC rise in value by 20% in the next four days.

Or, worse yet, the exact opposite...

With dollars, the value is the same tomorrow and next week as it is today and, to within a couple of percentage points, a year down the line.

That's not great for speculation and that's the point.

Another Tech Bubble?

Bitcoin took an 80% plunge from then-unprecedented peaks just three years ago.

BTC

Once it does correct, speculators will resume buying, and it will rise once more, perhaps reaching higher peaks still.

That's not the stuff of a currency. That sounds more like an investment.

Add to that the fact that almost all cryptocurrencies are based on functioning, sometimes even useful, underlying technologies, and the investment model grows even more valid.

When you buy Bitcoin (BTC), or Ethereum (ETH), you're buying a tiny chunk of the tech — not just a product, but a piece of a growing puzzle that usually has a finite limit of pieces.

When new digital currencies come out, they do so in processes called "ICOs" (initial coin offerings).

A powerful, tech-savvy government agency keeps a close watch over the introduction of new coins and punishes those who use thinly traded digital currencies to commit fraud.

The agency is the Securities and Exchange Commission, otherwise known as the SEC, the same crew that takes down billionaire scam artists and big-time Ponzi scheme perpetrators.

Sounding more and more like an investment.

Big Brother Hasn't Forgotten

Whether you choose to adopt the romantic, idealized image of the crypto or the realistic one, the fact is that governments have taken notice.

Earlier this month, the U.K.’s Financial Conduct Authority announced a ban on the sale of crypto derivatives to retail clients, claiming that: “Retail consumers can’t reliably assess the value and risks of derivatives like contracts for differences (CFDs), futures, options, and exchange-traded notes (ETNs) that reference certain cryptoassets.”

And in October of last year, John McAfee, the eccentric founder of the McAfee brand of antivirus software, was charged by the SEC for fraudulently promoting newly listed digital currencies.

mcafee

His alleged compensation: $23 million in digital assets.

Just earlier this week, another domino fell as Janet Yellen, Biden's likely choice for Treasury Secretary, weighed in with this ominous remark:

“I think many [cryptocurrencies] are used, at least in a transaction sense, mainly for illicit financing, and I think we really need to examine ways in which we can curtail their use and make sure that anti-money laundering doesn’t occur through those channels.”

The scamsters are in on it, members of the incoming administration are in on it... all while prices are stagnating around all-time highs. 

Really starting to sound like an investment now and not a good one either.

Coming to a Theater Near You: A Pretext

If and when another correction comes, it is likely that other governments — our own being a frontrunner — will take similar steps in an effort to curb the development of future bubbles in the market. Their reasoning will be the same reasoning consistently relied upon in the application of restrictive, oppressive measures by governments in the modern age: the benefit of the greater good.

This might curb crypto usage in the short term, but in the long term, it will only invigorate the efforts of computer scientists and geeks the world over to develop a global crypto economy.

Eventually, something like this will arise, but as long as nations with governments exist, do not expect Bitcoin or any digital currency to supplant government-backed dollars, or euros, or yuan.

And that's not just a practical matter of needing stability of value, it's a matter of perception too.

As long as crypto value is expressed in terms of a fiat currency, fiat currency will remain the global standard for transactions both large and small.

That's why even if you do choose to buy that house using bitcoins, it won't be for a set number of bitcoins... it will be for the Bitcoin equivalent of a set number of dollars.

A change in that basic paradigm would indeed signal a fundamental change in global economics. It might even be the start of a new kind of human society. When that revolution gets rolling, it will definitely get a lot of pushback from the establishment.

Governments might even collapse over this, which means the efforts to control crypto's evolution might get desperate.

For today, however, the biggest threat remains the IRS.

So if you cashed in any crypto gains in 2020, make sure to let your accountant know. Because whether you like it or not, if that deposit exceeded $10,000, the taxman already knows.

And when it comes to taking your big swing this year, maybe look somewhere besides cryptos for a while.

There are plenty of other opportunities out there with near-to-midterm gain potential, and none of them require typing your personal information into new and unfamiliar websites.

We'll be reporting on some of the best of these for 2021, so stay tuned.

Fortune favors the bold,

alex koyfman Signature

Alex Koyfman

His flagship service, Microcap Insider, provides market-beating insights into some of the fastest moving, highest profit-potential companies available for public trading on the U.S. and Canadian exchanges. With more than 5 years of track record to back it up, Microcap Insider is the choice for the growth-minded investor. Alex contributes his thoughts and insights regularly to Wealth Daily. To learn more about Alex, click here.

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