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Today, states can follow money trails and transaction histories, usually involving checking bank accounts. As as I understand, It's impossible for anyone else to read your Bitcoin transactions and current balance without your consent.

In a Bitcoin world, how can a state monitor bank account when it's impossible to check their transactions?

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    How does it do this where cash is used? – Stephen Gornick Apr 5 '13 at 11:54
  • It fails (usually), but at least they can track cash retrievals. – Martin Wickman Apr 5 '13 at 12:16
  • Banks are regulated by the governments and they have to comply with certain regulations that help track criminals. If it weren't for the government the banks would give a damn as long as they got their "transaction fee" - Governments are mostly conservative or aggressive - there is no cyber government yet. If you offered any head of state a Bitcoin they would respond: "What flavour is it.. its one of those chocolate ones, right?" Our governments suck with cyberspace. We get spammed, hacked, stolen identities, bullied, black mailed - and no body can do anything about it. Police? Buhahahahahah – Piotr Kula Apr 5 '13 at 12:28
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    Theoretically, a purely bitcoin-based economy would be as difficult to tax as a purely cash-based. So, hopefully, governments will take a Georgian view and tax only over land value to encourage users to use it and never let it idle... – Joe Pineda May 27 '13 at 17:14
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What prevents Bitcoins for being used by criminals to avoid taxation?

nothing. thats the price of anonymity: it can be used for good and for bad.

In a Bitcoin world, how can a state tax its citizens when it's impossible to check their transactions?

in a hypothetical purely bitcoin world, the state would have to find different ways of funding itself, if it existed at all.

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    Can you imagine the day your payslip is in BTC? :) Doesn't change the fact that you still would have to pay income tax and social welfare(if social welfare exists in your country) – Piotr Kula Apr 5 '13 at 12:22
  • I don't think the government will accept BTC as a legal thing, because it can't be legally defined since it's consensus-based anyway – Karel Bílek Apr 5 '13 at 16:24
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As is, the US has a voluntary income tax. You fill out forms, determine how much you owe, and pay it. If the government suspects that you're wrong, you get audited. So with bitcoins, it would be the same. You would determine your income and pay Uncle Sam his due. But you have to pay in USD, not BTC.

Cash transactions and bartering income already have to deal with this, but with bitcoins the scale would grow.

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    Agreed, in the current state Bitcoins are bartered for, and the US requests that we declare the assets we own. However, voluntary doesn't mean optional, there are penalties for assets that aren't declared etc. – random65537 Apr 5 '13 at 17:52
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  • Nothing prevents criminals from dumping their money into bitcoins, doing a few transactions, and pulling it back out as "clean".

  • Though, I guess if the gov't was smart enough, they would watch the criminals. Wait for them to transact with a major exchange (might have the exchange have to tell the gov't about large transactions) then see they are trying to dump this money into btc and stop the exchange from completing the request. Either by arresting the criminal or shutting down the exchange. But that is a whole lot of work just to catch a single criminal. It would only be worth it if millions were trying to be laundered. If so, as a criminal, you would split that up to try and not get caught, or fly under the radar.

This is a stretch.

But if the government really wanted to gain control over bitcoin and the economy they would have to do it like everyone else and gain 51% control over the network. With their wealth and power it might be easy for them to do, but at the cost of millions of dollars not going elsewhere in the state/nation.

And still with 51% control they cannot do much. They can only fork the blockchain(+ something more I am not sure of). But once that happens everyone will get wise and just not listen to them when they try to declare a block.

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    :P gee thanks, either way all of stuff is redundant now and adding nothing, so i will remove it – RhysW Apr 5 '13 at 17:10
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Exactly the same that prevents paper money to be used to avoid taxation.

Paper money can theoretically be traced, since they have numbers. In practice, it's almost impossible. The only instrument the state have is to force sellers to report each transaction, for example using fiscal machines. Then, the anonymous controllers can control, if sellers are giving receipts.

Still, in many countries, small shops and services are operating mostly in black market (South Italy, for example).

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