Why Trading Crypto Currencies on Foreign Exchanges to Avoid Taxes is a Dumb Idea
By james seibel on ALTCOIN MAGAZINE
Do you live in a country that enforces the rule of law, such as the United States, Canada, or a member of the EU? Do you think you can avoid paying taxes on cryptocurrency trading and appreciation? Do you trade on centralized foreign exchanges such as Binance, or decentralized exchanges like Ether Delta?
News flash — you are likely in for a world of pain when the tax man gets you!
You might say, “James, you idiot! (smug face) I only connect with anonymous VPN, use a Proton Mail account for my email registration, and haven’t KYC’d in years! I bought into Eth at $2 and the greedy government bureaucrats will never touch my crypto riches!”
Before I begin my argument, let me first say that I have some experience dealing with the US government. I am the former CTO at Airfox, which conducted an ICO during the 2017 crypto boom and subsequently settled with the SEC and Massachusetts MSD, one of the first US ICO companies to do so.
While raising $15 million in an ICO during 2017 was an insane experience that I will never forget (positively), the months of dealing with government regulators and the consequences also provided me with an insane experience I will never forget (negatively). If possible, you don’t want to deal with government agents whose success is measured by the impact of press releases and the amount of dollars they take from you.
But this essay is not about the fairness of the government, regulators, or opinions about the ICO process. This essay is about why trading on foreign exchanges or Dexes to avoid the tax man is a dumbshit, stupid, idiotic idea.
And one last thing — there is nothing wrong with decentralized exchanges or foreign exchanges. If you trade on them, great! Binance has a good mission and decentralization is the whole point of crypto.
The problem is if you trade offshore to avoid the tax man. This is a super stupid, really dumb idea and if you think you will get away with it, you are making big mistake!
Philosophically speaking, I’m a low-tax kind of guy. You don’t want to pay taxes? Great! Join the club. Run for office. Change some minds. I don’t think every dollar collected in taxes is spent appropriately. It’s just, like, my opinion man! I like the private sector and dislike red tape. I don’t think we should live in an anarcho-capitalist dystopia where corporations become the government. But I do wish the government was a better steward of its financial resources and reduced the burden of taxation.
But realistically speaking, I pay my taxes, and so should you! You live in a society, the society has laws, you can disagree with those laws, but the laws exist. If you violate the law, you are an outlaw! And believe it or not, being an outlaw has consequences. Expensive ones!
Let’s put it this way — let’s say you made $100,000 on crypto. Woah — amazing money! In most countries this is life altering. In the US, the tax man wants $20–40k of your success. Seems like a lot, right? So you think, “Maybe I can avoid these taxes…”
Not so fast, Mr. Crypto — do you know what a tax lawyer costs? You will spend multiples of that $20k to avoid prison. In fact, you would spend every penny you have to avoid such a fate. Don’t think you’ll go to prison? The IRS will send you there if you knowingly and willingly committed tax evasion. Honest mistakes don’t become criminal — those are honest mistakes! However, hiding $100,000 of Bitcoin gains in sketchy Maltese crypto exchanges certainly shows a sophisticated knowledge of fraud! Professor Google can reveal all you need to know about tax fraud consequences.
Even without prison, the amount of money you’ll pay getting out of this mess will be many multiples of what you would have paid in taxes. Tax attorneys throughout the western world have been salivating over their potential revenues ever since Coinbase was forced to reveal their trader histories to the IRS. Crypto tax fraud is a real growth industry for enterprising attorneys!
Now, here’s the situation with government enforcers. They don’t catch everyone, and in fact, most get away with it. But government agents are dogged and have unlimited time and resources — and all it takes for you to lose is a single mistake. They also love headlines and press releases. In fact, that’s the #1 way they can get promotions! Nothing is better than great press. No one likes tax cheats! They are total scum in the eyes of law-abiding, tax paying society. Joe taxpayer thinks, “I pay my taxes, why does this Bitcoin asshole get to avoid them?”
Let me put a hypothetical out there. Your favorite foreign crypto exchange finally gets subpoenaed and some judge in Malta approves the release of their accounts. Or maybe some executive flies to the USA for a conference, gets arrested at the airport, and the company decides to provide the US government with their data so the executive gets released. Just look at how the executives of offshore online poker companies were handled when the US government decided to strike. All records of trades, deposits, withdrawals, and user email addresses are leaked. All government tax agencies in the world get access to these records.
“But James, the government bureaucrats are idiots! They can barely keep the roads paved let alone understand something as sophisticated and complex as crypto! (smug face)”
Ah, fellow crypto trader. You may be right about the roads. But remember what I said — the government is dogged and has unlimited resources. They don’t need crypto experts on staff. They use their unlimited resources to pay third-parties like Chainalysis to do the work for them!
Even worse is that the blockchain is a perfect, immutable record of transactions. This is an absolutely ideal situation for data scientists to analyze — nothing could be better! They can piece together your “elaborate” scheme of moving coins through Shapeshift, a spare wallet, and back into the exchange in a millisecond! All it takes is a single address that can be linked to you personally, in your entire history of crypto trading, to identify you and every trade you have ever made.
If you failed to turn on your “anonymous” VPN a single time, or if it dropped for a split second and your true IP was revealed, that will appear in the request as well. Whoops! Guess you are in a world of financial and psychological pain!
Like I said — all it takes is a single mistake.
If this essay resonated with you, I suggest you settle up with your tax agency, file amended returns, and pay back taxes.
Crypto is real and it’s here to stay. So is the government and its taxes. Paying them is the right thing to do, and the penalties for being caught avoiding them, at least in the US, are severe. The decision is yours, but I recommend you do the right thing. Good luck!
