Debunking myths about cryptocurrencies: myth that cryptocurrencies are used for tax evasion
YEREVAN, May 19. /ARKA/. Some believe that digital assets make it difficult for tax authorities to detect attempts to conceal income. In reality, blockchain captures data on all transactions in a detailed and transparent way, and is therefore ill-suited for concealing financial activity.
Tax authorities track, fine, and hold accountable individuals and businesses that attempt to use cryptocurrencies to evade taxes. That said, Binance shared its view of the situation with the editorial team, noting that tax compliance is key to the mass acceptance and legitimization of the entire cryptocurrency and Web3 ecosystem.
Myth: cryptocurrency is used for tax evasion
The decentralized nature of cryptocurrencies implies that these assets are not controlled by a centralized entity such as the government or a bank. And while decentralization has its pluses like increased security, it has created the misconception that cryptocurrencies are used for tax evasion.
All cryptocurrency transactions are recorded in a public registry, but transactors remain relatively anonymous. Some believe it makes it difficult for tax authorities to detect attempts to hide income. This misconception has become so popular that in 2021 CNBC even ran an article titled "Cryptocurrencies Help Tax Evasion" in 2021.
Reality: blockchain stores detailed data about all transactions
The reality is quite different. Blockchain networks are publicly accessible and viewable digital registries of cryptocurrency transactions. Transaction records are transparent and immutable. And traditional financial services still have tax havens that are created with offshore bank accounts and complex corporate structures.
Anyone can view blockchain bases at any time with the Blockchain Explorer, an online tool that allows you to view every transaction, associated address, and other data ever made. A combination of computer science, economics and forensics (sometimes called "blockchain analytics") has resulted in an innovative investigative approach. It allows transactions to be traced back to specific public, pseudonymous blockchain addresses, and then links those addresses to the real identity of the user through their IP address and exchange account.
There is a common misconception that cryptocurrencies are mostly used for tax evasion. In reality, blockchain records all transactions in a detailed and transparent way, and therefore is not suitable for hiding financial activity from tax authorities.
Fighting tax evasion
The United States' Internal Revenue Service (IRS) has issued guidance on the taxation of cryptocurrencies and is taking action. Other countries are also beginning to regulate cryptocurrencies and prevent illegal activities using digital assets. The resources and capabilities of tax authorities may vary from country to country, but governments will be keeping a close eye on the onchain space in the coming years. Because transaction data in blockchain registries is kept intact, tax inspectors will be able to review this information and identify all illegal or unrecorded transactions over the years.
The Cybercrime Unit (CCU) at the IRS is a five-year-old division of the larger Criminal Investigation Unit (CI), which specializes in investigating cryptocurrency crimes related to unpaid taxes. In addition, CCU is a major client of Chainalysis, one of the most prominent blockchain analytics companies. Together, they track, fine and hold accountable those who try to use cryptocurrencies to evade taxes.
In addition, cryptocurrency exchanges are required to promote anti-money laundering (AML) and perform Know Your Customer (KYC) verification, collecting personal user data and reporting any suspicious activity to authorities. Reporting standards are also being developed and implemented internationally: for example, in August 2022, the OECD approved the Crypto Asset Reporting Framework (CARF), which mandates that tax information on transactions involving digital assets be provided in a standardized form. In other words, attempts to use cryptocurrency for tax evasion are very likely to be detected.
Why cryptocurrency taxes should be paid
The Binance team believes that paying taxes is not only required by law, but also helps the blockchain industry grow. Cryptocurrency revenue reports increase the legitimacy of the entire ecosystem, thereby attracting more users, investors, and companies to the field.
Tax compliance is key to the mass acceptance and legitimization of the entire cryptocurrency and Web3 ecosystem. The myth that cryptocurrency is used for tax evasion hinders the development of the industry, which is why it is so important that users comply with tax laws to eradicate these misconceptions.
Compliance with the law also has a positive impact on the cryptocurrency process, eliminating the need to worry about fines and lawsuits. Legitimacy provides stability, innovation, development, potentially more favorable government treatment and fair regulation of the crypto industry.
Fact: While some may try to use cryptocurrencies to evade taxes, blockchain actually makes it easier to track and catch financial criminals. -0-
