Cameron Keng at Forbes breaks it down:
I agree that Bitcoin is effectively pseudonymous and potentially anonymous. But, it’s important to understand the difference between “anonymous” and “tax fraud.” Knowingly or intentionally refusing to report or pay taxes on income earned is by definition – tax fraud. Whether you’re likely to be caught is an entirely other argument. Mixing the two is a mistake that we shouldn’t make. Tax fraud is a crime that occurs the moment a taxpayer commits a crime with “intent.”
The second argument begins when we concede that we’re engaging in tax fraud. Assuming we’re committing an intentional crime, the question comes down to what is the likelihood of getting “caught.” We’re basically gambling or playing the odds that we’re not going to be that unlucky person that the IRS calls.
Many people believe that if the IRS “doesn’t know who owns the bitcoin” and their wealth is “entirely in bitcoin,” then the IRS can’t touch them (people are arguing that the IRS can’t levying bank accounts and garnishing wages because the IRS doesn’t know who owns the bitcoins). I’d like to dispel this myth. The problem with this argument is that it is short-sighted and factually incorrect. First, it only focuses on whether the IRS is able to “track” and tax the income when it is earned. The IRS is not required to audit an individual or business solely on whether they know that you’ve “earned income.” If your spending outpaces your income, then the IRS is going to audit you. This is an age where we’re able to create a “social currency” out of electrons, it’s safe to assume that the government has the technology to track spending in a meaningful way.
To prove this point, most people don’t know that the IRS requires informational reporting by credit card agencies and payment processors through 1099s. Property is recorded publically through titles that is tracked. The IRS is hiring talented engineering, economics and mathematical talent faster than they’re hiring tax accountants and tax attorneys for the sole purpose to create the infrastructure and algorithms that are able to improve their DIF system. The DIF System or Discriminant Function is the process that the IRS uses to pinpoint tax audit targets. Technology is a double-edged sword that cuts both ways.
Also, as a seasoned tax professional I’d only need to glance at bank statements, credit card statements or an asset ledger to discover whether there is tax fraud. Unless you’re willing to live like an ascetic monk devoid of all worldly pleasures, then the IRS is going to discover that you’re lying. Once the IRS learns of the tax fraud, then they’re capable of seizing all of your assets for a fire-sale to collect on the tax due or they’ll simply put you in jail for upwards of 10 years. I don’t think any amount of money is going to be able to compensate me for a year in incarceration, let alone a decade.
As an example, Bob owns a million bitcoins and is a billionaire. Bob spends a million dollars a year and owns a McMansion. The IRS calls and asks where did this money come from? Bob can’t explain where the money is coming from and is slapped with a giant tax bill. Bob never pays the tax debt and is convicted of tax fraud or evasion – a felony. Bob spends 10 years in jail. Bob leaves jail and has to leave the country and probably can never return, if he wants to spend any money from his bitcoins.
To be fair, I’m not arguing that the IRS is an omnipotent government agency that makes the CIA look like cub scouts. The IRS is one of the most underfunded agencies and I’m sure that millions of tax fraudulent taxpayers escape their gaze annually. But, the real issue is whether the risk outweighs the probable benefit to you.