Why Tax FUD actually benefits the Cause of Crypto HODL’ers

Today is tax day, Apr 17, 2018 and @anonymint wrote an interesting post on how taxes destroy us all. There’s certainly a lot of fear going around about how to be in compliance with the tax rules. This is especially the case with the IRS in the USA which seems to have generated the most fear from their own population.

The reality is that most of you have it backwards. I look forward to my next audit by the IRS because that’s when they will get a lecture from a software developer on the futility for many to be in compliance with the rules. The rules have finally reached such an antiquated state, that to be in compliance is simply impossible. Below you will get a demonstration as to why.

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You don’t have to be belligerent or tuck your tail for IRS employees. They will know that you aren’t the source of their problems. While I can’t guarantee that you won’t have an encounter with a stupid IRS employee who doesn’t understand the technology, you should know that millions of people are now explaining the problem and that word is quickly going to the top to many governments around the world.

I already had this discussion with my tax accountant and explained all the details of how the Steem reward system works. While she said that for now just worry about any Steem that leaves the platform, the rules say that some of it is income and some of it is investment. There is a real problem, when you’ve invested a significant amount, in finding which part of the payout was ROI (capital gains) and which part of it is income. How can you isolate the two? Actually to be totally blunt, you can’t. When she understood that, she said that there will be new regulations about cryptocurrencies coming in the future. We knew this was coming so relax.

The IRS is about to face a hard reality and it actually works to the advantage of all lovers of freedom and voluntarism. The vast number of transactions on the Steem blockchain alone are enough to force non compliance of most people except for the dead accounts on this platform. What about those bots that do 100K + transactions per day? Do you think that every one of those transactions has been separated out as to what part was capital gains and what part is income? Of course not. Will they go to jail because they didn’t understand the law? That wouldn’t be practical and would further sink their ship of state very quickly. Here’s why…

The Needs of the Many Outweigh the needs of the Few

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We all know that there’s strength in numbers, right? I don’t just mean in terms of the number of people who will be affected by these regulations, but there’s also strength in the numbers of transactions. This will force an attempt to rewrite the rules. Why? Because an audit will not even catch a millionth of a percentile of the total transaction pool. It's far too inefficient.

The IRS of course will be most interested in collecting as much tax as it can from the top earners in crypto which is why it will motivate them to rewrite the rules. This will also cause them to look for the highest value transfers. If you’re one of these people, you can afford to hire a tax attorney.

The rest of us small fry will most likely not be bothered with an audit because it creates more problems for the IRS than it’s worth. They have very limited personnel, so only 1% of you can expect to be audited. They currently have much bigger problems to contend with and need to generate as much wealth from as few audits as possible or they go under.

What the IRS will do when it understands the Math...

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Here’s how a typical post breaks down. I decided to stop using upvote bots a few weeks ago because the math wasn’t working in my favor, but just to illustrate, I will pick a post from a few months ago which shows the payout using upvote bots, for example…

In the above post, the total payout was $82.55, but this wasn’t in USD and not all of it goes to the author. About 75% goes to the author and 25% goes to curators. If you were a curator, then you also got part of that reward. This is probably why often times when you break it down the 3/4 ratio of reward isn’t quite exact. This happens when you upvote your own posts.

So the method goes like this. Of that $63.76 in Steem/SBD, you have to find how much of it you were paid in Steem, how much of that was paid as SBD, and of course how much of that was powered up (but the ratio will stay the same as for unvested Steem).

For the SBD portion, you take 1/2 of the $63.76 which is $31.88. Since SBD is supposed to stay pegged to the USD (but it doesn’t even come close often times), you have to find out how much that $31.88 is worth at the exact moment it was paid out in USD. If that was 2.94, then you would have $93.73 USD.

The next part is to take the other half which will be $31.88 in Steem, which of course will not be paid as 31.88, but as a fraction of the price of Steem at the time of payout in USD averaging over the 7 days of the payout period of the post. So if Steem was $4.00 at the time, you would get 7.97 Steem, but you can take the $31.88 directly. Add this to $93.73 and you get $125.61.

Then you subtract the amount of SBD that you contributed to make the post more popular. This would mean you have a deduction similar to profit / loss from business on your Schedule C. In the above example, assuming that this was $60 SBD, you would then figure how much of this was in USD at the time you paid the upvote bot. Assume that the SBD was $2.08, that would be a deduction of $124.80.

This calculation of the value you came out about 0.81 cents ahead which is a typical calculation result for us minnows using upvote bots (this is one of the reasons why I stopped using bots because you typically break even or even have a loss). However, if you invested a couple thousand dollars in Steem the way I did when I first started, your payouts are bigger because you invested. Does this mean that this is income, interest on investment, or capital gains?

Now take all of those automatic upvotes, every single click that generated a blockchain transaction, multiply this about 100 times a day (100,000 times a day if you're a bot owner) and you will be done with the calculation for one tax day in a 365 day tax year. Since there’s no software to bail you out of this situation, you have to do this by hand, or you go to jail. Millions of people will be facing this absurdity. You aren’t alone. Sometimes the appearance of something insurmountable isn't really, as this dog demonstrates...

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Obviously when faced with doing the impossible, what do you think will realistically happen? Will they cart off tens of thousands of violators to jail, confiscate their bank savings (why do you still have a bank account anyway?), will officers of the law beat you up? If they do any of these things, the result will be this as stated by @anonymint:

The IRS has a big problem and they had better get their heads out of their arses and quickly.

Essentially the law is becoming inconsistent with itself. That is that hallmark of the collapse of the rule of law and collapse of Western civilization which is actually well underway. So as you noted, we the people can become collateral damage within a society that becomes dysfunctional where insanity rules.

This is the time to be educating everyone on the virtues of voluntarism. It's also important to understand the opportunity that this gives those of you hodling crypto. You will in the future be in an extremely powerful bargaining position. As the ship of state sinks, and you have only your cryptocurrency left with no bank accounts, do you really think the state is going to want to spend the $60K / year to incarcerate you as a tax evader while this happens? Not a chance.

What really happens in these situations

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Many times before, as the nations currency collapses (which the USD is likely to do because of the insane debt to GDP ratio), the enforcers of the law are themselves compromised by the inability to do their jobs with the established state currency.

This means that they will be taking bribes in cryptocurrencies. You will begin to dictate terms because they will soon be out of money. If they kill you, then they never have the chance to decrypt your holdings. If they harm you, then they risk losing out on a bargain that can help both you and them because of the structure of bitcoin transactions and multiple wallet addresses.

When chaos erupts, you can become government. Will you pay if tortured? Perhaps, if you're a lousy negotiator. But because crypto holdings aren't at all easy to trace once they leave the KYC (Know Your Customer) environment of exchanges, they have to guess part of the time which addresses belong to you and which don't. Chainanalysis is just a fancy name for tracking KYC info and labeling as many points as possible in the chain of addresses which will of course be far from complete.

While much has been made of the fact blockchain is public information, they still have to guess after it leaves the exchanges. If you never reuse bitcoin addresses they can't usually confirm an address doesn't belong to you until another point in the KYC apparatus surfaces (such as your ordering something in crypto and giving your name and home address for delivery or sending funds back to an exchange).

Another way they can link identities is if your wallet aggregates funds from several addresses to create a spendable UTXO (Unspent Transaction Output) for the larger transactions (this is going to become increasingly difficult when Lightning Network becomes fully usable) which you can mitigate by sending transactions smaller than the smallest in your pool of transactions. This requires more transactions to complete an order, but such a technique enhances privacy.

And if they're stupid enough to insist that the first transaction / address jump was your selling off, then the IRS just let you off the hook in a big way if you sent it at $5,000 USD and it appreciated to $100K afterwards. Explain that to them and they will back off because of greed (and because the rules say you'd be taxed twice which would put the IRS in violation of their own rules).

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As this situation unfolds, the tech giants like Amazon will have to take over as a form of interim government to keep things running. These corporations like Apple, btw, haven't been paying hardly any taxes at all. Good for them, but it will still be their "karma" to pay for the infrastructure to keep their own business models operating, or they will indeed lose everything.

A long time ago I had a significant insight at Carousel Mall in Syracuse, NY, circa 1995. I was browsing around the mall and noticed probably at least three different branches of police, the mall police, the state police and the Brinks security guards. My insight was that their operations had nothing to do with "protect and serve" the public, but were entirely geared toward the private interests of corporations. Guess who will be funding the police when this all goes down? You guessed it, corporations. They will become their own government when this happens and will keep things running. Carousel Mall could become Mad Max, Beyond Thunderdome.

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Civilization will begin to localize into pockets of walled off communities and agorism will become a central means for survival (at least for a while).

So my advice to you is to stay armed and hodl on, and seek professional tax advice knowing that the situation changes daily. No need to panic for those of us hodling crypto, but it soon will be time for government to panic. If you're prepared, you can put yourself in the catbirds seat and actually be leading government employees by the hand into the uncharted territory of voluntarism. Many of them are somewhat aware of what's happening and secretly hope the top psychopaths will face justice for what they've done.

*** Disclaimer - This article isn't tax advice, but my understanding of the situation as explained to me by my tax accountant. Proceed at your own risk.

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