12

Is it possible for a U.S. citizen to evade income tax by being paid in Bitcoin?

Rodrigo de Azevedo
  • 1
  • 1
  • 17
mcchucklezz
  • 295
  • 1
  • 3
  • 8
  • 1
    This topic is also covered on money.SX for example https://money.stackexchange.com/questions/86833/tax-implications-of-btc-for-rent – dave_thompson_085 Nov 27 '17 at 21:37
  • 7
    I suspect that you might be unaware that evade has a specific meaning with regard to tax collection. Evading taxes is making a deliberate illegal act in order to not pay taxes that you owe. Avoiding taxes is taking legal actions to lower the amount you owe. Is it possible to evade taxes by illegally using bitcoin to obfuscate a transaction? Absolutely it is. Is it legal tax avoidance? No. – Eric Lippert Nov 28 '17 at 06:55
  • I would also see this money.se question which specifically covers income tax for wages in this scenario. – Joe Nov 28 '17 at 15:45
  • 3
    I feel like in 99% of cases of questions beginning with "Can one avoid paying US income tax by..." the answer is probably no. – Shufflepants Nov 28 '17 at 16:28

2 Answers2

34

No. You have to pay taxes no matter what currency you are paid in, or for that matter, in most barter transaction as well. You would have to pay taxes even if you were paid in goats.

Also, the counter-parties in transactions in which you are paid in Bitcoin and earn money often have an obligation to file information tax returns to the IRS.

If you don't report the income, both you and any counter-party subject to reporting requirements could be liable for the tax as well as for penalties and interest and possible criminal charges as well for intentionally evading taxation and filing false tax returns.

ohwilleke
  • 211,353
  • 14
  • 403
  • 716
  • 4
    Here is the IRS Virtual Currency guidance; https://www.irs.gov/newsroom/irs-virtual-currency-guidance & more detail; https://www.irs.gov/pub/irs-drop/n-14-21.pdf. "For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency." – Digital fire Nov 27 '17 at 19:46
  • How does paying taxes in goat work? Could you expand on that? – Bakuriu Nov 27 '17 at 21:06
  • 1
    @Bakuriu The goats have some monetary value and you have to pay an amount of money related to that value. – JAB Nov 27 '17 at 21:33
  • 1
    Some but not all payers are required to file information reports; however you are liable for income tax on income (including profit from a trade or business) received in cryptocurrency the same as for anything else of value, plus self-employment tax on income or profit from self-employment, regardless of whether there was an information report. – dave_thompson_085 Nov 27 '17 at 21:33
  • 15
    @Bakuriu: You don't pay taxes in goats. You pay taxes in cash based on the fair market value of a goat. – cHao Nov 27 '17 at 21:33
  • 2
    Sure you can pay taxes in goats; if you're in a country that accepts goats as legal tender for paying taxes. – BlueDogRanch Nov 27 '17 at 21:54
  • 10
    @Bakuriu FWIW, the goat example isn't as far from reality as you would think. I have been paid for services as a lawyer in my own private practice in the 21st century in Colorado, in livestock (pre-slaughtered thank goodness) and yes, I did report it on my tax return for the year. (It was the year of the crash in 2008, and none of my clients had a lot of cash on hand to pay me.) – ohwilleke Nov 27 '17 at 22:01
  • @BlueDogRanch It turns out that you can't actually even pay your taxes in large amounts of currency and dealing with the problem is a big issue for my clients in the legal marijuana business. – ohwilleke Nov 27 '17 at 22:08
  • @ohwilleke interesting; is that because banks don't want to deal with the businesses and their cash re: federal law; or the businesses don't want to deal with the banks and get a bank draft or check to send to the IRS? – BlueDogRanch Nov 27 '17 at 22:17
  • 1
    @BlueDogRanch The former. Banks aren't allowed to deal with money that they know to be marijuana money under federal law. – ohwilleke Nov 27 '17 at 22:27
  • 1
    @ohwilleke wait, the notes say "all debts, public and private"... How do poverty-suffering unbanked people pay their taxes? – Harper - Reinstate Monica Nov 27 '17 at 23:51
  • The IRS accepts cash (subject to a $1,000/day limit). See https://www.irs.gov/newsroom/irs-offers-new-cash-payment-option . If you're impoverished it's highly unlikely you have a $1,000 tax bill anyway. – Ryan Cavanaugh Nov 28 '17 at 02:02
  • 4
    @RyanCavanaugh Thousands of people in the legal marijuana industry have hundreds of thousands of dollars in tax liabilities each but have to deal in cash because they aren't allowed to set up bank accounts. It has nothing to do with being highly impoverished, but does have a lot to do with being unbanked. An arbitrary $1,000 a day limit is a huge problem for them. Also, FWIW, the IRS does not in fact accept goats as legal tender, nor do Idaho's tax collectors (unless they are foreclosing on tax liens, in which case both accept them). – ohwilleke Nov 28 '17 at 03:20
  • @ohwilleke, I have a suspicion that has never been tested in court. The IRS can make up whatever rules it likes—and does. Whether someone can actually be arrested and successfully prosecuted if they refuse to attempt tax payment in any other way than via cash is another question. On that note, read the first couple pages of Robert Heinlein's "Have Space Suit — Will Travel" for a laugh. (Highly relevant, and viewable through "look inside.") ;) – Wildcard Nov 28 '17 at 09:08
  • The more interesting question that arises here is: are you then allowed to also pay your taxes in goats? – PlasmaHH Nov 28 '17 at 09:49
  • "You would have to pay taxes even if you were paid in goats." :) – Sreeraj Chundayil Nov 28 '17 at 13:46
  • 2
    @Wildcard "I have a suspicion that has never been tested in court." All questions even remotely related to tax payment have been tested in court. – ohwilleke Nov 28 '17 at 14:45
4

Taxable income (Merriam-Webster) as defined by the IRS is

...generally speaking, is the gross income of an individual or corporation, less any allowable tax deductions. Your taxable income is, in other words, the amount of your income that is subject to income tax. What is taxable income? | US Tax Center

So if you have a good accountant, you may not have to pay much or all on your income depending on your deductions. But that's more of an accounting question.

But income that is paid in Bitcoin is still income; it doesn't matter if you keep the funds in Bitcoin or convert them to US dollars, it's still income. Even in Idaho.

And the people and/or businesses who pay you have to keep tax records and report your income. For annual amounts less than $600, Form 1099-MISC doesn't need to be filed by the employer, but the payee still needs to show the income on their tax return.

The web has many accounts of people who fall into the trap of thinking that paying income taxes is illegal because tax policies are not clearly outlined in the Constitution. And they may also feel that Bitcoin itself is a currency outside the realm of the law, and when that earned Bitcoin is not converted to a traditional currency, such as the US dollar, it is outside the law. But if that Bitcoin is income as defined in the dictionary, it is subject to income taxes. People who evade paying income taxes run the risk of an audit and prosecution for not paying taxes. Read Tax protester statutory arguments - Wikipedia.

BlueDogRanch
  • 18,824
  • 5
  • 35
  • 61
  • 4
    Bitcoin isn't defined as "income", it is defined as "property". – Digital fire Nov 27 '17 at 19:48
  • 6
    @digtalfire Yes, and as with any other thing of value paid as wages, including property, the payment is "reported by the employer on a W-2 and is subject to federal income tax withholding and payroll taxes," as stated in your linked ref. – Upnorth Nov 27 '17 at 21:18
  • 2
    FWIW, the Idaho Supreme Court recently tried to rule that it didn't have to follow federal law, by the US Supreme Court in a swift and unanimous per curium opinion quickly overruled that holding. – ohwilleke Nov 27 '17 at 22:04
  • 3
    @DigitalFire income is a net transfer of property from one party to another. Either way the federal government isn't interested in letting you define your way into tax evasion – Ryan Cavanaugh Nov 28 '17 at 02:04
  • Bitcoin isn't exactly "currency" so why pay taxes? – Chen Stats Yu Nov 28 '17 at 08:00
  • @ChenStatsYu As discussed in comments to the other answer, it doesn't matter whether Bitcoin is a currency. You'd still have to pay taxes even if your employer paid you with goats, and we all agree that a goat isn't currency. – David Richerby Nov 28 '17 at 13:59
  • @DavidRicherby some wired policy...how would they work out the tax then? – Chen Stats Yu Nov 28 '17 at 14:47
  • 2
    @ChenStatsYu The same way you work out how many goats you think is a fair wage for the work you did: by considering the current cash value of goats. This has all already been discussed above. – David Richerby Nov 28 '17 at 14:49
  • @ChenStatsYu see this IRS page https://www.irs.gov/taxtopics/tc420 – DavePhD Nov 28 '17 at 14:51
  • I think my next ad promoting my law office in the local alternative weekly should say "Will Work For Goats!" in big bold letters. – ohwilleke Nov 29 '17 at 19:27