Reframing Bitcoin and Tax Compliance

Abstract

This Article argues that, contrary to the common belief that Bitcoin enables tax evasion, the Internal Revenue Service (“IRS”) can increasingly police transactions in Bitcoin. First, commercial and technical intermediaries have emerged as part of Bitcoin’s ecosystem. This diverse set of intermediaries can facilitate tax enforcement, as the litigation over the IRS’s summons on Coinbase—the largest domestic digital asset exchange—and subsequent IRS efforts show. These intermediaries could report transactions to the IRS or even, one day, withhold and remit tax payments. Second, the publicly visible, trustworthy nature of Bitcoin’s blockchain—its unique role as a shared truth—allows tax authorities to observe transaction flows. This renders Bitcoin unusually regulable for tax purposes, as recent efforts by the IRS to rely on Bitcoin’s blockchain to police tax evasion demonstrate. The Article offers a proposal by which the IRS might make better use of Bitcoin’s blockchain: the IRS can tailor an existing program to reward technically savvy whistleblowers who scour Bitcoin’s blockchain and determine identities that correspond to public Bitcoin addresses at issue.

Keywords: Bitcoin, tax evasion, cryptocurrency, tax compliance