If you are a U.S. taxpayer fond of gambling, there is a new game in town. You can now take your chances on Uncle Sam by requesting your federal tax refund be paid to you with Bitcoin. There's only one catch: it's not free. But if you are willing to pay a fee for the privilege, you can load up on Bitcoin after completing your annual return.
Tax season in the U.S. has come and gone (the annual filing deadline is April 15) for this year, but some people have already received refunds in Bitcoin thanks to a collaboration between BitPay and Refundo. BitPay is a cryptocurrency payment process while Refundo provides a variety of tax related financial products to U.S. citizens.
According to CCN's Samantha Chang, the Bitcoin tax refund service is primarily aimed at the unbanked and underbanked - two groups of people that typically do not have access to bank accounts. Such people tend to take tax refund checks to check-cashing stores or retail outlets willing to make good on the checks for a fee. That is where the oddity of the service comes into play.
Receiving your tax refund in Bitcoin comes at a cost of 1% of the refund amount plus a one-time $34.95 transfer fee. Is that a better deal than the typical check-cashing fee?
How the process works
At this point it is important to note that bitcoins do not flow from government coffers directly into taxpayer wallets. Such a payment would be neither practical nor legal. In terms of legality, bear in mind that the U.S. government does not recognize bitcoins or any other digital tokens as legal tender. Therefore, they cannot legally issue tax refunds with cryptocurrency. They can only refund U.S. dollars.
This requires a middleman to make the conversion. So if John were to want a Bitcoin tax refund, the fiat used by the government to pay for his refund would go to a third-party who would convert that fiat to bitcoins and then forward the tokens to him. That is why there is a fee involved.
Here is a basic, step-by-step process outlining how this works:
- John creates a Refundo account.
- He receives unique routing and account numbers.
- He then prepares federal and state tax returns.
- The unique routing and account numbers are entered on the return.
- John's return is filed electronically and processed by the government.
- His refund is sent to Refundo via the assigned routing and account numbers.
- That fiat is converted to bitcoins.
- The bitcoins are transferred to John's digital wallet.
As for how long it takes, that really depends on how quickly the IRS and state agencies process the two returns. It normally takes anywhere between 7 and 21 days for refunds to be issued. Once issued, it shouldn't take more than a couple of hours for Refundo to do what they have to do.
Similar to the Ohio System
As fascinating as this particular program is, it is not the only bitcoin tax scheme in the US. In 2018, the state of Ohio launched a program whereby state residents could pay certain kinds of taxes using bitcoins. Ohio's process is similar, but in reverse. The state cannot receive bitcoins any more than the federal government can issue them.
Ohio residents wishing to participate in the program login to the state website as usual. They navigate to the appropriate page for paying their taxes before selecting the Bitcoin option for payment. They are then redirected to a payment page where they enter the appropriate information.
Upon clicking to submit the payment, their bitcoins are transferred to a third-party payment processor who immediately converts them to fiat. The fiat is then transferred to state coffers. The taxpayer's account is automatically credited with the payment, and that's that.
A convenient way to pay
Setting aside Refundo's stated goal of assisting the unbanked and underbanked for just one minute, it is hard to argue that paying your taxes or receiving your refund via bitcoins is super convenient. You can send or receive tax payments without having to mess around with bank accounts and paper checks. With a computer or mobile device, you can do what you need to do from anywhere you have an internet connection.
Receiving your tax refund in bitcoin is also convenient if you happen to spend bitcoins regularly. For example, maybe you are a big fan of video slots. You routinely make deposits at a small number of Bitcoin casinos you frequent.
Receiving your tax refund in bitcoins makes it easier for you to make your casino deposits. You do not have to go through the extra step of converting fiat to digital coins beforehand. As your refund comes in, you can transfer a portion of those coins to your casino account.
If you live in Ohio, you get the best of both worlds. You can receive your federal refund in bitcoins and then turn around and use the same coins to pay your state bill. Moreover, everything can be done in mere minutes. You receive coins into your wallet and send them right back out again.
The only downside to all of this convenience is cost. Based on Refundo's numbers, receiving a tax refund of USD $2,000 would end up costing you $54.95. Is it worth it? That depends on how badly you need the coins.
If you had no bank account and were forced to take a refund check down to a check-cashing store, you are probably going to pay a fee of 1% to 2%. Even at the upper end, it would probably cost you less to go that route than to pay the fees associated with Bitcoin transactions.
Serving underbanked communities
Before closing this post, let us talk about Refundo's position of offering crypto-based tax refunds in order to help unbanked and underbanked communities. This seems reasonable on the surface. After all, there are alternative financial services providers that do the same thing. They offer check-cashing services, online bill pay, money orders, and other financial products needed by people who don't have bank accounts.
There is only one thing that gives us pause here: do the unbanked and underbanked really have use for bitcoins? At least in the U.S., most of the people who would fall under one of these two banking categories are people living at or near the poverty line. Most of them live in inner-city neighborhoods where investing is just something people in the suburbs do.
Please do not misunderstand the point here. When Bitcoin was launched a decade ago, its creator hoped it would be an alternative monetary system capable of leveling the playing field between the haves and have-nots. It still might do that at some point in the future. But right now, the price of Bitcoin puts it out of the reach of most low-income households.
Just how is someone with no bank account going to use bitcoins? If the goal is to be able to play slots online, then fine. Receiving a tax refund in bitcoins works. But if that refund money is going to go toward paying the bills, receiving it in bitcoins doesn't help. The taxpayer would still have to convert those coins to fiat in order to write a check or take advantage of online bill pay.
Overall, the strategy of targeting the unbanked and underbanked is illogical. Those most likely to take advantage of bitcoin tax refunds are traditionally banked individuals who do not need the refund money to pay the bills and would rather have bitcoins instead. For them, the coins represent an investment they hope will eventually turn a profit.
Where it goes from here
Refundo's bitcoin tax return service is still only a few months old. We don't know how many people took advantage of it this tax season; perhaps that information will be available in the near future. At any rate, it will be interesting to see where it all goes from here.
It could be that the program falls flat on its face. It could be that it is shut down even before the 2020 tax filing season opens. On the other hand, it could prove to be so successful that it acts as a model for other companies wanting to get in on the tax refund game.
We can also see a day when the U.S. government issues its own stablecoin backed by the dollar. Perhaps these two tax schemes are a precursor to that stablecoin. Maybe there are regulators watching in the background to see how well it goes, with the expectation that any modicum of success would translate well into establishing a government-backed coin.
Of course, all of this is speculation. All we know for now is that U.S. taxpayers have the option of receiving their federal refunds as bitcoins. Those who live in the state of Ohio can pay some of their state taxes with bitcoins as well. Whether or not it goes any further is anyone's guess. If you are a gambling man or woman, maybe you want to get in on the ground floor by receiving next year's refund in bitcoins.