It has been said that the power to tax is the power to control. As such, government taxation is often seen as a way for politicians and bureaucrats to control the masses. Cryptocurrency is seen as a way around that inasmuch as people can trade with a digital asset that exists outside of the purview of government control. But, as many people are finding out, taxing authorities are relentless. They will find ways to tax the very air you breathe.
A case in point comes out of India. According to Cointelegraph's Vireshwar Tomar, India's taxing authority is now engaged in an ongoing campaign to train its employees how to effectively investigate cryptocurrencies, crypto investors, and businesses that accept cryptocurrency payments. Tomar doesn't say how long this training has been going on, but it has been long enough for the Income Tax Department of India to create a rather extensive guidebook offering plenty of details on how the whole cryptocurrency thing works.
Cryptocurrency is a gray area
Cryptocurrency investors in India operate in uncharted territory. Indeed, cryptocurrency is one big gray area in that country. India does not recognize crypto as legal tender, nor does it officially back cryptocurrency as an alternative monetary or payment system. Yet regulators have not outright banned cryptocurrencies either. As Tomar explained, this leaves investors in an awkward position of not knowing how to declare their cryptocurrency investments.
It would be easy to automatically assume that cryptocurrency investors are cheating on their income taxes by not properly reporting profits. Hopefully that is not the case with the Income Tax Department. Hopefully the Department understands that the ambiguous nature of India's tax laws makes it nearly impossible for investors to get it right.
It could be that the ongoing training is designed to help Department employees understand how cryptocurrency works for the purposes of eventually clarifying the law. That would be the best possible scenario. Investigators would be educated, they would be able to inform lawmakers, and the end result would be some much-needed clarification. But what if that is not the purpose of the training?
Seeking out illicit activity
It could be that the cryptocurrency training is all about finding tax cheats. But maybe it is more than that. Perhaps taxing authorities want to learn how to track down illicit activity being facilitated with cryptocurrency. They certainly would not be the first to have such a goal. Taxing authorities and regulators around the world have been trying to figure out ways to uncover illicit activity for years.
The Income Tax Department's training manual seems to suggest that uncovering illicit activity is at least partly what the Department is interested in. For example, one section of the training guide focuses on local trading exchanges that are not nearly as secure as their global counterparts. Local exchanges are a haven for illegal activity because their know your customer (KYC) policies are so lax.
The guide explains how investigators can use local exchange information to uncover IP addresses. With IP addresses in hand, they can then learn the identities of traders simply by contacting their ISPs. Again, the guide even provides examples of how it is done in the real world.
Another section of the guide discusses how some Indian citizens may have converted older 500- and 1,000-rupee banknotes into crypto when those notes were stripped of their legal tender status and replaced back in 2016. The government views any crypto proceeds derived from such activity as illegitimate.
Leaving no stone unturned
There is quite a bit more in the training manual worthy of discussion in future posts. The point here is that Indian taxing authorities are leaving no stone unturned. They are determined to make sure all employees are fully trained in all things crypto so that they can effectively investigate any and all crypto activity they come across.
One of the ways they have been gathering information is by sending questionnaires to people they believe are already engaged in cryptocurrency activity. One particular questionnaire cited by Tomar included 26 questions, of which 21 were related to cryptocurrency. The questionnaires request information about:
- cryptocurrency activity involving local exchanges and peer-to-peer networks
- cryptocurrency investing - both locally and in the cloud
- any cryptocurrency payments received in exchange for goods or services
- any cryptocurrency income declared on previous tax returns.
Tomar says the Income Tax Department sent notices to crypto investors and traders in 2017 and 2018 to try to better understand their habits. They have even gone as far as to inquire among major crypto exchanges about information relating to traders based in India.
Taxation is the eventual goal
Even if the Income Tax Department leverages its training to better investigate fraud and illicit cryptocurrency activity, the eventual goal is to tax cryptocurrency income to whatever extent possible. Taxing authorities in every country ultimately have no other goal. They exist to levy and collect taxes. It is that simple.
Cryptocurrency taxation is coming to India at some point. It is just a matter of how long it takes and what official taxing regulations look like. And for the record, India is not the only country that seeks to tax cryptocurrency assets. The desire is nearly universal.
In the United States, cryptocurrency is taxed in several different ways. If you are an investor or trader, both the SEC and IRS consider your cryptocurrency assets as similar to traditional securities. They are like stocks and bonds for tax purposes. Any profits you make on trading are treated as capital gains and taxed accordingly.
Maybe you are not an investor or trader. Perhaps you are a merchant willing to accept Bitcoin payments for goods and services. Those payments are revenue to the IRS. They are included with all of the other fiat revenue you generate. You pay income taxes on all the profits you derive from the combined revenue.
Taxing illicit activity
Just to demonstrate how desperate taxing authorities are to collect money from citizens, consider the absurd idea of taxing illicit activity. It happens. At least governments want it to happen. Once again, we will discuss tax laws in the United States.
As absurd as it sounds, U.S. tax laws require criminals to pay income taxes on all of their ill-gained income. IRS Publication 17 features a full list of illegal activities the U.S. government considers taxable. These include:
- drug dealing
- money laundering
On the one hand, it seems ridiculous to expect criminals to report income derived from illegal activity. On the other hand, it is not fair to exempt criminals from income tax while collecting it from law-abiding citizens. As such, taxing authorities face a quandary. The way around this quandary is to require criminals to list their ill-begotten income but not explicitly state how they came by it.
This constitutional loophole supposedly gives criminals an out. They can pay their taxes without incriminating themselves by doing so. But the IRS is foolish if they think large numbers of criminals are filing tax returns to begin with. They are not because they do not. And those that do certainly don't declare ill-begotten revenue on their tax forms.
We say all that to say that one of the goals of taxing cryptocurrency income is to get a hold of all of that revenue being lost through the illicit business being transacted with crypto. The online drug trade is a perfect example. It is conducted around the clock on the dark web.
Dealers at every level can facilitate transactions with cryptocurrency payments. Cryptocurrencies can be converted to fiat using any number of laundering strategies. The end result is the movement of large sums of money that cannot be tracked by taxing authorities. This is the type of thing that governments want to change.
They are looking to learn everything they can about cryptocurrency so as to come up with ways to uncover illicit activity. Once uncovered it can be taxed. That is the goal. Let police and prosecutors deal with the criminal aspects of such activity; taxing authorities only want the revenue.
Not the end of the world
If the news about India's cryptocurrency investigations is disheartening to you, relax. It is not the end of the world. We have all lived with theft through taxation for our entire lives. What is happening here is nothing new. The Income Tax Department is not doing anything that taxing authorities in any other country are not doing. The only difference in this particular case is that Indian regulators attempted to keep their training a secret. They did not want anyone to know what they were doing.
Rest assured there is no taxing authority in the developed world that is not looking into cryptocurrency. From the IRS to HMS Revenue and Customs, taxing authorities are never going to give up looking for new and creative ways to extract taxes from citizens. Remember this: the only two things you can absolutely depend on are death and taxes.
Go trade cryptocurrencies as investments. Go spend your BTC on your favorite online video slots. Send cryptocurrency remittances to family and friends around the world. Do not let the fear of taxation dampen your enthusiasm.