Is paying your taxes with bitcoin a gamble?

29 November, 2018

There is more than one way to gamble with bitcoin. Sure, you can make a bitcoin deposit at your favorite casino before sitting down to a couple of rounds on the slots. You might even consider purchasing bitcoin as an investment somewhat of a gamble as well. But how about paying your taxes? Do you think there is any inherent risk involved in doing so?

The motivation behind our question is a story out of the U.S. involving the state of Ohio. State officials have decided to allow taxpayers to pay 23 different kinds of taxes online using either BTC or BCH. Not only does this make Ohio the first state in the U.S. to accept cryptocurrency, but it also makes them only the second government entity in the world to do so. Venezuela's national government is the first, but there remains some question as to the legitimacy of their cryptocurrency involvement.

Throughout our research of bitcoin gambling, it has always been our understanding that keeping government out of the crypto space is critical to ensuring the integrity of decentralization. But that begs the question of what constitutes genuine government interference. What Ohio is doing with cryptocurrency is more like a commercial transaction than anything else.

Let's unpack this and see where it goes. It might turn out that paying your taxes with bitcoin is somewhat of a gamble. On the other hand, it might be the greatest thing that has happened to American taxpayers in a long time.

How the system works

Taxpayers who owe money to the state of Ohio can always pay using fiat cash, paper checks, money orders, and credit/debit cards. But now, they can also pay certain kinds of taxes with cryptocurrency thanks to a new crypto portal recently launched by the state.

Almost all the 23 taxes included in the plan pertain to business, so it is not likely that individual taxpayers will be accessing the system anytime soon. Furthermore, businesses do not have to be physically located in Ohio to use the system. Any business required to pay Ohio taxes can choose crypto payment. Here is a short list of some of the eligible taxes:

  • Taxes on tobacco products
  • Motor vehicle fuel taxes
  • Pass-through entity taxes
  • Sales tax
  • Withholding tax.

Paying the taxes via crypto is very simple. The taxpayer logs on to the state portal, uses a drop-down menu to choose either BTC or BCH, enters the appropriate account information, and finalizes the payment. Money is then pushed automatically from the taxpayer's account to the state's account.

All indications point to a system that works as seamlessly as making a bitcoin deposit at your favorite casino. Transactions are instant and secure. They are verified and permanently added to the blockchain within minutes. The only downside here is that the state charges a small fee for verifying bitcoin transactions following completion.

Not keeping their crypto

At first glance, one might be wary of a government entity accepting tax payments with BTC or BCH. It is easy to be suspicious that such entities might keep hordes of cryptocurrency stored away in a digital wallet. But that is not what is happening here. The state of Ohio is not keeping their cryptocurrency.

Ohio government has reached a deal with their payment processor to immediately convert crypto payments into fiat currency. So if you were to pay sales tax on behalf of your business using bitcoin, the payment processor would automatically convert your bitcoin to U.S. dollars before transferring that amount into state coffers.

This arrangement keeps Ohio completely out of the cryptocurrency arena. They do not have to worry about how the volatility of bitcoin affects either revenues or budget. They don't have to worry about losing a ton of money whenever the market corrects. And yet the risk is still there. So who absorbs that risk? The state's payment processor.

Managing the risk

Whether you are talking a payment processor converting bitcoin into fiat or an online casino accepting cryptocurrencies along with more traditional payment forms, risk has to be managed in some way. That leads us to wonder what Ohio's payment processor is doing. It would not be reasonable for them to hold on to all the BTC or BCH they process for the state.

One way to manage their risk is to turn around and sell the crypto at an exchange immediately after processing a tax payment. They could also wait and convert all their crypto at the end of the business day. By selling their BTC and BCH right away, they keep their own funds as liquid as possible.

The payment processor can also take a more hybrid approach that would involve keeping some crypto in their own accounts and selling the rest. Maintaining a base level of BTC or BCH would allow the payment processor to manage crypto assets like any other security, perhaps even turning a profit by doing so.

A third option is to take all the BTC or BCH and diversifying by converting it into half-a-dozen other cryptocurrencies. But this approach does not seem reasonable either. The payment processor still has to have enough fiat on hand to cover tax payments to the state of Ohio.

We have no way of knowing how Ohio's payment processor is managing its risk. But we are generally curious to know. Whatever they are doing could provide valuable insight to gambling operators, merchants, exchanges, and anyone else involved in the cryptocurrency market.

A pass-through market

Assuming that the state of Ohio does not use their entrance into cryptocurrency as a stepping stone to regulation, they could be inadvertently developing a model for ultimately transforming the world to a completely cashless society. Their model is, in effect, creating a pass-through market for cryptocurrency. Allow us to explain.

Let's say you pay your sales taxes using bitcoin. Once the transaction is finalized, you are free and clear. The state's payment processor converts your Bitcoin into fiat before sending the payment to the state. The state is free and clear once U.S. dollars have been deposited into its account.

The next step is for the payment processor to convert the bitcoin into fiat by selling it on an exchange. Once that transaction is complete, the payment processor adds the fiat to its own bank account and it is free and clear. The exchange now has more Bitcoin to offer on the open market. You could theoretically go back and buy the exact same bitcoin you used to pay your tax bill.

This creates a digital full circle that lets everyone involved get paid in an incredibly fast and secure way. Assuming 10 minutes to finalize each bitcoin transaction in the process - and 10 minutes is a long time these days - everything would be completed in a half-hour or less. That same bitcoin you used to pay your taxes would be available on the exchange in no more than 30 minutes.

Try doing that with fiat currency and traditional electronic payments. It is not going to happen. Just paying your taxes with a credit card would take at least several days for everything to post and finalize. And of course, every step of the transaction is open to security issues. BTC or BCH are not.

The implications are huge

We will not offer an opinion about the risk of paying your taxes with bitcoin one way or the other. We can see both sides of the proverbial coin here. But on a larger and more general scale, the implications of what Ohio is doing here are huge.

They are using BTC or BCH essentially as tokens representing U.S. dollars for tax transactions. The tokens are of little value to the state because they are not holding them. They are simply using cryptocurrency as a payment processing tool that ultimately puts fiat currency in state coffers.

Imagine a world where every private and public sector entity managed payments this way. Fiat currency would still exist as legal tender controlled by governments and central banks, but cryptocurrency would act as the payment facilitator. Likewise, merchants and consumers could transact business among themselves in as many cryptocurrencies as they see fit. Only when necessary for making certain kinds of payments would the average consumer have any need for fiat.

It could actually work

The state of Ohio may be onto something here. If they can make this work for tax purposes, it could theoretically work for any kind of financial transaction regardless of size, scope, or geolocation. Cryptocurrencies could become the de facto standard without requiring any centralized control or government interference.

Yes, there are lots of different ways to gamble with bitcoin. If you are of a mind that paying your taxes with bitcoin is a gamble, you might be intrigued by Ohio's entry into the crypto market. All eyes will be on state officials as they look to manage their cryptocurrency involvement. What they do could lay the groundwork for other government bodies getting into cryptocurrency down the road.