Using cryptocurrencies for illicit activities
Cryptocurrency operates on a decentralized network that lacks a central authority, so it is possible to exchange cryptocurrency without registering an identity. However, the blockchain publicly records every transaction, and while names are not assigned to addresses, you can trace activity back to a crypto exchange, which knows the end user.
A user can transfer coins from one exchange to another party’s wallet, however, if the wallet belongs to an exchange platform, then all users are required to complete their KYC before trading. This allows all transactions to be recorded and reported to tax authorities. Recently, the U.S. government has issued a notice to exchange platforms for disclosing all client data for users who have sent or received over $10,000 in the tax year. This policy fills the gap which does not allow traders to transfer coins with complete secrecy.
If the user has transferred coins from a wallet to another that does not need KYC formalities, then there is a slight possibility that coins can be transferred out illegally which is essentially money laundering.
In this case, there won’t be much information about the transfer, however, there will be an outgoing withdrawal of coins and if that exceeds $10,000 then the IRS can send an audit notice to investigate further.
Upcoming technologies are adopting API integrations that allow users to link their exchange platforms with a software which will further connect to all transactions. It is like linking bank accounts with QuickBooks. The only aspect that software does not cover is transfers, if a user transfers coins from one wallet to another the cost basis is not tracked which can lead to misreporting of taxable gain/loss.
What can be the best solution to ensure that crypto investors pay appropriate taxes on capital gains and the loophole of transfers gets covered?
Government agencies should introduce a one stop solution to cryptocurrency taxes. This software should be created using strong AI and API keys which allows investors to link any exchange around the globe and must be multi-currency. Retailers accepting crypto coins as payments should also be able to link their wallet addresses to track capital gains, cost basis of coins received and inventory balances.
If government agencies provide investors with a software solution, it will kill two birds with one stone. Investors do not need to worry about tax calculations and the government need not bother about illicit activities because all transactions will be processed and monitored using their software.
