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Crypto "Prophets" From 1997 Point to IRS Showdown: Blog Expert

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Milton Friedman is not the only one thinker who may have predicted the rise of crypto-currencies two decades ago. In The Individual Sovereign: Mastering the Transition to the Information Age, James Dale Davidson and William Rees-Mogg wrote in 1997 about financial technology in surprisingly prescient terms:

"After the turn of the millennium, a lot of global trade will migrate into the new realm of cyberspace, a region where governments will have more domination than they will exercise on the seabed. or on the outer planets. "

That seems pretty much right. It's fun to look at some of these early cryptocurrency prophecies and how they imagine the future. And above all, to compare them to the reality of the world today.

What makes the book of Davidson and Rees-Mogg particularly interesting, however, is its economic and political predictions. They envision a world beset by extraterritorial tax evasion and monetary debasement, leading to an economic flight to "cyberspace." Here is how they express it:

"When the state finds itself unable to incur expenses by increasing tax revenues, it will resort to other more desperate measures. Among them, the printing of money … In almost all areas of competition, including most multi-billion dollar investments, the migration of transactions to cyberspace will be motivated by a near-hydraulic pressure – l & rsquo; Impulse to avoid predatory taxation, including the tax that inflation imposes on all those who hold in a national currency. "

Indeed. These points may seem obvious to many in the world of cryptocurrency today, but in 1997 it was somewhat prophetic

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What Happens to Taxation?

But what does Davidson and Rees-Mogg predict doing in response to this flight to cyberspace? They envisioned a rather bleak future, where Western governments would "go wrong" and "seek to suppress the cybereconomy by totalitarian means".

We could say that we are already here. Anyone who has been audited by the IRS for cryptocurrency transactions could surely feel like this! Or maybe this future is just around the corner

But are we really in favor of a totalitarian imposition of cryptocurrency transactions? Attempts to ban transactions in Bitcoin?

We could be it, but it is also interesting to look at what Davidson and Rees-Mogg were wrong. For example, they predicted that governments would find themselves virtually unable to track these transactions in cyberspace, especially those found in offshore banks. They write:

The widespread adoption of public key / private key encryption technologies will soon allow you to carry out many economic activities wherever you want …. Once logical next steps will have been taken and offshore banking sites will offer RSA encrypted e-mail communication services using public key system account numbers, financial transactions will be almost impossible to monitor at the bank or in the communications. Even if the tax authorities were to plant a mole in the offshore bank, or burglar bank records, they would not be able to identify the depositors.

Moles in offshore banks? Burglarizing the banking records? Clearly, the authors have underestimated the power of Western governments.

Nowadays, IRS tax collectors do not need to rob foreign banking records because Swiss banks (and almost all other banks) regularly open their books.

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Davidson and Rees-Mogg have not anticipated US offshore enforcement efforts over the last decade nor the adoption by the Foreign Congress Account Tax Compliance Act (or FATCA). How could they? It seemed impossible for the Swiss to abandon their tradition of long-standing banking secrecy when the United States knocked on the door. But never say never.

Will governments get their hands on crypto?

So, are we really indebted to a totalitarian fiscal future in cyberspace? Well, it 's probably not going to be as dark as they imagined . Western governments are better able to track the financial transactions that Davidson and Rees-Mogg were considering, of course.

But will the cryptocurrency economy avoid a confrontation with the IRS? As improbable. Because of the difficulty of tracing transactions, and the amount of tax revenue involved, we can expect a decline in the IRS.

As a tax attorney, I have seen the efforts of the IRS decade, and he may offer some clues about what will happen to the economy of the cryptocurrency. In the early stages, we saw subpoenas to foreign banks, like UBS, for the records of their US clients. It starts now with Coinbase and other exchanges

Next, Swiss banks came under pressure to comply, including criminal prosecution against major banks and key executives. The IRS also looked at courier carriers like Federal Express for mailing registrations between Swiss banks and US people. This could mean assignments to ISPs, portfolio application providers, or others, for their transaction records.

Finally, as the IRS did not have the resources to audit everyone with a Swiss bank account, it instituted a disclosure program. Foreign account holders could avail themselves of the Voluntary Offshore Disclosure Program (the "OSC"), pay taxes, pay a penalty and avoid jail time. Those who arrived earlier had a better deal. The IRS has got the best deal, bringing in over $ 10 billion in tax revenue.

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If the last decade of offshore tax enforcement efforts is a guide, a confrontation between the IRS and the cryptocurrency world is probably imminent. But it is perhaps more efficient and bureaucratic and less totalitarian than envisaged Davidson and Rees-Mogg

Yet the idea that Western governments will be unable to impose the Cryptocurrency gains are unrealistic. Taxes are one of two life guarantees, and it makes sense to plan for them, even with cryptocurrencies. How is it for a prediction?

Bio, Dashiell Shapiro is a tax partner at Wood LLP in San Francisco, CA, and a former DOJ tax attorney. His practice focuses on tax controversy and audit defense and includes international tax work and financial products / tax planning for cryptocurrency.