Side channel privacy-attack-by-IRS: Can one be private and legal?

It looks like IRS reporting requirements for cryptocurrency means that users of private coins must reveal their transactions (which are disposals of property), or violate tax law.

The only technical way to be 100% compliant is to have an income under $10,400 as a single filer - then you don’t need to file a return. As tax season approaches, it may be that you can only keep your transactions fully private for about a year - come next April 15, the IRS wants to know.

This looks like it applies to most countries that have a capital gains tax. Both US and non-US users are welcome to chime in with thoughts. It seems like this is a major side channel attack on privacy and usability.

The American gov and all the Elite who control it are antagonistic to cryptocurrencies. They will use the heavy hand of tyranny to crush anything crypto touches unless it suits their will to power in some manner. Such a cancer this government is. They’ll use every means they can to control as many people who have crypto as they can.

I’m not sure this is an “attack” more simply how the current tax system works (which clearly needs to evolve as it relates to crypto)

I wrote a thread here that sounds a lot like yours, only thing in yours I would change is omit theoretically and I hope I’m wrong
Also, you don’t have to submit a record of individual transactions, just the summation of your taxable gain loss
You’re supposed to retain the records in case you get audited
Edit - so theoretically, your privacy is as intact as it can be

Yeah, side channel attack is a bit of a misnomer, but I saw it as a government attack channel: Anyone showing interest in (private) cryptocurrency by having Zcash/Bitcoin listed on a tax return could be audited, and demanded to show records, which will bring up: date, time, and likely also the nature of the transactions.

Being unable to destroy transaction records for 7 years (auditable timeline) also adds a privacy/data storage burden. And trusting one or more third parties with this information (IRS, accountant/tax software) who may be breached is also asking for trouble. Practically, an audit attack may be unlikely to happen today, and at least in the US, if someone hasn’t left an identity trail on an exchange, it’d be difficult for a government to identify someone as a cryptocurrency user.

Thanks @Autotunafish for bringing up the summation idea. Are you saying it’s OK to just combine all the transactions into one, even if they all occurred on separate dates? Unfortunately, I don’t think current rules allow you do to this. The instructions for filling out form 8949 for capital gains seem to read that only if there is a 1099-B with reported basis e.g. from a stock broker, can just the combined gain/loss be reported. If it does work though, combining is a much better way to preserve privacy. Agree with @garethtdavies that some sort of de minimis currency-style exemption is probably in order to make practical use e.g. goods exchange easy to do legally.

I’m guessing you’re referring to this thread: TAXES mining reward, buy sell (capital gain/loss) Is there a section/link with the summation?

1 Like

The summation I refer to are the totals you report, sorry for any confusion. This was the first year I had to file for cap gain/loss and misc income but it wasnt that hard (which is relative), but it depends on what you’re filing for, like past unreported income, i didnt delve into that too deep.

Nor did I touch on this
Its about claimed hard fork coins and the lack of their taxation guidance. Maybe this applies to you (you as a whole, not specifically you). Luckily its not rocket science.
Claim it as though it were any other found property with its taxable value correlating to the timestamp and fair market values. IRS form 525 pg 31
Then if you sold it, you claim the amout gained as capital gains (since you payed nothing to acquire, theres no possibility of capital loss on that one)

We already paid the tax its called electricity bill :slight_smile:

I would highly recommend rethinking that, because its not accurate
As much as we dont agree with income taxes (and I dont), they are consequence bearing things

Idk how it is in the US but where i am if you win money from the lottery the goverment cant tax you on it , same goes for money won on gambling . So looking at the drastic ups and downs on cryptos i would say that is a big gamble there . As a miner i am spending money on electricity so i think i have already paid them a tax for my cryptos . But then again thats just my point of view

Well here in the u.s. lottery winnings are absolutely taxable, as well as any other prize winnings. Some places keep maximum prizes below 20K so they can avoid having to report that persons winnings (like reservation casinos), but up until that point it’s basically the honor System. That’s why even if you file wrong the IRS is very lenient versus somebody who doesn’t, because that person at least attempted to fill burden of good-faith placed upon them.
Your gambling winnings view is interesting and you may look into the taxation rate on that because it is definitely taxable in the United States as well. So theoretically if you filed your crypto gains as gambling earnings, though you did it wrong, your way less likely to face any kind of criminal charges, I think its in there
That electrical bill nonsense, forget it, you pay that anyways, you can deduct the cost of the electricity for mining if you know how much it is but it itself is not a tax
Edit - I know it sucks but the sooner you face facts the better, correlating all those Market values with trade gains and losses is time-consuming

This is what you’re talking about, like kind exchange tax deferment, posted in the taxes Thread about it as well, this has to do with certain trades prior to end of year 2017, where exchanges of like-kind properties do not require immediate reporting of gain or loss. With physical property you could say you traded gold bullion for gold coins, that’s a like-kind Exchange. Trading gold bullion for silver coins is not. There isn’t really any guidance as to what constitutes a like-kind crypto exchange aside from exchanging it for the exact kind that you have (so good luck). And yes filing for like kind exchange tax deferment does require records of acquisition and sales.
It’s worth noting-
the code specifically excludes certain intangible assets from Section 1031 like-kind exchange treatment, including stocks, bonds, notes, partnership interests, certificates of trust, and “other securities.” There is no authority treating cryptocurrencies as “securities” for purposes of Section 1031.
But, because issuance of crypto coins may be treated as an issuance of securities under federal securities law, it is possible the IRS could argue that coin exchanges are “securities” excluded from 1031 treatment.
It’s going to depend entirely on whether or not the IRS views different cryptocurrencies as being in the same asset class or if one is a different class from another one if they don’t view it as a security in the first place.
This one discusses option for Traders who lost greater than $3k and try to attempt to claim greater than that by declaration of normal loss. There’s a capital loss limitation of $3K, the section in question does not mention intangible items and again is a giant if.
This one talks about next year’s potential taxes, EU as well, some countries are implementing