Blockchain Technology and General Issue of Tax Evasion via Bitcoin

Blockchain Technology and General Issue of Tax Evasion via Bitcoin

Güneş Çetin Gerger
DOI: 10.4018/978-1-7998-6650-3.ch005
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Cryptocurrencies often also serve money laundering activities, terrorist financing, tax evasion, and other illegitimate activities with a market value of more than 7 billion euros across the globe, though the total amount is hardly measurable. Indeed, the blockchain technology involves many virtual currencies, including bitcoin, to conduct various financial transactions related practices throughout the world economies. Besides, other blockchain applications are making positive contributions to a wide array of other industries including healthcare, supply chain, manufacturing, etc. This technology which constitutes the backbone of digital assets transactions currencies is characterized by anonymity, privacy, security, and speed. In this sense, for tax administration authorities, detection of financial fraud and regulations with respect to taxation of virtual transactions pose newer emerging challenges. This chapter aims to examine the blockchain technology, cryptocurrencies, especially bitcoin, and look into regulations by world governments to combat tax evasion and illegal transactions.
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The Blockchain is the software architectural structure of the new are. In fact, in the Blockchain as a database, data are recorded into blocks in an ordered manner. Each record has a time stamp. When a block is full, the next block is created, and the blocks are connected to each other in the form of a chain. Today, in information systems, databases are the most used constructs. This situation is also valid for the Blockchain. A Blockchain may be created for each project, each cryptocurrency and each recording system. In this sense, the Blockchain is a record book. We may call this a “general ledger” (Güven, Şahinöz, 2018).

The World Economic Forum defined the Blockchain technology as follows: “The Blockchain technology, or distributed ledger technology (DTL), is a technology protocol that makes it possible for the exchange of data between two parties without needing an intermediary.” In terms of security, the Blockchain is superior, as all records in the chain are at the same level with same privileges, and cannot be changed, without an agreed consensus. It is not in question for the system to crash, be hacked or its data getting deleted. As an important discovery, the Blockchain may be used in terms of social, political and legal aspects. The most popular applications of the Blockchain technology are in the transaction of cryptocurrencies.

Creation of cryptocurrencies occurs without the control of any state or government, and does not show any physical aspect; these are virtual currencies. Cryptocurrencies are created by “miners” with the Blockchain technology and mathematical encryption methods. By adding a new link to the chain existing over the Internet, miners gain money in exchange. This amount of production is limited to 21 million units for Bitcoin, which is the most prevalently used virtual currency among the many cryptocurrencies. In the Blockchain, where Bitcoin operations are recorded, all past transactions can be seen and monitored. However, the account owners are not clearly known, therefore all operations take place anonymously. In this aspect, it is often also used for the purposes of money laundering and the underground economy. This in turn causes the prevalence of tax evasion. The main issue in tax evasion is the anonymity meaning that cryptocurrency users remain hidden, and their transactions cannot be taxed, which in turn creates an undetectable area. Accordingly, Bitcoin is sometimes described as a “tax haven”.

States i.e. governments are also spending time and effort to find ways of bringing cryptocurrencies within the taxation systems. While these cryptocurrencies are now being taxed in some countries, they are still outside the taxing system in other countries. There is still no clear decision on how cryptocurrencies can be brought under the income tax systems. In general, Bitcoin income is being regarded as “commodity”, rather than money. In the cryptocurrency scenario, money is created as much as the amount declared during establishment by following publicly available methods that are known by all concerned. On the other hand, in the conventional monetary system, the state may create as much money as it wants through the central bank, and the state is the guarantor in this process (Çarkacıoğlu, 2016). Bitcoin production requires a highly difficult process. However, looking at its usage, one may see that it is being used by many large organizations worldwide including Wikipedia, Virgin Galactic, Tesla, Microsoft, Overstock, Namecheap, etc. (White, 2018). The superior properties of cryptocurrency have made it prevalent. These properties are security, anonymity, portability, bidirectionality, offline capacity, unlimited term, broad acceptability and user-friendliness (Matonis, 1995). These superior properties may also lead to negative effects that may result in tax evasion.

It is a fact that digital technologies stand as a basis for complex tax fraud and tax scam schemes. Even though technology has been a significant facilitator of illegal economic activities, cyberspace consists of many tools that are used for money laundering and other illegal financial transactions. For example, banking products and services which are regulated mediators, electronic payment systems as non-bank mediators, cryptocurrencies which are mostly unregulated and may also be decentralized, online services and trading platforms, online gambling and e-commerce. Converting cryptocurrencies into cash or other means of traditional payments is used as a common way of illegal money transfer (Çetin Gerger and Bozdoğanoğlu, 2017).

Key Terms in this Chapter

Tax Evasion: It refers to any criminal act or any offence of dishonesty punishable by civil penalties that is intended to lower or non-payment of taxation.

Blockchain: It refers to a form of distributed ledger spread over multi computers for sustaining a permanent and tamper-proof record of transactional information of digital assets.

Proof-of-Work: In a PoW system, network participants have to solve the so-called “cryptographic puzzles” to be permitted to introduce new “blocks” into a Blockchain.

Anti-Money Laundering: Anti-money laundering (AML) refers to a group of laws, regulations and processes aimed at preventing criminals from disguising illegally obtained funds as legitimate income.

Tax Compliance: Tax compliance means taxpayers' decision to comply with tax laws and regulations by paying taxes timely and accurately.

KYC (Know Your Customer): KYC related practices are especially relevant in user and client relationships with business. It is the first step in a customer’s good relationship with a company.

Cryptocurrency: A digital currency for which encryption methods are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.

Bitcoin: This refers to the decentralized and most popular virtual currency that can be sent from user to user on a peer-to-peer Bitcoin network without the need for intermediaries.

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