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Comment by ddxxdd | Hacker News Reader

How long before someone comes up with a cryptographic approach to anonymizing bitcoin exchanges?

Perhaps exchange #1 could hold a database with bitcoin addresses and PGP-encrypted information about the bank accounts/mailing addresses of cryptocurrency holders.

Exchange #2 could hold the private keys of those bank/home details while receiving withdrawal requests and reimbursement for distributing bitcoin

The bitcoin holder can then request exchange #1 give a withdrawal request to exchange #2 in such a way that no exchange has enough information to connect a person to a bitcoin wallet.

Maybe I'm overthinking this; is there already a way that tech-savvy people can use Bitcoin in a way that's impossible to be tracked when converting to cash?

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> Maybe I'm overthinking this

Definitely. What you’re describing would certainly be a conspiracy to violate all sorts of American laws and is punishable by a lot of time in jail. Add one more layer to your process and you qualify to be prosecuted via RICO laws!

Why do this on behalf of a bunch of random folks you’ve never met?

Almost the stupidest thing an investor can do is try to illegally evade taxes. It is pretty much all downside and no upside if you walk through the likely outcomes.

Either double theoretical, paper wealth or lose actual time to a jail. One of those is realer than the other.

Avoiding taxes is critical, but breaking the law is foolish.

I mean, you can already use decentralized exchanges where you won't even have to give your name. I think for most people that are not doing anything illegal, there's no point in trying to evade taxes. The way I look at it, you either made lots of profits, so you'll have to explain where you got the money from anyways. Or you didn't make a lot of profit, why hide it? There won't be that much tax anyways.

> so you'll have to explain where you got the money from anyways

Explain to whom?

To your bank? Presumably if you made a lot of money, you'll be buying some houses and maybe some cars or creating your own businesses or something. If you transfer large amounts, it might get frozen if you can't explain the origin (kyc/aml).

Assuming you're being facetious, I have always wondered where the line is. If I discover ten thousand dollars in cash in a hole in the ground and deposit it, will the IRS notice? Will the bank require some kind of information? What about if it's a hundred thousand?

The bank will have to report it to the IRS. They will cross-reference it with your taxes. They will also come talk to you if you have a pattern of doing it regularly. But you will probably not have an issue with it.

The bank will fill out a form about "structuring deposits" for any transaction around $10K. They will also report transactions in general over $10K.

https://en.wikipedia.org/wiki/Structuring

Yes, When large amounts of money are deposited into an account there is an automatic notice sent to the government. A One time event shouldn't be an issue however if you have multiple events of large deposits then it's going to trigger algorithms and the government is going to start asking where you got the money from and they'll perform an audit. If you attempt to bypass the system they have systems in place to detect that and will perform an audit. Just pay your taxes

Try depositing 50k at any US bank. Instant paperwork. Try depositing 10k. No questions asked.

Coinbase, for one. There's a whole process under the KYC/AML regulations if you want to deposit large amounts of crypto with a legit exchange.

I'm not from the US but my understanding is that even if you're doing illegal stuff there's still no point in trying to evade taxes, as IRS is not allowed to notify anyone about where you got the money from anyway.

"Illegal activities: Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Schedule 1 (Form 1040), line 8, or on Schedule C (Form 1040) if from your self-employment activity"

They thought of everything!

This clause came from the era of Al Capone, who famously boasted, "They can't collect legal taxes from illegal money." (Which was true at the time.)

They added this clause and then ended up catching Capone for tax evasion.

https://www.forbes.com/sites/kellyphillipserb/2020/10/17/al-...

I think the point of this is less that the IRS won't report it to someone else, but that it adds tax evasion as a reason a criminal can be pursued.

You are probably thinking it's like where contact tracers or census workers or whatever aren't supposed to report illegal immigrants because it's more important that they get accurate info than report people to ICE. I don't think that's the case with the IRS, they're probably more than happy to let other agencies know about your illegal activity.

I got it from here (https://money.cnn.com/2013/02/28/news/economy/illegal-income...):

"If you tell the IRS you made $1 million from stealing money or dealing drugs, does the agency tip off the cops? Legally, it can't, unless a law-enforcement agency gets a court order granting it access to a specific taxpayer's return. The IRS isn't supposed to proactively alert other agencies about misdeeds unless terrorism is involved. In that case, it still needs a court order to disclose anything, but the IRS can initiate the legal process on its own."

I have no idea if it is still valid or not.

Definitely still valid. When I trained as a tax preparer for the VITA program (which involves training specified by the IRS), this was a key point of the training. We were also told that information from clients was confidential and we couldn't report to anyone outside the IRS that someone was earning money illegally. The software (paid for by the IRS) even had built-in workarounds for reporting income for someone with a fake SSN on their W-2 because they didn't have work authorization.

I did this for multiple years, and some of the volunteers had been doing tax prep for over a decade. The same clients came in year after year. If we couldn't guarantee that their tax information was safe from ICE, they would definitely have stopped coming.

I'm sorry, but I don't understand the mindset here. Having created something whose only advantage is in money laundering and paying for illegal products, having created something that by its nature has and always will have massively wasteful consumption and externalities, you're now looking for a way to avoid paying the taxes that support society?

"Externalities" isn't the right word to use here; Bitcoin miners pay for the resources they use to mine Bitcoin.

But there is a positive externality associated with Bitcoin, in that it serves as a check and a balance against authoritarian governments, present and future.

Hence why it's important to ask these questions.

>"Externalities" isn't the right word to use here; Bitcoin miners pay for the resources they use to mine Bitcoin.

Yes it is, Bitcoin miners are overwhelmingly located in China and powered by highly carbon-intensive coal plants. The costs of those emissions are not borne by the transacting parties, because they are global and intergenerational. Regardless of whether Bitcoin miners pay for their coal-powered electricity, their revenue is effectively subsidised by externalities. The higher the demand for Bitcoin, the greater those externalities.

I don’t get it, are you proposing that alternative currencies like USD are completely carbon neutral and have no externalities?

Personally, I am not aware of any currency that does not have externalities, most currencies have a sizable body count from the wars required to preserve their value. Presumably, once Bitcoin is fully mined it may end up having the least externalities of any currency, past or present.

> Presumably, once Bitcoin is fully mined it may end up having the least externalities of any currency, past or present.

The "mining" is of "new" Bitcoin is utterly and completely irrelevant to the the power consumption. The power consumption is the goal, in order to verify that enough power has been sacrificed so that one is allowed to update the ledger. The "new" Bitcoin is an addition to the ledger without a corresponding subtraction, a creation of something from nothing, done as an incentive for transaction validators to spend such tremendous amounts of electricity. As that incentive goes away, transaction fees will increase in order to cover the cost of electricity.

At all times, cryptocurrency resource consumption must be proportional to the total value represented by that cryptocurrency. Anything less than proportional, and the network would be vulnerable to attack. This is independent of the particular mechanism used to incentivize the waste of resources.

Energy usage is absolutely an externality for almost exactly the reason you claimed it's not. The miners pay the electricity company but the electricity company's price doesn't take pollution into account.

No one is avoiding anything. It’s governments that are mistaken in thinking they have the authority to tax the private exchange of digital assets. Sure they can try, but at the end of the day decentralized anonymous currency and centralized taxing authority are fundamentally incompatible.

That doesn't matter, you still need a way of turning 50 USD into crypto. You can either give a random stranger 50 USD on the street for X crypto - some kind of a black market fee or you give coinbase 50 USD via credit card and it's in your account immediately and a reputable company backing it.

The more "illegal"/gray crypto becomes the less it is worth, the worth (at least at todays scale) is due to the ease of use/popularity. It's super easy to buy 1 BTC right now, go back 5 years you basically needed to know someone who knew someone or be part of a forum and hope the other person didn't scam you.

It's called thorchain and it's on the way to the moon...

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