A cryptocurrency is a digital currency, also referred to as alternative currency, which relies on cryptography. Cryptography is the science of converting information from a readable state to an apparently meaningless one.The originator of an encrypted message shares the decoding technique needed to recover the original information only with intended recipients, thereby precluding unwanted persons from knowing which information has been shared.
The best known cryptocurrencies are:
Bitcoin, currency code BTC, created in 2009;
Litecoin, currency code LTC, created in 2011;
Namecoin, currency code NMC, created in 2011;
PPcoin, currency code PPC, created in 2012.
For an income to be taxed, one of two basic procedures can be applied:
1.Source, meaning that the income being taxed has been earned in the country where it is being taxed;
2.Residence, meaning that countries tax the worldwide income of their residents, irrespective where this income has been earned.
Furthermore, there is an additional procedure applied only by the US, which requires taxation on global income—wherever in the world it has been earned by an American citizen (passport holder) or resident alien (green-card holder).
Cryptocurrencies can be used for tax evasion is because their coinage is an anonymous electronic token, which can be exchanged directly between two parties in any country and which does not need to pass through any financial intermediary. Hence cryptocurrency transactions such as cash transfers cannot be traced by third parties and are invisible to tax authorities.
These developments are not going on unnoticed by the authorities.
Recently one of these crytocurrency operators, Liberty Reserve, its operators, were accused of money laundering and operating an unlicensed money transmitting business.
According to the prosecutors in New York, Liberty Reserve operated a $6 billion US online operation, which formed a central hub for tax evaders.The legal papers filed described the operation as one that goes beyond the confines of traditional international banking. It traded in virtual currency and provided the kind of anonymous and easily accessible banking infrastructure increasingly sought by criminal networks.
In addition, in the beginning of October 2013, with the prosecutionand closure of the company Silk Road, Bitcoin itself came under attack. According to the FBI, Silk Road was a website on the "dark web" which could only be accessed via the anonymization service Tor. They further commented that Silk Road was the hub for a substantial amount of legal and illegal dealing in goods and services, all of which had to be paid for using the cryptocurrency Bitcoin. The FBI also electronically seized more than 28,000 Bitcoins with a value of around $3.6million US. A number of other arrests have followed in other countries.
During the last couple of years, many legislative initiatives have been deployed by the EU, USA, the G8 countries, OECD, and FATF—all geared toward combating money laundering and tax evasion.The latest and most commented upon of these initiatives is the Foreign Account Tax Compliant Act (FACTA), introduced by the USA and scheduled to become effective by June of 2014.
As we can see, no matter how innovative the tax dodgers become, the long arm of justice always remains within reach. For this reason, the best advice is to seek professional advice and arrange your matters in a legally compliant manner.