“When I get a new piece of certified mail from the IRS, my heart skips a beat,” admits Lincoln Rice. “Even though intellectually I’m sure it’s probably no big deal, that fear is so ingrained in us.”
That’s a big admission for Rice, whose job is, essentially, to help more people get angry letters from the U.S. Internal Revenue Service. He’s the coordinator (“If we were a normal nonprofit, my title would be something like Director”) of the National War Tax Resistance Coordinating Committee, a group that shares resources for Americans who don’t want their tax dollars to support the military or warmaking.
This piece is part of CoinDesk's Tax Week.
“A lot of [early] war tax resisters … were conscientious objectors to the Vietnam War, and were either recognized as such by the federal government, or did stints in prison,” says Rice. After the war, “many of them started thinking, ‘I might not be asked any longer to participate in war with my body, but I don’t want to pay for it, either.’”
Some are willing to go so far as to break the law to withhold their support from the U.S. war machine. “Some folks do an illegal form of tax resistance,” Rice says, “Where they … refuse to pay all of their federal income tax and redirect it to more life-sustaining purposes.”
The group is following in a proud American tradition of tax-based political activism. The Boston Tea Party, which helped spark the American Revolution, was a violent protest against “taxation without representation,” following the British imposition of unfair taxes on paper and tea. Samuel Adams, considered one of America’s Founding Fathers, was active in tea smuggling intended to evade the hated duties. In 1846, Henry David Thoreau was thrown in jail for refusing to pay taxes, partly out of opposition to the Mexican-American War. The experience spurred him to write “Civil Disobedience,” a key text in the evolution of American (and later global) activism.
In contemporary America, groups have continued to advocate for various forms of tax resistance or tax protest, with different rationales and approaches. Rich individuals and corporations bob and weave their way through the tax code to make sure they’re paying the least they can legally get away with. Also working within the law, modern mainstream conservatism supports low-tax policy, embodied for decades by the “no new taxes” pledge that conservative activist Grover Norquist pushed on Republican candidates who didn’t want to face a primary challenge from his allies. For decades, far-right precursors to the so-called “sovereign citizen” movement have used (often questionable) legalistic reasoning to argue that the U.S. income tax is already illegal or unenforceable.
Then there are the libertarians. Libertarian tax resistance is often philosophically radical and can manifest as a refusal of the ideas of citizenship, collective action and even “society” itself. Libertarians often equate taxation with theft or worse, arguing the private sector can and should provide most of the services the government does today.
Those anti-tax and anti-government attitudes were a major factor in perhaps the single most important moment in the brief history of cryptocurrency. As early as 2011, a small group of libertarians associated with the New Hampshire-based Free State Project began to wonder if cryptocurrency, which is very hard to seize and was at the time hard to trace, could provide a technological means for protecting their wealth from involuntary government seizure.
That seems less plausible than it did a decade ago. But in the meantime, Free Staters helped kick-start awareness of bitcoin, arguably more than any other single group. They’ve taken major hits for it, including a recent wave of bitcoin-related arrests of hardline libertarians. They have been the conduit for crucial figures including Roger Ver and Eric Voorhees – though also for the considerably less laudable Craig Wright.
With tax time fast approaching, many American cryptocurrency investors and traders are bracing themselves for the onerous task of calculating how much they owe the IRS – then the equally burdensome act of paying it. More than a few will find themselves pondering a dangerous question:
What if I just don’t pay the IRS?
How common is tax resistance?
The tax landscape in America is essentially unique among developed democracies, in two seemingly contradictory ways. On the one hand, the American tax system relies more than others on self-reporting and voluntary compliance.
“U.S. war tax resisters are envied by resisters in other places like Canada or Europe,” says Rice. “We get to fill out the W-4 [tax withholding form] to tell our employer how much to withhold from our paycheck and send to the IRS – no other western country allows that.” Most other Western countries determine withholding for citizens, and often essentially prepare taxes for them. This means Americans have much more ability to refuse or otherwise avoid taxes.
Strangely, America’s second unique feature is that its citizens voluntarily pay their taxes at a higher rate than any other country on Earth. About 83% of Yanks pay their taxes voluntarily and on time, according to the IRS. That makes Americans almost shockingly compliant compared to some places: One 2012 study by the Vienna Institute for International Economic Studies found only about 62% of Italians comply with personal income tax laws voluntarily. Even more stunning, only about 68% of Germans do.
Rice said compliance is largely thanks to fear of the IRS. But Americans on the whole also seem surprisingly happy to pay taxes. Starting in the late 1990s, the percentage of Americans who feel they personally pay too much in taxes has declined dramatically. One 2017 study found that 76% of young Americans believed “everyone or almost everyone” should pay taxes.
Alejandro Zentner, an economist who studies taxation at the University of Texas at Dallas, offers an explanation that’s both sensible and shocking: Despite decades of growing distrust, Americans still have much higher than average faith in the honesty of government.
“In the United States, when people protest their taxes, they do it because they don’t like the actions of the government,” such as fighting wars, says Zentner. But “a lot of people in [countries like] Argentina argue for not paying their taxes because of corruption. Which is kind of a different driver. They feel that the government is collecting this money and organizing parties.”
Bitcoin and taxes
Cryptocurrency, for better or for worse, is inextricably and forever bound with tax resistance. Taxes weren’t a major focus for Bitcoin creator Satoshi Nakamoto – the word “tax” does not appear in the Bitcoin white paper, and Satoshi’s various writings were generally more focused on Bitcoin as a way to address currency debasement (or inflation) and banking-driven credit bubbles.
But a small cadre of hard-line, U.S.-based libertarians – including Roger Ver, the first person to ever invest in a Bitcoin startup – saw the huge potential of the technology before anyone else outside a small group of cypherpunks. This group played a role in articulating libertarian politics to Bitcoin technology, laying some of the most important conceptual foundations for the cryptocurrency explosion we’re living through today. This group of early Bitcoin adopters included at least a few outright “tax protesters,” who not only opposed taxation in principle, but actively and very publicly refused to pay their own taxes.
Ver first learned about Bitcoin when then-lead maintainer Gavin Andresen appeared on a podcast called "Free Talk Live." Ver was a longtime listener of the show, which was (and still is) produced by fellow travelers of the Free State Project, an initiative to establish a kind of laboratory for a libertarian social order in New Hampshire.
That single podcast episode (which isn’t easy to find online these days) triggered a Cambrian Explosion for Bitcoin evangelism and adoption. On the ground, bitcoin became widely used by members of the Free State Project, and in major Free Stater clusters such as Keene, NH. These events also led longtime libertarian Eric Voorhees to Bitcoin. He went on to found important early projects and companies like Satoshi Dice and ShapeShift.
Roger Ver took a more zealous approach, earning him the nickname “Bitcoin Jesus” until the Block Size Wars left him somewhat marginalized. According to a number of Free Staters interviewed by Reason Magazine, Ver’s early advice helped make them millionaires. The impact even went beyond bitcoin – Vitalik Buterin wrote exhaustively about the Free State Project for Bitcoin magazine, years before conceiving Ethereum.
Libertarians are broadly opposed to taxation and the state, in nearly all forms. But the Free State group has included folks who took the principles of anti-tax politics and put them into vigorous, even theatrical practice. Ian Freeman, the founder of "Free Talk Live," recently claimed to New York magazine that he hasn’t paid federal income tax since 2004. That claim doesn’t necessarily imply lawbreaking given Freeman’s reportedly minimalist lifestyle – some tax resisters intentionally live on incomes too low to tax. Freeman is currently under house arrest for bitcoin-related allegations that Free State allies, including Voorhees and Ver, have claimed are trumped up and politically motivated.
Also key to this early Bitcoin cluster was a woman named Michele Seven, who was an active tax protester before Bitcoin even launched. Seven spoke publicly as early as 2009 about her refusal to pay more than half a million dollars in back taxes and fines claimed by the IRS. Seven would go on to a position of substantial influence in the Bitcoin community; she proselytized Bitcoin for many years under the handle Bitcoin Belle.
Read More: The 7 Types of Crypto Tax Nightmares
The idea that Bitcoin’s pseudonymity could be used to hide wealth and avoid taxes was more realistic a decade ago than it appears today. The Free Staters pursued that goal with some tactical nuance, striving to build an ecosystem of bitcoin-accepting retailers to help isolate the system from the U.S. dollar and protect users’ identities.
As libertarian magazine Reason recently pointed out, some who collected substantial bitcoin hoards early on have gone very quiet as their tokens became fortunes. This may be the surest form of tax avoidance available to crypto users: Once they’ve mined or otherwise acquired tokens without linking them to a real-world identity, some users simply pretend the tokens don’t exist. Hence the “tragic boating accident” meme that continues circulating: If you’ve ‘‘lost‘’ your coins, you certainly can’t be taxed on their rising value.
A second notional pillar of anti-tax enthusiasm for Bitcoin was the idea that bitcoin was currency, and therefore less legally taxable than conventional financial returns like capital gains in stocks. That concept was never particularly airtight, and was put to rest in 2014 when the IRS officially declared that it considered bitcoin property, not currency.
At a higher level, though, Bitcoin opens up dramatic new possibilities for shrinking the footprint of the state. Libertarianism (not alone among political ideologies) has always grappled with a degree of incoherence at its heart: while private property stands as its alpha and omega, a state has been historically necessary to protect private property rights through police and military force. These are the entities moderate libertarian thinkers like Robert Nozick generally have in mind when they leave space for a “minimal state.”
Critics like Stephen Holmes and Cass Sunstein, though, claim this carveout also “reveals the statist preconditions of laissez-faire, the authority that underwrites liberty.” And it gets worse. In a world with more and more intangible assets like stocks and patents, the state apparatus required to secure property rights grows. Suddenly you need not just the police, but intellectual property (IP) courts and securities oversight. By extension, you then need state taxation to pay for them.
Bitcoin, and blockchain more generally, present a chance to break that bind – a completely non-state mechanism for securing intangible property. This is the driving ideological force behind systems like tZero, a now somewhat moribund early attempt to put corporate equity on the blockchain. TZero was built with the backing of Overstock.com and Patrick Byrne, a once-stalwart libertarian increasingly entangled in Trumpism.
The implications for taxation were just one element of Bitcoin's appeal to libertarians, though. Its uncensorability, then on display on the Silk Road market, was arguably more magnetic for the Free Staters. And the biggest draw was and remains simply that bitcoin was non-state money. Libertarian icon F.A. Hayek argued in 1976’s “The Denationalization of Money” that separating money creation from the state could make all money better thanks to competitive dynamics – an argument now common not just among bitcoiners, but across crypto. Libertarians circa 2011 were uniquely positioned to realize that bitcoin represented the first genuinely tenable non-state money thanks to its technological innovations.
Tax protest: A very convenient truthiness
In the early 2010s, Michele Seven was an occasional co-host of the "Free Talk Live" podcast, and reportedly played a role in turning Roger Ver and Eric Voorhees on to bitcoin. Extremely well-spoken and personable, Seven was by all accounts quite influential and well-connected in the early Bitcoin scene, and likely deserves a bigger share of credit for the system’s growth than she gets today. That is reportedly in part because of damage to her reputation over her role in introducing Craig Wright to influential bitcoiners.
But before making her huge impact on bitcoin, Seven was declaring her refusal to pay a large tax bill, saying she owed nothing because she was “not a slave.” Given Seven’s central role in a community widely seen as strongly principled, one part of her story is jarring: By her own telling, she did not refuse to pay taxes on principle, only articulating her politics to her unpaid taxes after what she herself describes as an oversight. Moreover, this seems to be a very common trajectory among individual tax protestors.
In an interview published in 2009 by the YouTube channel Motorhome Diaries, Seven describes having “recently received a notice that the IRS intended to place a levy” on her property, to collect a tax debt of over $637,000 incurred in 2006. Seven described that year as a hectic and trying time thanks to serious family illnesses.
“Initially, I didn’t file simply because I didn’t have time. It slipped my mind. And although I traded in the [stock] market, I realized that I hadn’t actually made enough money to have a tax consequence if it came down to it. I did not make the $1.5 million that the IRS is claiming I made that year, but rather $60,000.”
You may have guessed Seven’s mistake: She was an active day trader in stocks without a good tax strategy. Each of her winning trades incurred a tax obligation, but she instead kept that money and used it to trade more, with apparently modest success. Though seemingly unaware of this at the time, she was essentially using leverage provided by other Americans to trade stocks. And when leverage goes the wrong way, you can wind up, as she did, deeply in the hole to your lender.
Seven and other Free Staters come across by and large as clear-eyed and principled, genuinely willing to suffer serious consequences in service to their deep political commitments. But most tax protestors – the term used by the IRS for those who dispute the government’s legal authority to tax – follow a much less sophisticated version of Seven’s path. Declaring themselves philosophical tax protestors or sovereign citizens is often a post-facto rationalization of not paying tax debts they’ve already incurred for entirely non-ideological reasons.
“The vast majority of [tax protestors] are middle- to lower-class tradesmen with little or no college education,” former tax collector Richard Yancey wrote in his memoir about life as a “revenuer.” “Most protestors are merely gullible saps who have fallen on hard times and are conned by unscrupulous promoters into parting with money they don’t have for a ‘product’ that doesn’t work.”
Yancey was a tax collector mostly in the 1990s, and the ‘product’ he’s referring to is a relic of the pre-internet age. Grifters would target individuals who had already been hit with tax liens, trying to sell them “secret” methods to erase their tax debts. These usually included form letters purporting to eliminate taxes by invoking made-up legal principles, often some variant of the “admiralty law” conspiracy theory or specious “sovereign citizen” logic. They didn’t work, and still don’t.
Rice at NWTRCC marks this as one major distinction between war tax resisters and legalistic “tax protesters”: “We do view our actions as illegal, and as a form of civil disobedience,” he says. “And in our group there’s a large emphasis on redirection. It’s not so much an emphasis on, this is money that I earned and it should stay with my person. There is a sense of communal responsibility.”
Tax resistance and the burden of history
Though forms of tax protest and tax resistance have recurred throughout American history, contemporary small-government and tax-protest movements have been shaped by a specific context: the end of slavery and the struggles to integrate U.S. society. To a substantial degree, tax protest, elite tax evasion and anti-tax politics have been embraced by factions seeking to deny equal citizenship to African-Americans.
“You can see these tax resistance policies overlapping with anxieties about the end of slavery,” says Camille Walsh, who studies conflicts over taxation and school funding. “Defense of the institution of slavery goes along with preventing the federal and state governments from having the power” to protect the rights of former slaves.
That story is long and tangled. But modern right-wing tax protest can be seen in part as a response to the limits of earlier attempts to equate “taxpayers” with “white people.” Walsh found that this rhetoric was widespread, for instance, in discussions of school integration in the 1950s. White opponents of integration often argued they had the “right” to send their children to whites-only schools because their taxes paid for them.
When those bids for control did not entirely succeed in exerting white control of schools, growing numbers of white Americans simply turned their back on the social contract and the taxation that underpinned it. Activist and historian Heather McGhee has convincingly argued in her book “The Sum of Us” that white Americans have been willing to give up tax-funded public goods simply to prevent them from being used by Black citizens. This included, most famously, allowing dozens of publicly funded municipal swimming pools across the American South to be closed and filled with concrete.
This racialized perception of taxation echoed as recently as 2012, when Republican presidential candidate Mitt Romney was castigated for the racial undertones of his comments on Americans who don’t pay income tax. The Anti-Defamation League, a Jewish organization, describes contemporary tax protest movements as still having “some white supremacist elements.”
The IRS in repose
If fear of the IRS has helped make Americans the world’s most dutiful taxpayers, that fear’s name might as well be William Culpepper. Culpepper is the pseudonymous, obsessive IRS revenue officer whose presence looms over Richard Yancey’s memoir “Confessions of a Tax Collector.” It is Culpepper who tries to teach Yancey, then a rookie IRS revenue officer, the merciless doggedness of the “revenuer,” a philosophy heavy on property seizure and light on human empathy.
“We nullify,” Culpepper intones to Yancey. “We confiscate. We obliterate. We take a bunch of numbers and make them go away … Your job is the black hole of occupations.” The nihilistic, even malevolent Culpepper is a mix of Agent Smith and The Terminator, but instead of a cyborg with a gun, he’s a sharp-dressed man with lien documents and the full power of the U.S. government behind him.
That image may still haunt many Americans – but it’s largely a thing of the past. That’s thanks mostly to the 1998 IRS Restructuring and Reform Act, passed partly in response to allegations that taxpayers were being harassed by revenue officers a la Culpepper. The Act placed more oversight on revenuers and raised the bar for aggressive enforcement.
IRS funding and staffing have also been consistently constrained since the Act’s passage. According to Yancey, the IRS had 9,000 revenue officers when he was hired in 1991. By 2004, just a few years after the RRA, that number had already plummeted to fewer than 3,500. Between 2010 and 2020, overall IRS staffing levels dropped a further 20%. The Act and these staffing reductions had the predictable effect of dramatically reducing enforcement action, including property seizures – even for those vocally declaring their refusal to pay taxes.
Read More: 4 Crypto Tax Myths You Need to Know
“Not only was there a change in funding, but a change in philosophy for the IRS,” said Rice. “It wouldn’t be uncommon for people practicing illegal forms of war tax resistance in the 1970s or 1980s to have their car repossessed, to have their wages garnished. During the 1990s there were people who had their homes repossessed and put them up for auction. That has largely ended.”
The Act also included an interesting provision preventing the IRS from using the term “illegal tax protestor.” As described by Yancey, tax protestors (particularly those of the sovereign citizen stripe) were often made examples of by the pre-reform IRS, singled out for particularly harsh enforcement to scare off imitators. Removing the term from the IRS lexicon was intended to change that, though the thinking still reportedly persists within the IRS.
Rice agrees that legalistic “tax protestors” are still subject to more aggressive enforcement than war tax resisters engaging in open civil disobedience. “I think the IRS feels they’ll have a better image if they’re going after a tax protestor, who they can say has just been [avoiding taxes] for their own selfish needs.”
But those fine distinctions seem less important than the overall relaxation of enforcement. In addition to declining enforcement against delinquent taxes, the likelihood of any taxpayer being audited dropped by more than half between 2010 and 2020. Many believe that this decline has gone too far, and proposals to restore missing IRS funding have been floated in Congress, including recently as part of U.S. President Joe Biden’s now-dead Build Back Better package.
But until such changes become reality, it leaves a huge window for those who oppose taxation on principle, of whatever sort.
“There isn’t a better time” to resist or protest taxes, says Rice. “This is probably the least effective the IRS has ever been.”
Further reading from CoinDesk's Tax Week
Uncle Sam may collect tax on every loan and repayment of cryptocurrency, which may catch users by surprise, creating a tax trap that could impair the rapidly emerging DeFi industry.
For over a year now, major tech companies and venture capital firms have been rallying behind NFTs (non-fungible tokens) as the next big thing in online commerce.
With the U.S. tax deadline (April 18) around the corner, confusion about cryptocurrency taxes abounds. Here are some ways you might have your facts wrong, according to ZenLedger COO Dan Hunnum.
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