Crypto Can De-Escalate the Tax War

There is a tax war between the government and the people, and there always has been. The government badly wants taxes, and people badly don’t want to pay them, so each side battles fiercely for their goal, constantly inventing new weapons in an age-old arms race that continues today.

Collecting taxes is of existential importance to the government because it finances their whole operation. Avoiding paying taxes is of great importance to people because they want to keep the money they make. As a result, this eternal tax war is of huge scale and importance in nearly all times and places.

Zachary Lerangis is the head of operations and chief of staff at Arkham Intelligence. This piece is part of CoinDesk's Tax Week.

The historical record bears this out. The text of the Rosetta Stone is an official government decree largely about royal and priestly taxation. The most comprehensive record we have of the medieval world is the Domesday Book, commissioned by William the Conqueror in 1085 after his conquest of England, which outlined the holdings of every landowner in the country in order to determine what taxes they owed:

“Then sent [William] his men over all England into each shire; commissioning them to find out ‘How many hundreds of hides were in the shire, what land the king himself had, and what stock upon the land; or, what dues he ought to have by the year from the shire.’ So very narrowly, indeed, did he commission them to trace it out, that there was not one single hide, nor a yard of land, nay, moreover (it is shameful to tell, though he thought it no shame to do it), not even an ox, nor a cow, nor a swine was there left, that was not set down in his writ” (The Anglo-Saxon Chronicle).

The Domesday Book was a major escalation in the tax war. It’s much harder to avoid paying taxes when the government sends its agents everywhere to directly record what everyone owns and owes. Escalation doesn’t only come from the government – the American Revolution can be viewed as a popular escalation in the tax war to outright violent revolt.

See also: The Silver Lining of a Crypto Market Decline: Tax Savings | Opinion

On a lesser scale, many people spend fortunes on complex corporate, legal and accounting schemes intended to minimize their taxes. These escalations are extremely costly and negative-sum. The IRS has an annual budget of $14 billion, and August’s Inflation Reduction Act increased its budget by $80 billion. Where will this funding come from? In large part, more taxes, fueling a vicious cycle.

Therefore, de-escalating the tax war is beneficial to everyone. If the government didn’t employ an army of IRS agents, everyone’s taxes could be lower. And if the people didn’t employ an army of accountants and lawyers to minimize their taxes, they could afford to pay more and still have more money in the bank.

Crypto can de-escalate the tax war. The transparency and immutability of blockchain transactions would allow for tax assessment and collection to be vastly more efficient than the status quo. Imagine a world without tax returns – you could simply report your blockchain addresses, and smart contracts would automatically determine what you owe and pay it.

Read more: The State of Crypto Taxation in India: Past, Present and Future

Cryptographic software systems could be designed for determining that all addresses are reported, transactions are accurately categorized, and tax calculated correctly. The calculation of capital gains, for example, would be trivial with the transaction record that blockchains provide. This objectivity and indisputability could make the job of both the government and taxpayers much easier and less painful.

Some might protest that this amounts to submission by the people in the tax war, but this is not the case. It would be a calculated de-escalation in a field of disadvantage – so that energy could be devoted to other more fruitful avenues of attack.

Fighting the government on assessment and collection is not the right strategy. The right strategy is to work towards a better and more just tax system. Obviously this is hard, but it is the only way. Fighting on assessment and collection doesn’t work collectively or in the long run. It is a defect-defect equilibrium. The government still gets their money. Some people may manage to “minimize” their taxes for some time, but this ultimately comes at the expense of everyone else and it often ends in an even bigger tax bill, or worse, jail.

The government and the people alike currently view crypto as merely another weapon in the tax war, with each trying to use it for their own ends. It can instead be a tool of peace or at least a lasting truce, paving the way towards a just and efficient system.