The Automatic Tax Man Cometh

Crypto won’t save you from taxes, but it may eventually make them easier to pay, says futurist Dan Jeffries. This piece is part of CoinDesk's Tax Week.

By Dan JeffriesLayer 2
Feb 22, 2022 at 2:59 p.m. UTCUpdated Mar 14, 2022 at 7:34 p.m. UTC
By Dan JeffriesLayer 2
Feb 22, 2022 at 2:59 p.m. UTCUpdated Mar 14, 2022 at 7:34 p.m. UTC

Daniel Jeffries is an author, engineer, blogger, podcaster, public speaker and Managing Director of the rapidly growing AI Infrastructure Alliance.

I've never been a tax activist. I've always taken the "give to Caesar what is Caesar's" approach to my tax burden.

I'm not very religious either, but I always loved that line from the Bible. Jesus used it to deftly deflect some antagonists who were trying to trip him up and trap him. They hoped he'd tell people not to pay taxes so they could paint him as a revolutionary and insurrectionist and get him arrested. But he wasn't biting. His reply was simple, just pay your dues in the material world too.

This essay is part of CoinDesk's Tax Week.

But there are a lot of tax activists in crypto. You can spot them in any Reddit, Twitter, Telegram or Discord thread where they angrily swear the government will need to pry money from their cold dead hands. What's a tax activist? That's someone who thinks taxes are unconstitutional or wrong and refuses to pay. To many tax activists, crypto is the great white hope, that will bring the dawn of a bright new day of self-sovereignty, where people seize back control of their money from the state and nobody can force them to pay a single sat (a unit of bitcoin) that they don't want to pay.

There's just one problem.

Crypto will make paying taxes a whole lot easier in the future.

To understand why, you just have to understand a little bit about how technology changes over time as it gets more widely adopted.

Taxes and crypto: diverging from Satoshi's vision

To see where crypto is going, you have to know where it started, and it started as a decidedly libertarian movement.

A quick read through Satoshi Nakamoto's writing from his forum posts and the original Bitcoin whitepaper gives you a lens into Satoshi's mind, and that mind favored hard money and privacy. It's all right there in Satoshi's posts to Bitcoin forum:

"Privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous. The public can see that someone is sending an amount to someone else, but without information linking the transaction to anyone."

Above all, Satoshi wanted us to return to self-sovereignty. It's baked into the design of the system. Instead of storing crypto in a bank or with a centralized power, and "[having] to trust [banks] with our privacy," crypto gets stored in our wallets, governed by our private keys. Control your keys and you control your destiny. If you've got your keys nobody can force you to give up your money or seize it without a lot of effort.

But while crypto may have started as a libertarian movement, it won't end there. Both crypto and how we pay taxes will change radically over the next 20 years, as digital money becomes the dominant standard for money across the world.

If you're a Bitcoin maximalist or a hard-money adherent, you probably think it's inevitable that Satoshi's vision will win in the long run. We'll have a powerful, limited money supply that can't be debased and where privacy reigns supreme.

Whenever people look at technology they tend to see what they want to see, and what they want to see is their own beliefs reflected back to them and confirmed. We think because crypto was started by libertarians and, because we're libertarians, then crypto will continue to evolve along libertarian lines.

Unfortunately, that's just not the way a complex system evolves over time. When you're peering into the misty haze of the future and trying to see where it's all going, you're better off thinking of technology as bright blue paint continually flowing into a river. Imagine that brilliant blue spreading out and rippling, going wildly in every direction as it interacts with the stream of water and time.

The biggest thing that changes technologies is other ideologies getting their hands on it. While other groups may originally fear a new idea that came from a rival ideology, humans are an incredibly adaptive bunch. They absorb and change every technology they come into contact with, warping and changing it to fit their perspective.

Centralized powerhouses will look to force the decentralized nodes back through centralized choke points. It's already happening with the rise of central bank digital currencies (CBDCs) with every major government on earth hard at work on one right now. Governments will look to get it under control with laws and force. Tax agencies want to track and tax it, so no revenue escapes. Authoritarians will look to turn it into a panopticon that they can use to watch and trace people through, a one way mirror that lets them watch you without you knowing when they're watching.

We've never had a system where the original vision matched how a technology evolved over time. Look at something like the internet, which was built for researchers in universities and for militaries to keep messages alive with routing if the nodes got destroyed by nuclear weapons. Now we use it to watch people dancing on TikTok, scream at each other on social media, watch porn, trade recipes, stream movies and play games.

Think of public key cryptography itself. It started as research in the U.K. and U.S. military as a way to control secrets, but once it got released publicly, it powered everything from private messengers to cryptocurrency, something no military ever imagined.

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Headache (Getty) (Getty Images)

Once tech starts to interact with complex systems, it changes in complex ways.

Satoshi probably never imagined central bank digital currencies, but they're coming like a lightning strike now. It's no longer theoretical: Governments are hiring people, studying how to make it reality and testing the technology. China is already racing to deliver a fully digital money system so they can kill off cash. Killing cash will give them total visibility into everything people spend their money on at all times. When you think of how often you spend money every day, that's a lot of insights into your behavior and who you are as a person.

And just like that we've gone from an original vision of privacy and anonymity to a panopticon with the exact same technology.

What that means for taxes isn't all that hard to see.

Over the next 20 years taxes will be nothing but a script.

Automatic taxes

Whenever you buy anything or get paid in CBDCs, you'll get taxed immediately. In 25 or 30 years, taxes will get whisked out with every transaction. You'll buy a lamp at the store or call a self-driving taxi to pick you up, and sales tax will go right to the tax man. The taxi company won't file their income later and send the money on a delay. It will happen instantly and automatically.

That's because it won't take long for governments to figure out that the key super power of digital currencies is their programmability. Bitcoin and the cryptocurrencies that followed ushered in the era of programmable money. Programmability is the killer feature of digital money. That's why it's inevitable that it kill off dumb, analog money. You can't program a dollar bill to do anything at all. You can fold it and carry it with you and give it to someone else, but you can't do much else with it. A digital dollar will have all manner of scripts and functions and possibilities baked right into it. You won't need an escrow company when you buy a house, your eUSD or eEURO will just self-escrow.

By the time you go to report your taxes, most of them will already be paid. You'll get a report that tells you what you paid and whether you want to dispute it. If you're a regular worker with a fixed paycheck, that's not all that different from today. Taxes already come out of your salary. But if you're a business owner, a proud owner of a side hustle, a consultant, an artist or a trader, it will mean profound change. You won't put your tax money in a separate account and pay it later or quarterly. You'll pay right now.

That will have massive implications for the state, which will only keep getting bigger. It will also directly impact your bottom line. You'll no longer be able to earn any interest on that money in a bank or in investments while you wait to pay at the designated time. Instead you'll hand it over, and if you're charged incorrectly, it means you have to wait to get it back through whatever the dispute process of the future looks like, and that means you just gave an interest free loan to the government.

Maybe you're imagining that private cryptos will save you from automatic tax collection? Don't bet on it.

Open, private crypto will likely evolve as a parallel economic operating system of the world, existing alongside central bank digital currencies over the next few decades. But even if you've got control of your own personal keys, it won't be hard to subvert that with laws.

It won't take much planning for tax agencies and lawmakers to realize they can just mandate automatic tax collection on any business that has employees above a certain level or on any retail sales. They'll force companies to have a public, auditable wallet, linked to an identity, that they can study with chain analysis. The power to do this is built into every single crypto that exists today. It's nothing but a simple smart contract. When X gets purchased, Y goes to this address in addition to the business address Z.

No matter how you cut it, we're looking at a tax future that's almost all automatic.

That's not the worst thing in the world. Taxes are a complex mess, and if you've got passive income, investments, a business and a side hustle or all of the above, they're virtually impossible to do without a smart and savvy accountant. If you're a big business, you need to employ a small army of accountants and tax lawyers to get it all set up and keep it running smoothly. Scriptable, automatic taxes will likely streamline a lot of that regulatory and compliance burden and keep filing taxes simpler.

But if you're an original crypto libertarian and a tax activist, it might all come as a big shock. If you imagined bitcoin, monero, zcash and other cryptos ushering in a bold new era of tax havens, anonymous money and sovereignty, you're probably going to wake up in a tomorrow you never expected and didn't want.

Utopia lost

Technology is an unpredictable animal. If you're an engineer or a programmer, you may have wonderful dreams of tomorrow's technology and where it's all going and how it will change the world.

Technology does change the world, just not always the way we expect.

The people who started the early internet companies were often free-thinking dreamers who unleashed an "information wants to be free" revolution. They imagined open dialogue would break down authoritarian regimes and unleash a brave new world of openness and freedom.

Unfortunately, authoritarian regimes are doing just fine. They've figured out how to build national firewalls with man-in-the-middle attacks and how to employ armies of censors to attack free speech with a vengeance.

We did end up with vast open dialogues, but much of that dialogue turned poisonous because the original dreamers of the internet didn't account for how many angry and ignorant people there were in the world, and those people get to use that open forum to drown us all out. Of course, information did break free and now you can read or learn anything you want on the web, and that's a small miracle. Higher education is available at the click of a button, and the most motivated among us can get smart on anything they want to study.

But while information may want to be free, storing all that info costs a lot of money, people, energy, bandwidth, servers and software, and someone's got to pay for it. We pay for it with a surveillance economy that tracks whatever we say and do so it can sell us more ads.

Cryptocurrency will change the world too. It's already doing it. The crypto world is valued at trillions of dollars, and people are building all kinds of future technologies on top of it, like decentralized messengers and identity systems, along Web 3 and non-fungible token (NFT) marketplaces that will bring real value to people across the planet over the next decade. Self-escrowing, programmable money will streamline everything from buying houses and cars to creating self-executing wills that pay out automatically over time after a person dies.

But if you're an original crypto enthusiast who comes from the early Wild West days when crypto was too complex for governments, central banks and corporate behemoths to understand, then you probably won't recognize what crypto becomes over the next few decades. When all your taxes are collected automatically, physical cash is illegal, and everyone is using fiat digital central bank coins in one way or another (even if they are also using decentralized, private coins, too) will it still be what you wanted?

If you're a coin designer, you should be thinking about all the ways other ideologies can change and warp your philosophy. How can they exploit and change it? How can you prevent it? Can you prevent it at all? How? Can you build those protections in right now?

Only time will tell if there's some kid out there with a whiteboard who's figured out how to pull in some barely known branch of cryptography, the way zk-SNARKS got pulled into Zcash, to change the course of the future. Maybe someone out there will find some obscure mathematical theory, applied in a way nobody imagined, to deliver the crypto utopia of privacy and self-sovereignty that makes it impossible for big business and intervention zealous governments to warp it into something unrecognizable. But for now, it's not looking like it.

The biggest lesson the future of tax collection will have for all early crypto pioneers is likely to be a simple one:

Be careful what you wish for.

Further Reading from CoinDesk's Tax Week

To offset the impact of rising inflation, the IRS has revised a number of tax provisions to let people keep more of their money in their wallets for the 2022 tax year.

Tax guidance lags innovation. So does tax software. Meanwhile, misconceptions abound. If not careful, investors can end up owing more tax than expected and having to unload crypto to pay the bill.

Investors in MicroStrategy, Tesla, Block and Coinbase need to consider how wild price swings will affect results, not only directly but indirectly due to complex tax accounting rules.

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The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.

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Daniel Jeffries is an author, engineer, blogger, podcaster, public speaker and Managing Director of the rapidly growing AI Infrastructure Alliance.

Daniel Jeffries is an author, engineer, blogger, podcaster, public speaker and Managing Director of the rapidly growing AI Infrastructure Alliance.

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