Governments are turning their tax avoidance big guns on virtual currencies in a bid to track down one of the last international bastion’s financial secrecy.
Virtual currency exchanges are likely to be the next target for authorities is searching out hidden cash and assets as many hardcore tax evaders are rumoured to have switched their wealth into virtual currencies.
Their hope is the money is untraceable once it has disappeared into electronic vaults around the internet.
However, virtual currencies are next in line for compliance following the success of the US Foreign Account Tax Compliance Act (FATCA) and a green light for Organisation of Economic Cooperation and Development (OECD) proposal to crack down on individuals and companies shifting their cash between countries to avoid tax.
Because FATCA and the forthcoming OECD rules have reduced the number of places people can hide their wealth, one of the few options left is to go online with a virtual currency such as Bitcoin.
The hope for taxpayers switching to virtual currencies is that internet security will maintain a cloak of secrecy around their financial affairs.
Cryptocurrency insiders argue that governments will always find a way to hack online security and that for this reason; companies will not turn to the dark side of the web to shroud their finances.
However, they also explained that wealthy individual tax evaders are unlikely to change their habits and will look for ways to keep their personal finances secret and tax-free.
One trend of recent months is for governments to increasingly favour classifying virtual currencies as an asset – which means gains and losses in trades should be reported on tax returns alongside similar transactions, such as trading equities or property.
This stops virtual currencies claiming tax exemption in countries like the UK, where currency trades are exempt from tax but asset transactions are not.
FATCA and Bitcoin
The US government has also made a similar recent ruling.
The impact of this ruling is a virtual currency exchange outside the US becomes a foreign financial institution.
This does not change the exchange’s relationship with their customers, but does mean they are required under FATCA to report the personal details of any US resident client with an account with a balance exceeding $50,000 in a year or a US expat with an account holding $200,000 or more.
Ignoring FATCA means if and when the exchange converts a virtual currency to US dollars, a 30% withholding tax applies and possible barring from the US banking system.