#52 The Self Checkout Line
Where is the enforcement?
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Musings On Taxes
The United States has a kind of "self-checkout" line on taxes. You calculate em’, you pay em’, and only when the guy at the self checkout has some questions (i.e. an audit) does the enforcement part go into effect. In TradFi, you get a tax statement from your broker which does these calculations for passive investors and the broker then sends this info about you to the IRS. There is a second layer: the law and enforcement. If what you report is substantially different than the broker then you can expect a letter. Here because DeFi protocols (and thus the confusion around the infrastructure bill crypto provision) don't send income statements to the IRS, then where is the enforcement mechanism? It doesn't exist. The IRS is chronically underfunded and they don't pay well. Getting someone, even at the policy level, to devote resources to enforcement is questionable.
It is likely that over the next two years someone will get popped in DeFi. Not a protocol but a person. It will be a big person. That person will challenge the enforcement. Things get even weirder from there. You have tax appeals system but you always have a right to sue in federal court due to subject matter jurisdiction. So, the case law which serves as precedent is decided by federal judges who really don't know much about taxes. That whole process--there was a case one time where the federal court of appeals and took 10 years to consider a transaction that happened 10 years earlier.
Crypto is higher profile.
One of the things the IRS will do is write opinion letters. They take a while to respond and *are only relevant to the taxpayer who has requested them* but that doesn't stop tax practitioners from using them as a stand-in. If you want to know whether you do owe something in 6-12 months the IRS will send you a letter. The point in all of this is to say, anytime you convert value into a stable coin you are taking a risk that the value will become zero.
There is disagreement about the level of risk holding stablecoins but that risk is "non zero". You incur inherent risk by moving into a finance ecosystem without a lot of regulations. Most importantly the IRS will currently not accept stablecoins for tax payment. If you chose to not move back to USD and pay the taxes on your crypto gains you are carrying the risk of both getting nasty with the IRS and carrying stable coin risk. Everything has cost. What are you willing to pay to sleep an extra hour or feel good about knowing someone is not going to hassle you about taxes? And remember the IRS penalties accrue with interest from the time of the event. That means 10 years down the line penalties and interest could be larger than the tax bill.