For years, many entrepreneurs mistakenly thought that income received via PayPal was exempt from taxation.

Some got away with not paying taxes on such income. Others were nailed in tax audits for underreporting income.

Bitcoin is the new PayPal

Today, Bitcoin and other crypto currencies are used in the same way as PayPal used to be, a method of receiving business income while not reporting it and paying taxes.

There’s nothing wrong with legally minimizing what you pay in income taxes by taking advantage of existing loopholes in tax law. However, there is not, nor has there ever been, a loophole available for income that you can hide and not report. That’s tax evasion (tax fraud), and it remains illegal.

The Alleged Dangers of Bitcoin Use

A parade of imaginary and real horribles is already being used by Uncle Sam to justify a crackdown on Bitcoin. These include alleged abuses involving digital payments that:

• support terrorists;
• pay for drugs;
• launder money for drug cartels;
• pay for child pornography;
• fund assassinations;
• pay for Internet gambling; and
• promote tax fraud.

Perception is being heavily manipulated with anecdotal evidence to support regulation and control to protect the public. Legitimate Bitcoin transactions are not highlighted. The shady Silk Road underworld is the bogeyman.

The Illusion of Bitcoin Anonymity

Fanboys of Bitcoin and other encrypted digital currencies brag that anonymity ensures they can transact business beyond the reach of the law. That’s as naïve as thinking the National Security Agency (NSA) can’t track everything you do online if it wants to.

Governments around the globe are starting to respond to cryptocurrencies through a variety of methods. Regulation and taxation are inevitable…and that means the purported anonymity will disappear.

This isn’t taking a position in favor of such, just recognizing that there is every incentive and the ability by governments to ensure that Bitcoin will be controlled and related income taxed.

In the United States, you can expect to see action by at least the following government agencies:

• Financial Crimes Enforcement Network (FinCEN);
• Internal Revenue Service (IRS);
• Federal Trade Commission (FTC);
• Bureau of Alcohol, Tobacco, Firearms, and Explosives (BATFE);
• Drug Enforcement Administration (DEA);
• Federal Bureau of Investigation (FBI);
• States’ Departments of Revenue (state equivalent of IRS); and
• States’ Consumer Protection Agencies (state equivalent of FTC)

Can You Use Bitcoin Without Becoming a Criminal?

As long as Bitcoin remains a legal means of conducting ecommerce, you can use it. The key is to comply with laws and regulations that apply to such use.

Using Bitcoins or another cryptocurrency isn’t a legal loophole. If you owe taxes, pay them. If it’s illegal to buy something (e.g. cocaine), paying for it with Bitcoin doesn’t suddenly make the purchase legal.