Is Bitcoin a Money Laundering Machine?

Bitcoin trumpets itself as being totally anonymous. Facts speak otherwise. New Bitcoin World tackles the issue in Can code and competition build a better Bitcoin?

Everyone from the mainstream media to Wikileaks to the now-disbanded hacker collective LulzSec has trumpeted Bitcoin as “anonymous.” But the truth is that researchers have long since proven it’s anything but — since every bitcoin transaction appears on a public ledger distributed to everyone in the network (called the “block chain”), tracking bitcoins back to individuals is often trivial.

Zerocoin promises true anonymity by giving Bitcoin its own built-in money laundering system.  The special sauce is a zero-knowledge proof, a statement used to verify a piece of secret information without giving away the secret in the process. This makes it so that if someone looks at the block chain, they’ll be able to see that you minted a zerocoin at some point, but there will be no way to tell which one you’re redeeming.

Saskatoon Realtor Lists Home Priced in Bitcoins

Just in time for tax season, the Canada Revenue Agency says BitCoins aren’t tax exempt.

Originally designed as a virtual currency alternative to conventional money, the cash value of a BitCoin jumped from under $50 US to above $250 and back earlier this month, as speculators flooded the market after awareness of them grew.

Saskatoon realtor Paul Chavady said he has listed a house priced in BitCoins, and has found clients willing to pay his fees in the electronic currency.
The CRA told the CBC there are two separate tax rules that apply to the electronic currency, depending on whether they are used as money to buy things or if they were merely bought and sold for speculative purposes.

“Barter transaction rules apply where BitCoins are used to purchase goods or services,” Canada Revenue Agency spokesman Philippe Brideau said in an email.

When it comes to trading BitCoins for profit, the tax man says there are tax implications there, too.

“When BitCoins are bought or sold like a commodity, any resulting gains or losses could be income or capital for the taxpayer depending on the specific facts,” ruled the CRA.

If you think the anonymity of bitcoin will hide what you are doing, you probably better think twice. And the more popular bitcoin gets, the more government will be asking questions.

If bitcoin gets big enough, governments will do far more than ask questions, they will demand an accounting of every transaction, where the money went, and whether taxes were properly paid.

For more on bitcoins please see Mish Interview With “Bitcoin Jesus”

Mike “Mish” Shedlock