Lavin: Don't fall for tax dodge from 'Bitcoin Jesus'

Roger Ver, a computer-parts and explosives impresario known as Bitcoin Jesus, has come up with a pretty Bitcoiny idea: Give him some Bitcoins and he'll set you up with a passport and citizenship in the Federation of St. Kitts and Nevis, ostensibly free of income taxes, bad weather and meddlesome governments.

Sounds great! Ask nothing, expect nothing, etc ... In reality, though, this isn't a very good idea for either government-hating types or aspiring tax avoiders. And it's hard to think of too many other constituencies that might be interested in using Bitcoins for such a service.

Let's say you're a government-hater. A really ambitious one, determined to escape Uncle Sam and the Fed's sinister intrigues. So you convert a lot of money to Bitcoins, retain the services of Ver's company and pack your bags for a life of Caribbean emancipation. Two challenges suggest themselves.

One is that things will get pretty expensive. You have to buy $400,000 worth of government-approved real estate on the island as part of its citizenship-by-investment program, plus some expansive fees. Or you could donate $250,000 to something called the Sugar Industry Diversification Foundation, which, whatever its merits, doesn't sound like an exemplar of free-market enterprise. Then Ver's company takes its cut. So that's kind of a lot of Bitcoins, even if you're a highly prosperous government-hater.

And two, for all that, you're not exactly moving to a bastion of libertarian purity. You're moving to a place with a high tolerance for public debt, international bailouts and monarchical subjugation. For an example of the bureaucratic milieu, consider this handy guide from the St. Kitts Citizenship by Investments Unit: "The first step for applying for Citizenship is choosing an authorised person from the list of the Authorised Persons. The second step is contacting your chosen Authorised Person." Let's say you're just an ordinary decent tax-avoider, without the ideological elaborations. Why use Bitcoins for this transaction? A couple reasons come to mind, both bad.

The first is that you made a lot of money investing in Bitcoins and don't want to pay taxes on it. If you're an American, however, you're still subject to Internal Revenue Service reporting requirements. Even if you're really hardcore and actually do want to tear up your passport - and never live in the U.S. again - you still have to declare all your assets and pay taxes on any unrealized gains before the IRS will let you go. If you made your $400,000 from an early investment in Bitcoins, you'll need to pay capital-gains tax on whatever gain you accrued in buying your new island property/citizenship.

But how would they know, you ask? A fair point: You're free to take your chances in a country that has an extradition treaty with the U.S. and is one of the world's most obvious tax havens, at a time when the IRS is pursuing overseas tax evaders with historic assertiveness. And then hope no one ever tells on you.

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The other reason I can imagine would be to convert an illicit fortune into Bitcoins and use this set-up to help launder it. That's possibly more convenient than duct-taping cash to your loved ones, but it's not so great secrecy-wise. For one thing, whatever financial institutions you use for the conversion will almost certainly file Suspicious Activity Reports and tell the Treasury Department (but not you) about it.

For another, you'll eventually want to convert a lot of your Bitcoins back into something (East Caribbean dollars, say) that's a little easier to spend on tax-haven accessories such as margaritas and cocaine. To do so in any significant amount, you'll want to find Bitcoin exchanges that ignore anti-money-laundering laws, don't keep client accounts and don't do business with any reputable banks.

In other words, just pay your taxes. Sorry.

Might anyone else be interested in this service? Ver suggests Chinese citizens who want to avoid capital controls. That's convenient, although it requires a) breaking the law and b) breaking the law antagonistically by using a cryptocurrency your Communist overlords really don't like. There could also be a few totally legit and normal people out there who just think that using Bitcoins is the cheapest and most convenient way to conduct this lawful transaction.

But then ... why are they secretly purchasing an alternative citizenship in a notorious Caribbean tax-haven? The more plausible customers for this service, as with so many denominated in Bitcoin, are the unhappy and delusional, those convinced that somewhere there's an enchanted land where no rules apply, no one will ever bother them and the taxman never comes to the door. In this case, very rich people convinced of those things. Bless their hearts.

Timothy Lavin is an editorial board member at Bloomberg View.