Introduction:

Under the U.S. tax framework, a person is subjected to the same federal income tax rules, regardless of whether the income was obtained legally or illegally. But unsurprisingly, taxes are not often paid on ill-gotten income. Without a practical, anonymous means of facilitating the taxation of such income, taxpayers have no incentive to report their illegality. In this article, I first analyze the taxation of illegal income and its current treatment, as well as potential conflicts with taxpayers’ Fifth Amendment privilege against self-incrimination. I then discuss “zero-knowledge proof” cryptography, a method by which one party can communicate knowledge to another party and prove the veracity of that knowledge without disclosing sensitive information. Finally, I turn to the central thesis of this article, the proposal of an online application to be created and implemented by the IRS for the taxation of illegal income. I refer to this application as “SAPTIG,” which is an acronym for “Secure Application for Paying Taxes on Illegal Gains.” This would be a permissioned blockchain-based application that uses zero-knowledge proof cryptography, self-sovereign identities, and electronic ticketing to provide anonymity to taxpayers, which would both incentivize such taxpayers to maintain tax compliance as to their illegal income while also providing the IRS with a means to assess taxes on illegal income without implicating the taxpayers’ Fifth Amendment privilege against self-incrimination. Moreover, the SAPTIG application proposed herein directly aligns with the goals set forth in the Service’s recently published spending plan.

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