Blockchain Based Gift Tax Hack

Posted on January 21, 2020. Filed under: Uncategorized |

I was reading something this morning about gift tax exemption and had a weird idea. I’ll premise this idea with the acknowledgement that this solves a problem that I’m not sure I philosophically want solved, but regardless, thought it was kind of a cool architecture.

The IRS taxes gifts of a certain size. Generally the giver pays said taxes, and the rate ranges from 18-40% depending on the context. Every year, every person can take advantage of a “gift tax exclusion” which allows the giver to give AS MANY people as she desires a $15K tax exempt gift. You could give a million sub-$15K gifts and not pay any gift tax, but you can’t give a single $20K gift without paying tax on the extra $5K. If you are trying to transfer wealth from one generation to the next, the gift tax exemption is like the first thing an accountant or tax adviser will guide you to take advantage of every year.

If you have $100M that you want to pass down, the exemption ain’t gonna get you very far, and there’s a nice 40% Estate tax waiting for you if you transfer your wealth at death.

But I had this weird idea that you could create a network of proxy recipients, and make exempt gifts in parallel to thousands of them, who in turn would be incentivized but not obligated to pass the gift along to an intended recipient via their own exemption. Interestingly, you could authenticate this flow of funds and identify an intended recipient without needing to expose the ultimate recipients identity or bank credentials.

You’d incentivize people playing the role of proxy to pass along the gift via a take rate that is meaningfully lower than the gift tax rate (i.e. 10% cut), and design the network to make the income generation opportunity of continuing to perform the role for many givers more lucrative than maliciously keeping the money from any one giver.

There are many crypto protocols that create roles or jobs within a system, where the right to an income generation opportunity is bestowed only upon the best actors in the system. Livepeer’s transcoder nodes are a good example.

I wonder if you could create a crypto based gift tax proxy protocol to allow for untaxed giving at scale between generations. You’d be able to both incentivize proxies, transfer funds in network, and authenticate that the proxy did their job / the intended recipient ended up with the money.

As I right this post, a) I hate this idea, and would prefer if wealth wasn’t easily transferred between generations, and b) may have just designed a money laundering scheme by a different name.

But, without a contractual obligation to pass the gift along, and rather simply a strong network based incentive to do so, I kind of think this hack would work.