Is Paypal a tax shelter? Besides the transaction fees, I don’t see any other disadvantage to it.
What makes you think it is a tax shelter? Any income you earn via Paypal is still income and just as subject to tax as any other income that you have.
And if they choose to lock your funds you’re screwed.
You mean like hide from the government? If so, I must agree 
You definitely should NOT be looking to any payment service as a tax shelter. If you make the income in the tax year, you MUST report it. PERIOD. Trying to screw the IRS will end up screwing you a whole lot worse in the end of it all. They can and will seize any and all assets they can to get their tax money.
A few stories you may want to look at:
http://news.com.com/IRS+to+search+PayPal+records+for+tax+evaders/2100-1030_3-6060920.html
http://www.webpronews.com/topnews/2005/10/20/irs-requests-paypal-customer-records
http://www.nytimes.com/2006/04/12/technology/12paypal.html?ex=1302494400&en=2dac3a8cf8bc0b36&ei=5090&partner=rssuserland&emc=rss
BAD idea…
So pretty much the IRS has been cracking down on tax shelters in general and not just Paypal?
Hint for long-term business success: Don’t be a criminal.
I’m going to put this all in caps so you don’t miss it this time.
PAYPAL IS NOT A TAX SHELTER!
I’m curious as to who told you this or where you read it as that is one of the most incorrect statements that I have ever read in my life.
Paypal is a payment processor, period, end of story. Every penny that you get paid, whether you leave it in Paypal, withdraw it a bank account, or spend is taxable income and MUST be reported as such.
Example 1
You get paid $20 via Paypal, you leave the money in Paypal. Income reported and taxes are paid on the $20 you earned.
Example 2
You get paid $20 via Paypal, you withdraw the money to your bank account. Income reported and taxes are paid on the $20 you earned.
Example 3
You get paid $20 via Paypal, you then pay someone else $20 for something via Paypal. Income reported and taxes are paid on the $20 you earned.
and so on…
Besides the legal and moral downsides of not reporting income, Paypal as of now could probably be considered a tax escape in the sense that paypal doesn’t report people’s income to the IRS. Probably going to change in the near future, as there are some bills in the works that will require all payment processors to report transaction reports directly to the IRS.
I would imagine that billions of dollars worth of transactions are never reported just through paypal alone.
Tax shelter = tax avoidance = legal
Tax evasion = illegal
Hiding money in Paypal and not reporting it = tax evasion = illegal therefore paypal is not a tax shelter anymore than only accepting cash for work and not reporting it is.
Man, I should be syndicating tin cans in the backyard as tax shelters 
tke71709 your examples are good but, what about option 4: A gift. If someone I know sends me money for no reason other than a personal gift then there is nothing to report. Now even if the IRS got a hold of your account, how could they prove what the money sent to you was for?
With all due respect to tke71709,
How about this:
Get yourself a CPA. Asking around on Web Development forums about Tax Issues is like asking your CPA about your Websites backend coding structure.
It’s pretty much NOT wise.
I don’t necessarily agree with that Clenard. I think there probably a lot of smart businessmen/women who have talked to a CPA and have some good knowledge on the situation.
Well, from someone who is a Businessman I will assure you that anybody with even a GREAT CPA should always advise you to talk to YOUR CPA as it’s not wise to listen to he-say she-say Tax Advice.
Even if he was a CPA himself - you should never take Legal Advice from someone on a forum.
I’m not trying to be a jerk or even act disrespectful – I’m trying to save someone from making any mistakes, that’s all.
Seek advice from a Legal Professional who knows of your own circumstances.
Noted.
There is still nothing wrong with kicking thoughts about it around the forums. I often grab info/thoughts from people before I go seek out a professional for anything. Why? So I can have a better grasp on the possible issue at hand AND so I don’t get ripped off (might not be the case with a CPA but could be the case with any other kind of professional).
If you are being investigated on possible tax fraud, the burden would be on you to prove where that money came from - otherwise it would be far too easy to fiddle your taxes as when questioned, you could just keep saying ‘oh, that £10k? It was a gift, just like the other £100k I didn’t declare’.
Don’t know about the IRS, but in the UK if Revenue and Customs want to see your Paypal account statements, they will first ask you for them and if you are unwilling, they will get a court order for them within a few seconds.
With regard to the OP, they also have their own spider which crawls the net picking up tax dodgers, especially on ebay:
I can’t believe that the IRS would have this technology also - so if you are in any way publicly doing busness on the net, you will get caught.
There’s a reason I didn’t get into every possible scenario, it’s because as Clenard said, I’m not an accountant.
But I will say this, if the money was a gift, it wouldn’t need to be put in a tax shelter in the first place.
What does a payment gateway have to do with a tax shelter? They are two completely unrelated entities. Maybe things are different in Kangaroo land?
Sorry for responding to an old old thread, but I joined to reply to this.
There is of course a problem with some of the examples above…“income” isnt always “income”. Money that goes into paypal isnt always net. The money you get from paypal isnt always even profit. It does not paint a clear picture of money spent in ratio to money make…Some months you might spend more than you made, and yet you are supposed to pay taxes on gross income when you are already taking a net loss? It would be really unfair to tax people the going tax rates on GROSS income.
How do you calculate gross vs net when you are not even a business? A lot of people just sell as a hobby, on the side…like a yard sale, only online…
How is the IRS going to calculate this? Just expect you to pay full taxes on gross revenue even if you have no net profit?