Article: The real reason Bitcoin is doomed (Taxes)

[Berlin]

http://finance.fortune.cnn.com/2014/03/11/bitcoin-taxes/

 

enjoy

 

 

It's the taxman, rather than any private institutional failures, that will relegate the cryptocurrency to niche status.

FORTUNE -- It's been a busy couple of weeks for bitcoin enthusiasts, first as they dealt with the volatility brought on by the implosion of the world's largest bitcoin exchange, then as Newsweek fingered a 64-year-old California man named Satoshi Nakamoto as the creator of the virtual currency.

But compared to the question of whether bitcoin will ever achieve levels of adoption anywhere near the scale of government-backed fiat currencies, these stories are mere trifles. Bitcoin's biggest obstacle to success has always been receiving the blessing of the very governments that many of its supporters view as enemies one through 100.
 

Some governments, like China, have taken steps to combat bitcoin's use. In December, Chinese officials banned financial institutions from dealing with bitcoin though individuals are free to own them. The United States has taken a more hands-off approach, but it is inevitable that the Treasury Department, and especially the IRS, will have to take an official stance on the currency, and its position will have huge implications for the success of bitcoin.

Tax attorney Lee Shepard argues convincingly in a recent article in Tax Notes that "Bitcoin is not a currency," despite the protestations of some supporters. According to Shepard:

Users of Bitcoin should not think that it is exempt from taxation or outside the tax system. There's nothing that Bitcoin allows anyone to do that they can't already do in the regular banking system ... Libertarians, drug dealers, and tinfoil hatters like Bitcoin because it is not issued by a central government, but the irony is that it is more controllable and more traceable than the U.S. bank notes ...

Shepard points to a United States Tax Court decision from the 1970s that dealt with a company called Barter Systems, which allowed customers to trade in hard assets in return for "trade units" issued by the firm. This was during a time when inflation was high, which explains the appeal of these trade units. The U.S. tax court ruled that Barter Systems was required to report transactions involving these trade units and that the exchange "should be taxed on the fair market value of property received in exchange for trade units." Continues Shepard:

Bitcoin is analogous to the trade units considered in Barter Systems Inc. of Wichita. It is a privately issued medium of exchange accepted only in constrained circumstances and not backed by any promise of the issuer. Colvin treated the trade units as property in analyzing their use. The same analysis applies to Bitcoin.

If Shepard's analysis is accurate, then how bitcoin users would be taxed when they sell their bitcoins for goods or dollars would depend on whether that person is a trader, investor, or dealer. But one thing is for sure, the transaction would be taxed, as bitcoin transactions are easily traceable.

And if you're a bitcoin user that is buying and selling the currency on a short-term basis, as one would expect from a person using bitcoin like everyday currency, any gains you realize would be taxed as ordinary income -- as high as 39.6%.

MORE: Did Newsweek just validate the Bitcoin conspiracy theory? 

One of the main appeals for bitcoin is the fact that it was designed so that there can only be a finite number of bitcoins created. This, of course, will help those who keep their wealth in bitcoin avoid the hidden tax of inflation. The United States has an explicit policy goal of devaluing its currency at a steady 2% per year, and that adds up to quite a bit over time.

But here's the rub: The IRS will value the gains you make on bitcoin vis-a-vis the dollar. The more inflation in the dollar, the higher your tax bill will be if you keep your wealth invested in bitcoin and transact often using it. There's also the issue of the high cost of record-keeping and reporting to the IRS an individual or company's frequent bitcoin transactions.

So, if you're interested in bitcoin as a currency for its ability to maintain value, you're also going to have to plan on paying a high price to the feds for the pleasure of using it.

The great contradiction inherent in bitcoin is that so much of its appeal comes from its supposed independence from the government, but it's increasingly clear that for the currency to be widespread enough for it to be a stable store of value, it will have to have to receive the blessings of governments across the world. And those governments are unlikely to cede their control over the monetary system anytime soon.

 

[Kevin Beal]

It's theoretically possible to trace it all, but there are plenty of ways that you are (for all intents and purposes) anonymous. Certainly more anonymous that Forbes is making it out to be.

 

Mixing services can make it (effectively) impossible to track who owns what bitcoins, by putting your bitcoins in a huge collections of other bitcoins and randomly picking out the same quantity and sending it to another one of your wallets that is anonymous.

 

You could also purchase physical bitcoins from someone who wont save your personal information. Or pay someone to in a way that's off the blockchain (like with fiat for example) to send you bitcoin to an anonymous wallet.

 

This site has some good information on that. And Kirstov Atlas (who, I think, is a member on the boards) just wrote a book on this very subject that comes highly recommended (I haven't read it yet).

 

I don't know nearly enough, but if the only reason that we think that bitcoin cannot be anonymous is because all transactions are public, then I think that's kinda lazy thinking. I'm not worried personally. There have been a lot of scare stories put out there about bitcoin that ended being bunk.

[WorBlux]

And then there's the zerocoin protocol which is likely to be tested and developed in the coming years.

[cynicist]

You can't tie addresses to people since there is no registration. So you can operate with a "public" address that you share and then just create new ones to move money around. So you can use new addresses for each transaction or even multiple addresses to bounce it around and it's indistinguishable from what are regular transactions between individuals. It's not anonymous but Bitcoin is not designed to be and personally I don't think it's necessary or desirable. (The very same public ledger that prevents true anonymity is also what prevents double spending, which is essential to making it valuable as money)

[Kevin Beal]

So you can operate with a "public" address that you share and then just create new ones to move money around. So you can use new addresses for each transaction or even multiple addresses to bounce it around and it's indistinguishable from what are regular transactions between individuals.

Right, exactly. What people are looking for is those same bitcoins in the same amount transferred between accounts and not to another public address. Then they assume it's the same person, which sorta makes sense.

 

Mixing services basically do what you said but the mixing pot is much larger. But that can potentially be problematic if the mixing service is keeping records of the kind that would identify you, and assuming they got audited. Then it's pointless. But certainly there are viable solutions to anonymity for the reasons you mentioned.

[Kevin Beal]

And also, the transparency of bitcoin can be enormously valuable in a way that is basically impossible with fiat. That is, it can be as public as you want, and so if you have a contract that says that you need to always pay this amount to these people, that series of transactions is auditable to everyone. You have a built in transparency at such a low level that anyone can use to establish trust as a company / organization.

 

I can show that I've always paid the other clients I've worked with so that you can reduce your risk and even offer your services at a lower price to compete better in the industry you are in.

 

It can be the public wallet that DRO's use to offer the million dollar prize to anyone who can prove that you are building more weapons than you have claimed publicly, programmatically and open source through a trusted third party given to the whistleblower and tarnishing the reputation of would-be DRO states / monopolies.

 

It can be established as the public way that funds are distributed by charities and other bureaucratic organizations to be able to rate the organization by value to the end recipients.

 

It can be a store of value held by a third party that you can watch and trust, such as with wills or college funds and this sort of thing, so that you don't have to worry about it being laundered.

 

The amount of risk built into the cost of so many transactions can go almost entirely away dropping the cost of doing business between people, and opening up markets that couldn't previously exist, or with consumers / businesses across the globe. Combine that with the crazy small units bitcoins can be divided into and you enable a quadrillion new transactions that could never have happened before increasing the wealth and quality of life of billions of people.

 

Transparency can be a very very good thing.