
Why Bitcoin Can No Longer Work as a Virtual Currency - jaboutboul
http://www.theatlantic.com/technology/archive/2014/03/why-bitcoin-can-no-longer-work-as-a-virtual-currency-in-1-paragraph/359648/
======
streptomycin
All the Bitcoin tax advice I've ever read said to pay capital gains tax on it.
That's what I've done in the past, like many other people. The recent news
from the IRS just gives us more confidence that the mainstream interpretation
was correct all along.

So I don't think the sky is falling. Nothing has fundamentally changed.
"Bitcoin is like digital gold" remains a semi-decent analogy.

~~~
shittyanalogy
Bitcoin's value is based on market perception. Unfortunately the market may
not have been as savvy as yourself. Just because you are and have been willing
to treat bitcoins this way doesn't mean that the market is.

~~~
thisiswrong
Correct. But when the 'market' realizes how Quantative Easing is making them
exponentially poorer I guess they might just switch to gold again - perhaps
digital gold?.

~~~
cortesoft
Quantitative Easing is making me exponentially poorer? Inflation has not been
a problem since QE has started, so how exactly am I poorer, nevermind
'exponentially' poorer?

~~~
zanny
If you put a dollar in a box in 1914 and took it out in 2014 it would be worth
2230.49% less (or, $23 today is one 1914 dollar).

If you have cash on hand, that money becomes worth less as quantitative easing
expands the monetary base, among other inflationary factors.

If you spend that money (on investments, goods, etc) then you are putting your
long term value in other things than your currency.

The distinction is that the austrian school wants a reliable money sink that
grows more scarce and thus more valuable over time. The modern US dollar is
anything _but_ a place to store value - instead, the monetary system heavily
incentivizes you to get rid of your dollars as quickly as possible.

Which is fine, it means money doesn't rot in banks and fall out of
circulation. You aren't at maximum velocity but you definitely have good
momentum that way.

I think the real issue is blaming inflation for wage stagnation (which started
around the same time the gold standard was dropped), when in reality it is
just business exploitation of supply and demand that keeps wages down while
all other goods and services prices rise somewhere in the ballpark of
inflation.

I love bitcoin, and have a good chunk of my on hand cash stored in it for
buying stuff or just having fun trying to play the price, and state currency
manipulation does abuse their monopoly on legal counterfeiting to benefit a
select few and hurt the rest of us, but it isn't an issue with having an
inflating currency, I don't think.

It is why I like Doge in many ways. It is going to have constant inflation
forever, so it is very predictable, and if it ever got market demand
saturation it would only devalue over time so people would keep spending it.
And bitcoin is a great peer to that, because we are only going to have a
finite number of btc, and once the printing presses stop we will only see that
money supply shrink from lost wallets and such, so they will only become more
scarce over time.

~~~
exelius
The #1 mandate of the federal reserve is to keep inflation steady at around
3%. They've done a pretty good job of this (with the exception of the 1970s).
But QE isn't about causing inflation; it's about stopping deflation. QE is
designed to stave off deflation by intentionally expanding the money supply.

Basically, the money supply was artificially inflated by the housing bubble.
Once the bubble burst, a lot of money disappeared over the course of 3 months
or so. So the fed is using QE to prop up the money supply so the dollar
doesn't rapidly appreciate in value. What we've learned from Japan's "lost
decade" is that deflation can have even more harmful long-term consequences to
an economy than inflation (suddenly it becomes MUCH more expensive to make
goods in the US than the rest of the world, banks stop lending completely
because money gains value with no risk, etc.) It starts a chain-reaction cycle
that is really tough to break out of.

So the fed wasn't gutting the value of the dollar as much as they were
preventing it from appreciating value quickly. As good of a thing as it sounds
like it is, it's a bad idea to have money become more valuable just by holding
on to it. Inflation creates an incentive to invest your money back into the
economy, and while rampant inflation is almost always bad, a small amount of
predictable inflation is a good thing if kept in check.

------
jtbigwoo
The last couple paragraphs of this article are kind of ridiculous.

If the IRS decides that bitcoins are like stocks and bonds, the IRS will
accept an average cost basis rather than the user having to account for each
individual bitcoin (or fraction of a bitcoin).

If it works like inventory, then the taxpayer will have to decide between
several accounting strategies (last-in-first-out or first-in-first-out for
example) when deciding cost basis. It's complicated, but it's an order of
magnitude easier than what the author is suggesting.

~~~
jpmattia
> _It 's complicated_

I also have to wonder what tax returns would look like, once automated
tracking occurs. Thousands of transactions per year, netting out to very
little money (if and when btc/ltc values stablize) will make even electronic
returns quite sizeable.

I suspect that once the IRS realizes it has DoS'd itself, it will decide that
the foreign currency exemption of $600 was there for good reason and revert to
currency rules.

~~~
andrewfong
The IRS doesn't have to implement automated tracking though or read each and
every return. It has considerable discretion in which returns it decides to
audit, if any.

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josephagoss
Perhaps it can't work as a currency in the United States sure, I always
expected the USA to fudge up the acceptance of Bitcoin.

The world is a large place and Bitcoin is a very amazing, worldwide thing that
I fully believe can continue to work as a currency, outside of the USA of
course.

~~~
Gobitron
I agree. It seems to me that we're dealing something whose potential we don't
yet fully understand. It might very well fail, but a declaration by the IRS
changes nothing except the behavior of speculators.

If all Bitcoin is good for is a way to replace Visa/MC then there is nothing
all that fundamentally different about it. Dwolla and/or others will take care
of that.

It is clear that it will take time for the really interesting uses of Bitcoin
to emerge (if it survives). Until then, it doesn't matter what anyone declares
about it.

------
marcell
The author argument would probably not hold up under an IRS audit, and doesn't
fully match up with how bitcoin works.

First, many bitcoin users "own" their bitcoins using a managed web wallet like
Coinbase. In that case, you cannot trace the individuals coins on the
blockchain. It is up to the tax payer to report their cost basis.

Moreover, it is not obvious from looking at the blockchain which transactions
are use to buy goods (a taxable event, according to the IRS), and which
transactions are used to transfer money to yourself (the equivalent of moving
money from one pocket to another; not a taxable event).

Thus, the IRS ruling, while onerous, does not really affect the "fungibility"
of bitcoin.

~~~
exelius
Since most users store their money in wallets with exchanges like Coinbase,
how trivial would it be to write trading algorithms that minimize shifts in
capital gains? E.g. Coinbase would try to balance capital losses and gains on
a continuous basis, then come tax time they sell off an appropriate number of
BTC to pay the tax bill on the net appreciation of their coins over that time.

I think this will accelerate the shift towards Bitcoin exchanges operating as
banks under the law. If you, as a consumer, deposit $1000 with Coinbase, they
could store this as $1000 USD if they were a bank. Then, upon you actually
wanting to spend the Bitcoin, they perform the transaction to another bank. It
all happens so fast that the price of BTC doesn't change so the consumer pays
no capital gains taxes.

Likewise, if you choose to maintain your BTC wallet yourself, TurboTax could
write a module where you provide them your wallet address and they let you
know your tax burden by comparing your transactions over the last year with
the spot price of BTC when they were performed. It's not obvious from looking
at the blockchain, but if you have the blockchain plus the addresses of all
the various wallets owned by a person, you could do it. Transactions within
that set of wallets are non-taxable, transactions outside of it are. If you
don't provide all your wallet addresses, that's effectively tax fraud and is
no different than keeping a Swiss bank account. At the end of the day, the
government has the power to throw you in jail if you don't pay your taxes, and
that gives them the power to regulate the economy.

This is all predicated on the assumption that Bitcoin will never serve as a
true currency; which I think all signs are that it won't because governments
just aren't willing to give up enough control over the economy to make it
possible. But Bitcoin can still be useful as a method of transaction, which is
why I think we're seeing regulation pop up around it.

~~~
maxerickson
If Coinbase is holding dollars because bitcoin have scary tax implications,
why is the receiving party going to want bitcoin (instead of dollars)?

It's sort of an obnoxious way to put it, but you are essentially saying that
it will be like payments today, except with some bitcoin sprinkled on it to
make it exciting or cheaper or something.

(I do understand that bitcoin might enable international transactions where
some sort of technological escrow takes the place of contracts and trust, I
just haven't seen any real compelling explanations as to why the technological
escrow will end up cheaper.)

~~~
exelius
I don't think Bitcoin really have scary tax implications if you're an exchange
-- you're moving Bitcoin in and out of your wallets so often you can just
choose the most advantageous coins. An exchange is necessarily going to have
better record keeping than an individual because the executives of the
exchange can go to jail if things go wrong and proper safeguards weren't in
place.

This is really no different than how most commercial banks work -- your
balance is used to buy stocks, bonds and financial derivatives (obviously
subject to certain portfolio risk management requirements). It used to be
illegal to do this with non-government securities (aka bonds) until Glass-
Steagall was repealed, but now everyone does it. They trade these securities
on a regular basis, and then at the end of the quarter they book capital gains
and losses.

------
jnbiche
It's an interesting argument, and fungibility is a critically-important
feature of Bitcoin.

However, I don't think this is at all an unexpected move by the IRS. Most of
us were expecting this all along, and calculating our taxes accordingly.

Now, if the U.S. were smart and forward-looking we'd adopt the same policy as
Denmark and Germany (Bitcoins aren't taxed). But we're not, and so we didn't.

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zck
How are changes in the value of "traditional", state-backed currency taxed? If
I, say, bought 1 Euro for $0.80 in 2000, and sold it for $1.60 in 2008 (prices
from
[https://www.ecb.europa.eu/stats/exchange/eurofxref/html/euro...](https://www.ecb.europa.eu/stats/exchange/eurofxref/html/eurofxref-
graph-usd.en.html)), am I taxed on the difference?

Or do currency speculators and day-traders get off tax-free? That seems odd.

~~~
twoodfin
[http://www.fxop.com/Forex%20Taxation.html](http://www.fxop.com/Forex%20Taxation.html)

That makes my head hurt, but it sounds like if you hold actual currency and
realize gains, those gains are treated as ordinary income (top rate 39.6%),
but if you instead trade in qualified currency futures contracts, gains are
taxed according to a split formula which pulls the top rate closer to the long
term cap gains rate of 15%.

------
TrainedMonkey
"To tax Bitcoin as property, he says, destroys its fungibility: One Bitcoin
can no longer be exchanged for another."

I think that is false. From what I understand you only get taxed when you
realize the value of bitcoin, such as purchasing something with it.

------
akater
If I have a bitcoin in a wallet publicly known as “mine” it still would not
count as a valid proof that someone can tax me on it.

(I'm not American, it's a thought experiment.)

How does one prove the ownership of the wallet? If they just assume it's mine
because I once claimed so in public, would they also protect me from btc-
related theft, fraud and whatever else property related crimes, either on
gederal or state level, just because I claimed the crime had taken place? And
if no, what rights exactly do they claim to protect in exchange for taxes
collected from this ephemeral “property”?

This is ridiculous. Governments hate the fact that people can finally
challenge government monopoly on money, and are afraid of losing control, as
well as means to get rich at expense of other citizens. [1] I hope people will
be reasonable and don't pay any taxes, at least because they gain nothing in
return.

Again, a proper human rights campaign, with lawyers and cryptocurrency experts
working together, and a good targeted media coverage, could end all this until
it's too late. If we don't fight for our rights in today's rapidly changing
world we shall lose everything. All the great technologies will effectively
work against us.

[1] [http://www.fee.org/the_freeman/detail/the-austrian-
influence...](http://www.fee.org/the_freeman/detail/the-austrian-influences-
on-bitcoin)

~~~
genwin
It's an honor system, the same as for other non-tracked property. You sell
bitcoin, you pay capital gains taxes to pay for gov't infrastructure and
services provided to you (the things they give in exchange for taxes). You get
robbed of your bitcoin, if the gov't has no reason to suspect otherwise they
trust you when you claim a capital loss to pay less tax.

------
jcbrand
Doesn't all of this also apply to Gold? If you bought gold at $400 and then
later again at $1000, then you could apply the same non-fungibility argument
against it.

And yet, currency used to be redeemable into gold. Was it then not a real
currency? Didn't the non-fungibility of gold also infect the currencies it
backed, thereby making them non-fungible as well?

EDIT: of course gold backed currencies were fungible. In the same way, bitcoin
is its own backed currency. And hence, also fungible. QED ;)

~~~
gnoway
I don't think so, because when we were on the gold standard, the price of gold
- or the exchange rate in US dollars (?) - was fixed.

~~~
mikelarned
I may be interpreting the term fungible incorrectly. At a given point in time,
won't one Bitcoin always be exchangeable for another Bitcoin?

If I purchased a BC for $1 and the current market price is $1.50, my basis is
$1 and my unrealized gain is $.50, but does that gain impact something being
fungible? The coin is still mutually interchangeable at that point.

I keep reading examples of trading a baseball card. If I had two Babe Ruth
cards, one in perfect condition and one with bent edges, the items aren't
valued the same and most likely won't be directly traded for one another. They
aren't fungible.

~~~
gnoway
Yes I think you're right, which is why I think the IRS ruling is 'wrong' from
the perspective of people who want bitcoin to be legal tender. I think the IRS
ruling is entirely 'right' from the perspective of people who don't want to
criminalize bitcoin, but have an interest in preventing its use as currency.
Like the US Government and the banking industry.

------
captainmuon
I don't know... personally I don't even expect Bitcoin to be a good "medium of
value" or "commonly desired medium of exchange" in an economic sense. The main
raison d'etre for bitcoin for me is, should I some day have the desire to do
so, to buy drugs and other things deemed illegal, anonymously. (Since I don't
buy such things, I don't use bitcoin at the moment.) For this purpose,
bitcoins only have to hold their value for a miniscule amount of time, from
the time I buy them to the time I've transferred them (and to the time the
reciever of the bitcoins has done something with them). It is theoretically
even possible to reduce this time to milliseconds. (I'd buy bitcoins in person
or via wire transfer, they'd get passed through a tumbler, do the transaction
I'm interested in, and my transaction gets matched with other bitcoin<->money
transactions somewhere else on the planet. Most individuals would only hold
the coins for split-seconds.) Basically, I view it as a kind of digital Hawala
[1]. For this purpose, the current value stability is much better than needed.

[1] [http://en.wikipedia.org/wiki/Hawala](http://en.wikipedia.org/wiki/Hawala)

------
BenoitEssiambre
I don't get all the fuss. Bitcoin is being treated as any other currency. If I
make a profit buying and selling Euros I also have to pay capital gains tax.
What am I missing here?

------
lettergram
You still don't have to pay capital gains if you purchase something with
Bitcoins (rather than converting it to USD first). You do however have to pay
the tax on the item.

~~~
paulrr
Not true.

Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency
for other property?

A-6: Yes. If the fair market value of property received in exchange for
virtual currency exceeds the taxpayer’s adjusted basis of the virtual
currency, the taxpayer has taxable gain.

------
nostrademons
What happens when people start pricing things only in cryptocurrency, and
there is no dollar value attached to the transaction? This is fairly rare in
the Bitcoin world, where many places sell via payment gateway that immediately
converts back to $USD, but is common in the Dogecoin world, where many of the
goods exchanged are intangibles (tipping, donations) or one-off items (see
r/dogemarket for examples; there are a lot of handmade goods or services).

------
mr_spothawk
How can this apply to exchanging BTC for services? If I exchange 1 BTC for 1
year of service, and that company exchanges 100 BTC for 1 year of work by an
employee... how does the tax get collected?

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mathattack
This seems like a theoretical argument. From a practical point of view, isn't
there just enough anonymity that people won't report it?

~~~
cortesoft
Maybe for transactions between individuals. However, a business couldn't last
very long by 'just not reporting it'. This means that very few businesses will
accept a bitcoin as payment, and its usefulness will be limited.

~~~
jnbiche
Yes, but few Bitcoin businesses are holding coins for more than a few seconds,
or days at most. So the taxation issues will be minimal (and probably Bitpay
and similar services will calculate any minimal taxes due automatically).

~~~
cortesoft
Converting bit coins to dollars means that there will be fees.. which makes
bitcoins no better for a merchant than credit cards.

------
moe
Yes. And according to the laws of physics, a bumblebee can't fly. It's just -
the bumblebee doesn't know that.

~~~
shittyanalogy
wat?

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Scorpion
So if I sell at a loss, I get a tax break?

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lazyant
what happens tax-wise if I buy $100 of Euros and in a month I sell them at
$150?

~~~
BenoitEssiambre
I'm pretty sure, as with Bitcoins, you would pay tax on $50:

see [http://www.investopedia.com/articles/forex/09/forex-
taxation...](http://www.investopedia.com/articles/forex/09/forex-taxation-
basics.asp)

~~~
lazyant
So then I don't understand the point this article is trying to make, wouldn't
this would reinforce the idea that bitcoin is like a currency (a foreign one
for ex)?

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lhgaghl
George and I trade Pokemon cards a lot. Daddy says I can't play with Pokemon
cards anymore. That means I can't hang out with George.

Also, there are other countries besides the IRS one (with an order of
magnitude more people).

This article is pure trash and you should kill yourself if you agree with it.

~~~
jusben1369
For a moment I almost felt like you were advocating violence in response to
feeling your belief system being threatened.

