As Bitcoin becomes increasingly prominent within the global economy, there is a rising concern as to how it will be taxed. Other digital forms of currency, like credit cards and EMV card technology have made transactions more convenient, but they are still tethered to the old banking formats, which require personal information to create accounts. With Bitcoin identities are not used and that creates some concerns with the establishment’s methods of money creation and taxation.
There are two problems surrounding the taxation of Bitcoin: first, its users are unknown and therefore whom to tax is a challenge. Secondly, there has been a question as to its legitimacy as currency or even commodity. Both of these issues make taxing the Bitcoin economy a challenge.
The nature of Bitcoin is that the ledger of all transactions is open, but the identities of those who conduct the transactions is hidden. This is the opposite of normal current transaction models, where it takes personal identification to gain access to banking and thus credit and debit cards, but the transactions are encrypted. The problem with this model is that if any transaction is hacked, the personal information can be uncovered. This has been a skyrocketing problem with the rise of the cybercriminal.
With Bitcoin and the blockchain, however, there is nothing to reveal except for the fact that a transaction occurred and that is on display on the public ledger between anonymous participants. So how can these transactions be taxed? This has the IRS and the Central Banks in a bit of a frenzy. The IRS recently declared Bitcoin both currency and capital asset in an attempt to tax it. This doesn’t solve the the problem of anonymous transactions, but creates the groundwork for if people want to self-disclose, much like the revenue from a yard sale.
The IRS has an issue with the Central Bank, however. The Central Banks resist calling Bitcoin currency because that undermines their monopoly on fiat currency. If the Central Banks allow Bitcoin to be currency, then they are no longer the only ones who can demand treasuries to manipulate the money supply. This is great for everyone but the Central Banks, but Central Banks are used to making the rules and don’t like not winning.
Further undermining the Central Banks’ stranglehold on money creation is the fact that Bitcoin is a worldwide phenomenon given value by the participants and solving banking issues globally. Currently you can transfer money to someone in China using Bitcoin in minutes for free. With Paypal or other forms of ‘legitimate’ currency, it would take days if not weeks and cost a large percentage. This has increased the enthusiasm of Bitcoins use and created an increasing marketplace among merchants. And again, it’s covert nature makes the taxation contingent on self-reporting.
Ultimately, Bitcoin is disrupting the way we tax, transact and interact economically. I have no doubt that the IRS and the Central Banks will eventually devise a strategy to overcome the subversive potential of Bitcoin, but for now, it’s a convenient and frictionless way to have a digital, global yardsale.