So the news lately is that the US government IRS has released guidance indicating that they will treat bitcoin as property, making it subject to capital gains tax. Though they interpreted it as we should have expected, it should also be noted that this creates onerous record keeping requirements on people who want to use bitcoin as a day to day currency (note this doesn’t matter so much for people willing to buy and hold long term or use it for other purposes e.g. store of value). Assuming you’re American, say you bought a bitcoin for $100 and later spent it on something worth $1,000 – you have now incurred a capital gain of $900, and you have to keep records of this. For more detail, see this post by a US Tax attorney.
On to the double dip – while the US taxation authority, the IRS, has ruled that bitcoin is property, not currency – the US FinCEN has declared that they will regulate bitcoin as a currency (see secondary guidance paper here) by placing various regulatory requirements on US bitcoin businesses. This is related to the Anti-Money Laundering / Know your Customer regulatory requirements on US bitcoin businesses. Anti Money Laundering laws are actually just financial thought crime as explained by Jon Matonis in “Money Laundering is Financial Thought Crime“. The key point here is that it’s not the money laundering that should be illegal, but the crime itself.
Therefore, the artificial crime of “money laundering” had to be invented, mainly because more direct and traditional methods of enforcing certain laws yielded little result. Think of it as driving without a lightbulb above the license plate being a felony because thieves might drive away in the night. All must participate in illuminating the way to be tracked. More than anything, this is a clear sign of regulatory desperation.
This kind of behaviour by the different US govt agencies is almost schizophrenic! Anyway, we should not be under any illusions – this behaviour can be more easily explained as individual actors and agencies within the government acting in a way to increase their own power. Just like kings attempting to increase the size of their own kingdom. It’s not a conspiracy, it’s just the incentives and system you create by allowing a territorial monopoly of law and violence (the state).
Here are a few comments in relation to these developments:
- Let’s be honest, the IRS struggles enough dealing with Obamacare paperwork, think how far behind they’ll be with trying to trace back everyone’s bitcoin transactions to the real world transactions! Also, in terms of record keeping, I’m sure there will be service providers who do the record keeping mixed in with a wallet provider or do some kind of auto-tax calculation based on the transaction log bitcoin users send them.
- Even with the onerous record keeping requirements, there is still a purpose to using bitcoin as it is money that cannot be centrally inflated or confiscated. It is also money that is not subject to counter party risk, unlike much of our current financial system.
- In the bitcoin world, we’re dealing with generation 1 privacy such as coin mixers. Next generation bitcoin privacy will have techniques such as trust-less automated coin mixing (see Dark Wallet) and address management aka ‘merge avoidance‘ as Mike Hearn calls it. These techniques and tools can be built in and automated to allow the non-tech savvy to use them. Just like how not-so-tech-savvy people can use Bit Torrent right now.
- The world is not just the USA, there are other countries that will embrace bitcoin and those countries will end up attracting talent and capital. As an example, see Denmark who have (wisely) chosen not to tax bitcoin for personal transactions.
The Bitcoin genie has already left the bottle, there’s no putting it back in now.