- Published: Wednesday, 26 March 2014 07:33
- Written by Editor
So the US financial authorities have finally revealed their position through the IRS as to how to treat Bitcoin financially. The question now is whether this development should be regarded as overall positive, negative or neutral for Bitcoin.
While many are happy that there is now an official position that "legitimises" or "legalises" Bitcoin, the fact is Bitcoin was already legitimate and not illegal before, so what then are the wider implications of this tax ruling for the future of Bitcoin?
Well first of all as the IRS have chosen to treat Bitcoin as property - as distinct from a commodity or currency - they cannot have it both ways and treat Bitcoin exchanges as "money transmitters". In fact they cannot even treat Bitcoin exchanges as a currency exchange at all under this ruling. If Bitcoin is to be treated as "property", then a Bitcoin exchange is actually a merchant, or shop buying and selling property much as a pawn broker would.
So let us look at the positives first.
If Bitcoin is not money, then "money laundering" is no longer a consideration from a regulatory perspective or should be the concern of the likes of FinCEN. Money is money and property is property so unless a new concern is invented as "property laundering", then we should expect the money and financial regulators to leave Bitcoin alone. Of course the US Government is notorious globally for hypocrisy and double standards, so only time will tell whether this is their final word on the matter.
Another anomaly is the Bitcoin ATM which is technically no longer an ATM delivering exchanging money, but a vending machine similar to that delivering a bar of chocolate - in this case Bitcoin - for cash. Of course this comparison does not apply to bidirectional ATM's because it would be like putting a bar of chocolate in to the vending machine and getting cash in return.
Either way - if the US Government are consistent about this, then Bitcoin exchanges and ATM's should not be subject to any form of financial or anti-money laundering regulation - which is good news.
More importantly -how will this ruling influence the prospects of Bitcoin for being accepted in to the mainstream and therefore of course the Bitcoin exchange rate?
How Will It Affect Mainstream Acceptance And Merchants?
It is extremely difficult to see how taxing Bitcoin as "property" can be in any way positive for the future prospects of this and other crypto-currencies for the following reasons.
1. If every Bitcoin transaction including cash to Bitcoin exchanges and goods purchased with Bitcoin must be accounted for and taxed, this is a tremendous disadvantage for both consumers and merchants. Although Bitcoin enthusiasts may be prepared to go through these hoops, the general public, wanting an easy and straightforward life will most certainly not be. For the majority of people exchanging cash or card for goods is very easy and straightforward. If every such transaction must be accounted for, documented, tax calculated and submitted annually then this is far beyond the tolerance of most, who simply will not do it.
This tax will also affect merchants who must also account for each transaction from a tax perspective, and the current computerised accounting systems of which will not be configured to do it. So computerised accounting and other systems will need to be modified at a cost, and staff instructed as to the correct procedures. The Bitcoin related revenues and profits of large merchants will likely not be worth it, and small merchants will not bother at all.
2. Taxing Bitcoin as property in this way is effectively an additional tax on goods and services as well as investment appreciation - assuming Bitcoin appreciates in value - that merchants will need to price in to goods priced in Bitcoin and consumers will need to take in to account when comparing the cost of goods priced in Bitcoin to comparable goods priced in US Dollars. This will in effect be very difficult because account will need to be made for when the Bitcoin was purchased, at what price and what the price is at the time of buying goods or services to see whether any additional tax becomes payable - or even deductible. It is hard to contemplate any shopper buying weekly groceries while going through all that rigmarole just to use Bitcoin - especially when most are already wary of Bitcoin following the mainstream media blitz after Mt. Gox.
It is difficult to see how the IRS ruling to tax Bitcoin as property can be anything other than unambiguously negative for the future prospects of Bitcoin within the USA - and for citizens of the USA worldwide - for all the reasons stated previously in this article.
The IRS ruling is also in stark and opposing contrast to a ruling by the UK tax authority, the HMRC, which recently ruled, correctly, that Bitcoin is currency and should therefore be free of all tax.
Bitcoin is seen as the world's first decentralised digital currency, otherwise known as a 'cryptocurrency'. The advent of cryptocurrencies such as Bitcoin is a new and evolving area and determining their legal and regulatory status is ongoing. Cryptocurrencies have a unique identity and cannot therefore be directly compared to any other form of investment activity or payment mechanism.
The HMRC is to be applauded for its objective and unbiased tax free treatment of Bitcoin and for recognising it as a currency. Hopefully other countries around the world will follow their lead.
This anomaly also raises questions of consistency. London is the financial capital of the world and the UK HMRC very particular about taxation. If the UK can objectively, after reviewing all the facts consider Bitcoin, quite rightly, to be a a currency and therefore tax free, why do the USA who are extremely closely linked to the UK take the opposite view?
It should be abundantly obvious that the IRS ruling has been made in conjunction with wider "influences" and designed only to discourage Bitcoin acceptance with view to killing it off completely. Those controlling the US Government and banking system fully recognise the threat Bitcoin represents over their abusive monopoly and control over fiat currencies, used for control, and will do all they can to remove this very real threat. Taxation and regulation are two powerful weapons at their disposal.
Existing Bitcoin users in the USA have a straight choice of playing the game and accounting for every Bitcoin transaction or not. One of the great strengths of Bitcoin is its anonymity, but only if Bitcoin are bought, sold and used anonymously. The moment ID and proof of address is given to an exchange, anonymity is surrendered to controlling and taxing forces. So for people in the USA this rules out using a USA based Bitcoin exchange if they wish to remain under the radar. This is of course an entirely individual decision based on many factors such a tolerance of risk, principle and patriotism.
For those wishing to honour Bitcoin as a true global currency, for the people, by the people, between the people, without the malign influence of governments and banking system there are options. One possible such option is to use an offshore exchange such as Bitstamp which do not answer to the US authorities. The downside to this of course is that although Bitstamp cannot be compelled to hand over the ID of all customers, they will no doubt be pressured by the IRS for data on individuals should they be suspected of tax evasion.
The only long term solution are peer to peer exchanges between individuals, which can be kept totally private - this is the future and totally within the distributed peer to peer ethos of Bitcoin.
The IRS ruling is also another big negative for USA based Bitcoin exchanges. Expect regulation to follow where exchanges are not only required to take ID, but will also be required to hand over records of all Bitcoin transactions to the IRS, thus making it impossible to trade and use Bitcoin anonymously.
Bitcoin globally will evolve beyond government influences such as this, it has to before mainstream acceptance becomes viable, but in the meantime it is for each individual Bitcoin user now to decide whether to go along with the IRS and all the inconvenience that goes with it, or stay true to the totally distributed, peer to peer, anonymous roots of Bitcoin, the Bitcoin ethos and the Bitcoin movement, which is one of liberation and freedom.
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