Why Bitcoin Can No Longer Work as a Virtual Currency | Hacker News Reader

Why Bitcoin Can No Longer Work as a Virtual Currency

theatlantic.com

49 pointsjaboutboul69 comments

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.

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.

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?.

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?

It's an exponential with a base that is really close to 1. Check back in a few hundred years and you will be outraged at what inflation has done to your savings!

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.

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.

Inflation is non-uniform throughout the economy. Personally, in Silicon Valley, I see ample evidence of inflation - my rent on the same 1BR went up from $1410 to $2250 over 4 years. Anyone trying to put a kid through college has noticed a similar effect. The stock market is up about 100%, so if you're looking to buy stocks with your money or save for retirement, prices are also inflating. Fortunately, my salary has been rising similarly, but people stuck on fixed incomes or jobs without much negotiating leverage in this area are very much dealing with inflation.

It's making you about 1 - 3% poorer per year.

Given you store your wealth in cash. Most people don't do that, they have a) property: basically they don't really lose anything then (or it's not tied to QE) b) mortgage: they actually win with QE c) ...

So inflation does not hurt you as much as you think. There's a reason why 0% inflation is not thought to be optimal.

> There's a reason why 0% inflation is not thought to be optimal.

Because money sitting in a box under your bed isn't doing the economy any good. We saw a lot of the productive gains that lead to total GDP growth in the 80s because inflating fiat meant higher (predictable, not stagflation) money velocity.

Having inflation, and a dollar losing value, is good because it means you don't want to just sit in the dollars, you spend them on things and keep moving them around the system. You instead invest your money, and optimally have stocks or business interests using your money to make you returns while keeping the money circulating.

I don't think the problems with modern fiat are necessarily because you have inflating money - it is more that corrupt legal monopolies on counterfeiting will funnel new money into a select few, while the printing is hurting everyone else. It is more the unequal rigged distribution of new funds than anything.

Of course, bitcoin is a great replacement for bonds or gold, because it inevitably is going to deflate when it has market saturation, no more btc is minted, but wallets are lost so the monetary base shrinks. So you can reliability predict it getting more scarce over time, and if everyone else agrees it still has value it would get more valuable too.

And on the flipside you have something like Doge or Peercoin, the former with fixed monetary base expansion of a fixed number of coins (which means the total inflation drops each year and approaches 0% when you have enough Doge that adding 5 billion coins a year is a small fraction of the total monetary base. I guess eventually it would reach equilibrium, where your money lost from lost wallets or people forgetting passwords matches money generated each year.

I think Peercoin is interesting because the inflation scales with the monetary base, so 1% more of all active coins is meant to be printed each year, so you have a near constant 1% inflation.

I also think there is room for a cryptocurrency with predictive analysis of the monetary base - if the velocity is low relative to the number of coins, it means you aren't inflating enough and people are sitting on funds. If the velocity is too high you are inflating too much and should cut back printing. It would be neat to see an algorithm to balance that, which is why in common economics something around 1% inflation in the long run is considered optimal.

Of course you are right.

However, the market hasn't been moving much lately. So maybe that's indication that the market doesn't think the IRS decision is terribly good or bad news? That fits with my perception that they were just explicitly stating what everyone assumed to be true.

Or maybe the market will crash tomorrow. Who knows.

Except...gold has actual real world uses: industrial, and the often forgotten - jewellery. Bitcoin has some real world uses, but these are easily replaceable by the next cryptocoin. So Bitcoin is not really like gold.

Real world uses of gold don't come close to explaining its price.

Also, I only claimed that it was a semi-decent analogy. There are many differences between gold and Bitcoins.

It's a common fallacy referring to the 'real' use of gold. Most experts agree that if gold would only have the industrial value, then the price would be at maximum 5-10% of the current price.

Jewellery is tricky, because gold is not only used for its physical characteristics, it also 'feels good' to know that you have real gold jewellery -- which goes back to the 'perceived value/store of value' problem.

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.

> 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.

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.

What you have to realize though is that none of that matters with a real currency. And the point of the article is that this takes away from Bitcoin being a currency. You're going to have to think pretty hard about whether you want to use an average cost basis or whether you want to be trade specific. And once you choose one you can't change track midway. Given the significant fluctuations in Bitcoin's price that's going to matter. Lastly, you'll see "Fiscal Year" events. Bitcoin appreciated a lot this year? No one is going to want to move in and out in that later months due to the ever increasing tax cost of doing so. Come January there'll be movement again. So you'll get all these weird liquidity events.

I'm not for or against BC but the IRS definition is much more significant in terms of the future of Bitcoin.

>What you have to realize though is that none of that matters with a real currency. And the point of the article is that this takes away from Bitcoin being a currency.

If you trade foreign currencies you also have to pay capital gains tax. Bitcoin is being treated exactly as other currencies.

Except for the fact that it's being treated as a foreign currency vs a dometic one. Not much difference there (sorry I'm being snarky because you're basically reinforcing my point when arguing against it)

The IRS doesn't have much leeway here, I suspect. IANAL, but it's my understanding that U.S. laws specify dollars as the only currency of the U.S. If people can invent other currencies that the government is then required to accept as currency, I suspect it would take an overhaul of our laws. (And isn't there something in the constitution about the federal government having sole minting power?)

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.

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.

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.

The IRS is not limited to the technical realities of Bitcoin in coming up with explanations for how it interacts with the tax laws of the United States. "Individual coins cannot be traced on the blockchain" doesn't affect their operations in an iota. The IRS is well-adapted to environments where there does not exist a single public record of every transaction, principally because that is pretty novel.

If the IRS believes that people are misreporting bases in such a manner as to meaningfully affect their tax obligations via using Coinbase, all they have to do is send Coinbase a letter.

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.

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.)

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.

My broker handles stock in a very similar way. My shares of stock are held in street name by my broker, and my name is not directly assciated with individual shares. Instead, the broker keeps the shares and has a separate ledger keepting track of how many I own.

So far, the IRS hasn't used this situation as an excuse to pwn me. I don't think they'd even see anything particularly remarkable about it. After all, it's standard operating procedure for essentially every brokerage.

The reference client doesn't even provide a way to choose specific bitcoins to use when sending a payment. And even if it did, do they really expect users to keep track of every single address in their wallet and the date of acquisition of its individual bitcoins?

As it currently stands, if your client decides to spend a bitcoin from an address you owned for less than a year, any gains would be taxed as ordinary income.

I think this will effect corporate use of bit-coins. It might slow bitcoin adoption a bit, but it also has the effect of making them legit.

This should also keep accountants busy. They always seem to be anyway, now more so.

Its part of bitcoin "growing-up", so to speak and the IRS getting ahead of all the newfound wealth generated from these coins.

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

But it's going to be another hard blow to US tech innovation, which will simply move abroad - far from the IRS and NSA.

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.

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...), am I taxed on the difference?

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

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%.

"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.

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...

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.

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 ;)

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.

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.

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.

Yeah, that makes sense. So the analogue is flawed because Gold/dollar exchange wasn't floating back then but BTC/dollar is floating currently.

Perhaps the difference is that the IRS can theoretically tell how long you've held the particular bitcoin coin you're selling, whereas gold coins aren't so easily traceable in that way.

The IRS can't tell how long you've held a bitcoin, what price you bought it at, when you bought it or how many bitcoins you hold in total. The fact that you can arbitrarily split wallets and tumble coins means they basically have to trust what you say, or accuse you of fraud. This is similar to how you could melt down gold and lie about when you bought it and the price you bought it at.

Agreed, when the coins are tumbled like that. But if they weren't?

good luck implementing this.

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

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?

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.

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.

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).

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?

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

The IRS isn't that concerned about the guy in the next cubicle who owns 2.8 BTC. (Though they'll certainly go after him if they find out he's cheating the government.) This is aimed squarely at:

-big investors (like Goldman Sachs, for example)

-businesses that are trying to do business in bitcoin and might be inclined to push the limits with their accounting

-criminal enterprises trying to hide transactions. Remember they got Capone for tax evasion.

    Track some high profile cases.
    Bring them to court for tax evasion.
    Convict.
    Huge fines/jail time.
    Less people are willing to risk it.

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.

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).

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

Or, business that are eager to accept bitcoin will simply move to another country, paying effectively 0 USD to the IRS.

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

wat?

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

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

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

see http://www.investopedia.com/articles/forex/09/forex-taxation...

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)?

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.

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

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