Bitcoin And Taxes — zenruption

Photo courtesy of Flickr, under creative commons license

I’ve written quite a bit about the revolutionary implications of Bitcoin and the blockchain. In the evolution of money, from seashells to gold to EMV card technology, Bitcoin is not merely another electronic payment system like Paypal or DIY E-payment systems. Bitcoin is transformative. But its configuration, where the ledger is open and the identities of those on the ledger on all commerce create a system of anonymous users. This is exciting when considering the implications to cybercrime with the rise of the cybercriminal plus how it can prevent theft and identity fraud, but there is another implication that needs to be discussed. What are the tax implications?

Taxes

Many Bitcoin enthusiasts point to the fact that our current tax system has devolved to taxation without representation in that the taxes are used to disproportionately fund the interests of deep-pocketed lobbyists and their interests. This has cultivated a sentiment that participation in the tax system promotes a power structure that is concentrated and centralized, which is opposite of the ethics of Bitcoin enthusiasts.

Frictionless

However, there are real implications to not having any tax revenue and with the anonymous configuration of Bitcoin many have speculated that it could circumvent taxation entirely. Currently, Bitcoin transactions are frictionless: not fees, no sales tax, no traceable method of taxation. But now that the Bitcoin network is transacting in the billions of dollars, the IRS is responding. According to Villanova University, tax law in 2016 will include new provisions regarding Bitcoin and taxes. The IRS has two problems with this though. First, the Bitcoin reporting will be completely on the honor system, much like the revenue from a yardsale or other unlicensed transactions. Again, the ledger of transactions is completely open, but the identities of those transacting is completely anonymous. Therefore, any attempt to trace revenue or sales is futile.

Secondly, the IRS has classified Bitcoin as both an asset and a currency for tax purposes, but they fall into a bind. If they tax Bitcoin as currency, that legitimates the currency and the way it was created. The Central Bank very much opposes this. But if they don’t they are limited to taxation bases on capital gains, which is only 15% and assuming they can collect. Either way, Bitcoin is disrupting the way in which money functions worldwide.

Programmable

But before we hit the panic button on cryptocurrency and societal contributions, it is important to have some perspective. First, most money collected in taxes, as well as charities, goes to the bureaucracies that maintain them, meaning they have less effect. Secondly, Bitcoin are programmable. They are not merely money, but data, which can be delivered through the blockchain without various middlemen and bureaucratic hurdles taking their cut.

This means that if Bitcoin or other cryptocurrencies were to open themselves to some forms of internal monitoring, they could make contributing to societal good less expensive, more efficient and more representative of those who participate. Imagine a system, where instead of giving our money to a central agency, like the Treasury Department and allow bought and sold ‘representatives’ to determine how to spend our money, the money is tied to a live system where issues can be decided in real time and distributed based on a consensus. If a hurricane hits Florida and a consensus of Bitcoin users agree that we should all contribute, a fraction of everyone’s Bitcoin could be sent for relief, arriving immediately and bypassing all of the expense and delay of bureaucracy. This might sound idealistic, but the decentralized distributed model is where the world is moving. Just look at email.

Jerry Mooney is co-founder and managing editor of Zenruption and the author of History Yoghurt and the Moon. He studied at the University of Munich and Lewis and Clark College where he received his BA in International Affairs and West European Studies. He has recently taught Language and Communications at a small, private college and owned various businesses, including an investment company. Jerry is committed to zenrupting the forces that block social, political and economic justice. He can also be found on Twitter @JerryMooney

Photo courtesy of Flickr, under creative commons license.