Topic: The Taxation Of Bitcoin Won't Mean That Bitcoin Fails As A Currency (Read 580 times)

Note!


http://www.forbes.com/sites/timworstall/2014/03/28/the-taxation-of-bitcoin-wont-mean-that-bitcoin-fails-as-a-currency/

There’s a slightly strange argument about the taxation of Bitcoin over at Credit Slips. They’re arguing that the way that the IRS has decided to tax Bitcoin, as property, means that it can never become a successful currency. I tend to think they’re correct in that Bitcoin won’t become a successful currency but that’s entirely another matter. The specific reasoning that they’re putting forward here doesn’t seem to work for me.

They argue that a $20 bill is a $20 bill. It doesn’t matter where it came from, not why, I can spend it in exactly the same manner as any other $20 bill. That is, a $20 bill is fungible and this is a necessary property of anything that’s going to be used as a currency. They then go on to point out the following:

“The IRS ruled that Bitcoin and other virtual currencies are property, not currency. This means that they are subject to capital gains taxation. And that means that Bitcoins are not fungible. The price at which a particular Bitcoin was acquired (and this is traceable) determines the capital gains on that particular Bitcoin when spent. If I spend Bitcoin A, which I bought at $10, but is now worth $400, I’ve got a very different tax treatment than if I spend Bitcoin B, which I bought at $390. (Poor Satoshi–he’s got a lot more capital gains than most…) This means Bitcoins are not fungible, and that makes it unworkable as a currency. If I have to figure out which particular Bitcoin in my wallet I want to spend and what the tax treatment will be, Bitcoin just doesn’t work as a commercial medium of exchange.

And that seems logical but I don’t think it works. For consider the following:

I make $20 through selling my labour. Since I’m a pretty well paid sorta guy I pay, say, 30% income tax and 15% social security taxes on this $20. These tax rates are made up by the way, just as an example. Or perhaps I made that $20 through capital gains, taxed at 15%. I’m self employed so I only have to figure my taxes once a year.

So, by spending the one $20 bill the tax I’ll have to pay is 45% of that $20. By spending the other one it’ll be 15% of it. Does that mean that the two $20 bills are not fungible, each one exactly the same as the other?

No, it doesn’t, not at all. For they are exactly the same at the time I want to spend them: each one will get me exactly the same $20′s worth of goods. It is in the earning of them that they are not fungible: a $20 bill earned from capital gains is more valuable to me, after tax, than one earned through wage labour.

So it is with Bitcoin. Each and every Bitcoin will, at the moment I spend it, purchase me exactly and only 1 Bitcoin’s worth of goods. So Bitcoin is entirely fungible when it’s being spent. It isn’t fungible as to where and how and at what price I earned it, this is true, but then the same also isn’t true about our $20 bill.

And I think we do all agree that a $20 bill works pretty well as a currency despite this problem?