Transcript of video lesson
Tax season is over but it’s interesting to know that the IRS recently released some guidance talking about how it plans to treat the taxation of transactions that take place using Bitcoin or other cryptocurrencies in electronic or digital media of exchange.
In this guidance, the IRS has basically announced that it intends to treat Bitcoin as property, not as currency. Hence, there will be capital gains type treatment accorded to Bitcoin transactions so absent some sort of intervention by Congress, this is sort of the rule – the tax law – that pertains to cryptocurrencies at the moment.
This raises a whole host of interesting economics questions in the areas of barter and exchange and currency versus other forms of property. On your typical barter transaction of course, no money is exchanged. But take the case of the farmer who produces a bushel of wheat and takes it down to another farmer who has mules for sale and exchanges the bushel of wheat for a mule because the farmer with the wheat would rather have a mule than additional bushels of wheat for his additional personal consumption. This is a pure barter transaction that takes place without any money. Both parties of the exchange feel like they’re better off afterwards. We can assume – sort of a priori – that they wouldn’t have gotten in to the transaction.
This is an awfully tough way to run an economy because of the concept of a lack of coincidence of wants. In other words, if the only farm nearby doesn’t have mules but has nails or gun powder and that’s something you don’t particularly need, you have a lot of clause involved in trying to find someone who’s got something to exchange with you.
Of course, money arose from a pure market need and over the ages it developed in different kinds of money off silver and gold. Nonetheless, money solves this problem of lack of coincidence of wants and gives us a way to specialize and conduct business.
When it comes to the tax angle or the IRS perspective, it’s interesting to note that the treatment of a barter transaction where one farmer gives a bushel of wheat for the other farmer’s mule is treated the same as though this transaction have been conducted in cash. In other words, if the wheat-growing farmer takes his wheat to an exchange and gets US dollars in cash for that wheat, he pays income tax on that cash then he takes it and buys the mule with it. The cash he uses to buy mules may or may not be deductible as a business expense. Nonetheless, all this is firmly a taxable transaction from the perspective of the IRS.
With barter, it’s no different. There are specific rules in the tax code and tax regulations and apply to barter transactions. This idea that when the farmer trades wheat for a mule, he’s better off; the IRS says that’s an accession to wealth. Hence, you have to pay an income tax on that. This comes from a very famous tax case in the 1950s known as the Glenshaw Glass case.
The point here is that we cannot depend on technology somehow or different forms of trade to get us out of taxes because conceptually, the idea of what constitute taxable income on our society – and frankly, in most societies with most tax authorities around the world – is any sort of increase in your personal wealth.
When we go back to Bitcoin or cryptocurrency issues, this new IRS guidance creates and incredible burden in terms of compliance costs. Bitcoin or other cryptocurrencies will now be treated in effect like a capital goods. This means, just like with stock, you have to track your tax spaces. If you or I go out and buy stocks in Apple and we all wish we’d bought more. Let’s say we bought a certain block of stock and another block in 2005 and another block last year in 2013. Those all have different prices. We track our price and then when we sell the stock we pay capital gains tax or have a capital loss based on the price difference between what we paid for and what we later sell it for.
Now the IRS is basically saying that Bitcoin and other digital currencies are going to be treated in much of the same manner. That means that every time you acquire one of these you’re going to have to track your tax basis and every time you purchase something in effect, that could be, in the IRS perspective, a taxable event. If that comes down to using cryptocurrencies for every day transaction – buying gasoline, buying coffee, buying groceries – you don’t exchange Apple stock for groceries. But if Bitcoin is treated the same way, for example, it’s going to create a tremendous compliance burder.
In conclusion I would just say that as Austrians and as libertarians, we tend to encourage and champion any attempts to arrest control of money away from governments, from politicians, from central bankers. We want to see money as a market commodity and market phenomenon and has nothing to do with the state.
This recent IRS guidance is just an example. It’s really just the tip of the iceberg of how those same governments and central bankers and political class see things like Bitcoin. We all need to understand that technology alone cannot save us from the state and its taxing. The only thing that can save us is the actual elimination of those taxing authorities and better ideas among the population about the proper role of government.