Welcome to the CoinDesk Weekly Review 6th April 2014 – a regular look at the hottest, most thought-provoking and most controversial events in the world of digital currency through the eyes of scepticism and wonder.
Your host … John Law.
No matter what Ed Snowden says, Americans don’t really fear the NSA. They don’t generally worry much about the FBI or the CIA. But every American ever born, including everyone in those three-letter agencies, fears the IRS. It nabbed Al Capone, after all, and has a reputation to match.
So when it speaks, everyone listens. And it has spoken on bitcoin: it is property, not currency, and falls under capital gains tax law. John Law doesn’t propose to go into the implications of this – already very well covered by CoinDesk’s analytic masterminds – except to note that under US law, you can offset up to $3,000 capital gain losses against general taxation, which may be sadly useful just at the moment.
However, the IRS ruling does bring up two intriguing points:
First, that to be truly compliant under capital gains law, the degree of book-keeping for all transactions can be truly horrendous for the individual. Imagine having to keep a running tally of market rates every time you buy a burrito or tip a blogger, or receive some bitcoin from a pal.
Second, because the IRS’s writ doesn’t run outside the US, bitcoin can be taxed as something quite different elsewhere: Bulgaria, for example, says it’s a financial holding, not property. Dealing with international taxation issues is quite bad enough without having the very nature of the thing you’re dealing with change across borders.
One answer for the first problem is that bitcoin is the first widespread native digital currency – and it is a de-facto currency, no matter what label the taxman slaps on it for convenience. It only exists in computers, and computers make very good book-keepers. The IRS could issue guidelines, even open-source code, for wallets and other bitcoin transfer software, that automate information gathering and delivery to IRS standards. It’ll be up to people whether to use IRS-compliant software, but the impetus to do so would be very high.
It would even be possible, John Law suspects eventually inevitable, for cryptocurrencies to have their own taxation regime. It is a unique invention. The tax system is set up around property and money, two things that have been around for thousands of years, so the problem of introducing an entirely new fundamental concept hasn’t arisen before. It’s a stunning opportunity, a green-field site in a system absolutely crammed with ancient and complex machinery that’s a nightmare to understand and administer.
The second issue is a similar opportunity to change the ground rules. The lack of international taxation standards is a serious problem for the global economy; it’s what lets multinational organisations avoid paying a large proportion of taxes in any regime, and supports an entire industry of well-fed specialists dedicated to legally hiding money.
Because bitcoin and its ilk are a unique invention that can be considered as such, the chance now exists for a standardised international taxation regime that doesn’t care – for collection purposes – where a transaction takes place. One set of world-wide rules would change everything.
Such thoughts are close to heresy, especially for the libertarian persuasion and anyone else who intrinsically fears world government and the intimate insertion of state apparatus into individual lives. They raise enormous issues of privacy, accountability, international politics and state power. But these are problems already, and at some point we the people will have to sort out how to fix the current messes extant in all these areas.
So, John Law proposes, now would be a very good time to start having these thoughts, and having them large. Let’s play what-if. Accountancy meets science-fiction:
“Luke, I am your tax inspector …”
Well, if Darth Vader was to come to life anywhere, it would be in the IRS.
The Chicago Sun-Times now accepts subscriptions in bitcoin. It’s not that big a story as it stands – just an alternative way to pay for an old-fashioned paywalled block of access. As many have noted, the real game-changer would be with bitcoin-based micropayments, letting content providers sell pages of info for the equivalent of pennies or fractions of a penny. That could be finessed further: serve a page instantly for microcash, or let the punter see it for free after a second.
For cash-strapped journals, such ideas sound a lot nicer than the current choice of giving it away and trusting to advertising, or hiding your best stuff from the punters until they pay. And advertisers might like it, paying readers to interact with their content.
Social media services like Twitter and Facebook could create whole internal reward systems between readers and writers – voluntary, but if you join by putting a dollar’s worth of bitcoin in your account, you’ll get whatever rewards your readership generates. But could the bitcoin system stand up to the tsunami of tiny transactions such a system could generate?
Well, yes. A protocol extension scratches that particular itch by creating a trusted channel between buyer and seller that’s purely local and doesn’t convert to a full transaction until the channel is closed or a time limit is reached. An initial agreement is set up between the two sides and then incrementally changed as whatever is being microbought is sent over. When the session’s finished, the final amount is calculated and committed. In effect, it caches the cash.
You can read a more technical (OK, OK, accurate) description, and the author notes the new system has been included in bitcoinj, the standard Java implementation. It uses standard bitcoin protocols and cryptography, and copes with vanishing servers and other annoyances.
Of course, a lot more work needs to be done to test this out in practice, create ways to let buyer and seller easily set up the transaction, and in adding the relevant magic to content management systems. Shouldn’t take long.
Based on the hit rates to John Law’s publishing empire across blogs, social media and comments, he calculates he’ll be able to retire from paid work sometime in 2056. If he types a lot faster.
And finally …
This week’s free gift is the Advanced Bitcoin Simulator. It lives up to its name, accurately charting your progression in the bitcoin world from naive newbie to – well, you’ll have to play it to find out.
You’ll need a sense of humour, some experience of pointless computer games, an experimental streak, a degree of patience and the willingness to cheerfully survive catastrophe with remarkable resilience.
It may well be the most lifelike simulator John Law has ever experienced.
John Law is an 18th Century Scottish entrepreneur, financial engineer and gambler. Having reformed the French economy, invented paper currency, state banks, the Mississippi Bubble and other ideas essential to modern economics, he took 300 years off in a small cottage outside Bude. He has returned to write for CoinDesk on the foibles of digital currency.