Monday, August 19, 2013

Legalizing Bitcoin may drive it further underground

In recently rulings, the United States and Germany have declared Bitcoin to be legal money. Bitcoin proponents have hailed this as a good thing. They are probably wrong: declaring Bitcoin to be legal currency is the first step to regulating it, hence outlawing it.

The only purpose of Bitcoin is to act as an underground currency. It has too many flaws to act as a legitimate currency. Transactions take 10 minutes to complete, and the system really can't cope with millions of small transactions. Thus, it's great for drug sales and transferring money across borders, but it's a poor alternative to cash or credit card.

That Bitcoin can be used for legitimate purposes is only good insofar as it makes the currency more liquid. If you sell drugs, you need to be able to use the currency to buy other things that aren't drugs. The local cafe that accepts Bitcoin is great for the local drug dealer.

But too much legitimacy is a bad thing. Money is more than just the dollar bills you exchange. It means taxes on what you earn. It means reporting requirements on exchanges more than $10,000. It means, by law, you can be guilty of a crime simply for possessing Bitcoin. Imagine if you fly into the country, they search your laptop, and find your electronic wallet containing $10,000 that you didn't report on your customs form.

A lot of us have been playing at Bitcoin, because it's the sort of thing that us nerds do for fun. But now we've woken up and realized that this puts us in legal danger. I mined 6 bitcoins back when they were worth $10, and now they are worth $600. What does this mean for taxes? I don't know -- I'd better have a conversation with my accountant, which will probably cost me more than the Bitcoin is worth. It's safer just to stop playing with Bitcoin.

Thus, the "legalization" drives Bitcoin further underground, because well-meaning people aren't willing to touch them for fear of getting trapped by monetary laws they don't understand.

As a Libertarian, I resent the laws we already have, such as the anti-money laundering laws (targetng drug lords) that make it a crime simply to have money. Including Bitcoin in this regulatory regime is probably a bad thing, not a good thing.


Anonymous said...

If you mined 6 BTC and it's now worth $600 the tax calculation is dead simple and has huge precedents.

Capital Gains == $600 - cost to mine BTC.

Just treat your BTC as a commodity - which is what everything non-fiat currency is in the eyes of most G7 tax laws.

Anonymous said...

It's funny that for so many so called "Libertarians" the only issue they can ever really speak to that makes them so is a desire to legalize drugs. I mean, you really wake up in the morning sweating and gnashing teeth over the fact that drug lords have to jump through hoops to launder money? Yet, you probably have little to no issue with a cigarette tax.