Bitcoin Is Not Money

One of the ways to spot a fanatic is the old line about their inability to change their mind or change the subject. The first part is the key. No amount of evidence can get them to question their beliefs. This is something you see it with Bitcoin. The believers, despite the mountain of bad news, are still hoping and praying their Utopian fantasy will come true. This latest set back could, however, make the fantasy more expensive.

The Internal Revenue Service may have just taken some of the fun out of Bitcoin. But that may mean that the virtual currency is growing up.

The I.R.S. announced on Tuesday that it would treat Bitcoin, the computer-driven online money system, as property rather than currency for tax purposes, a move that forces users who have grown accustomed to operating under the government’s radar to deal with new tax issues and reporting requirements.

While that may seem like an expensive headache, some financial experts view the move as a way to push Bitcoin further away from the fringes and into the mainstream financial system.

“It’s getting legitimacy, which it didn’t have previously,” said Ajay Vinze, the associate dean at at Arizona State University‘s business school. The ruling, he said, “puts Bitcoin on a track to becoming a true financial asset.”

This was always going to be a problem for Bitcoin. No government on earth is going to treat it as a currency. It will always be property. That means the guys who bought ten grand in Bitcoin when it was trading at $50 will now owe taxes on their windfall. If you go into a pawn shop and sell a million dollars in gold coin the pawn shop is reporting the sale to the IRS and you have to report the gain or loss on your taxes.

In most states, gold is not hit with sales tax, but that is not the case with Bitcoin or any other digital currency. That means Bitcoin dealers will now be hit with sales tax audits, assuming states are savvy enough to do it. That’s the real story of Bitcoin. To this point, government have not had a need or desire to address it, so Bitcoin and other digital schemes have been able to flourish. When that stops, the flourishing stops.

The flaw in the Bitcoin plan has always been obvious to anyone familiar with how countries work. To be a country, you must control your borders, your currency and your central authority. Puerto Rico is not a country. It has a defined border, but Washington runs its currency and most of its government. Puerto Ricans can be as proud of their people as they like, but the remain a property of America.

The US government guards the dollar better than it guards the border. They know the key to keeping the American ruling elite in power is the dollar. If the world went to different money, say backed by energy, the current arrangements in Washington would unravel quickly. When you can no longer print away your mistakes, thus transferring the cost to some other place in the world economy, you have to act differently.