Bitcoin and Taxes

If you had read Satoshi’s white paper back in October 2008, you would have said “there is no way this can work.” There were literally hundreds of reasons Bitcoin could not and would not emerge as a new form of money.

Coming up on six years later, Bitcoin has overcome many of those issues and every day looks more and more like some form of financial value. What remains unclear, though, is if Bitcoin will predominantly be a store of value (like gold) or a medium of exchange (like the dollar), or both (the best case for Bitcoin bulls).

And one important factor in determining what happens with Bitcoin is taxation policy.

In the US, the IRS has issued guidance that places Bitcoin very much in the store of value column. The IRS has said that in their eyes Bitcoin is “property” and will be treated like stocks and bonds for tax purposes. In some ways this is good as the IRS is treating Bitcoin seriously and telling everyone how to report Bitcoin transactions to them. That’s progress. But sadly, treating Bitcoin as property makes it less likely that Bitcoin will become a medium of exchange in the US. That’s because consumers and business don’t normally transact in property. It would be a massive pain to keep track of “cost basis” and “sale price” for every dollar you received and parted with in the course of a day, week, or month. The good news is that because Bitcoin is “programmable money”, it is possible to do this programmatically for consumers and the companies providing payment infrastructure for Bitcoin are slowly but surely doing just that. However, in the long run, it would be much better for the IRS to treat Bitcoin as a currency, and my hope is they will do that as soon as possible.

An even more problematic issue for Bitcoin is VAT tax policy in countries where that is the norm. Right now, Canada is considering applying VAT tax to the purchase of Bitcoin. VAT can be as high as 15% in Canada, so that would mean every purchase of Bitcoin would cost up to 15% more than the current market price. And then when you turn around and purchase something with Bitcoin (as I did yesterday with seats for Tuesday night’s Met game), you would be taxed another up to 15% on that transaction. That’s double taxation which, in my mind, is always terrible tax policy. If Canada goes with this approach, it is my view that Bitcoin as a medium of exchange in Canada is a non-starter.

It is also true that VAT tax on the purchase of Bitcoin would be problematic for the store of value use case. Most investors aren’t going to pay a tax of up to 15% on the acquisition of investment property (like stocks and bonds). So why would they do that with Bitcoin?

The UK went down this path with Bitcoin and VAT last year and then, after careful consideration, the HMRC decided that VAT would not apply to Bitcoin acquisition, but VAT would be applied when Bitcoin was used to purchase goods and services, just like the British Pound.

If we had to pick a country that has taken the most thoughtful and helpful policy toward Bitcoin, it would be the UK. In fact, last week the Chancellor of the Exchequer announced an effort to make the UK the leading center of Bitcoin innovation in the world. That’s forward thinking. That’s what the US and Canada should be doing. But they aren’t. Instead they are stifling innovation in and around Bitcoin with their taxation and other policy initiatives.

I am sure many policy makers would prefer to see the Bitcoin genie put back in the bottle. But that’s not going to happen. Not only is Bitcoin alive and well, it is a global phenomenon, so even if you stifle it in your country, it can and will grow and thrive in other parts of the world. And so you are eventually going to have to deal with Bitcoin, what it means, and what it enables.

It is my view that treating Bitcoin like a currency is the most helpful approach. That will allow Bitcoin to find its best use cases without overly burdensome taxation and other regulatory requirements. I’m very pleased that the UK has found it’s way there and my hope is other major economies like the US and Canada will follow suit as soon as possible.