With the recent run-up in Bitcoin’s price and the return of the bull market, News Corp’s flagship financial paper felt the need to run an opinion piece against the cryptocurrency. The article, written by Lawrence Parks and titled “Bitcoin’s Futile Quest to Be a Currency,” alleges that the technology is doomed because the IRS has established onerous rules for keeping track of profit realization during the normal course of Bitcoin transactions.
The rules were established earlier this year when the IRS classified Bitcoin as “property” meaning that its exchange between parties is a taxable event, and any profit realized by the increase in Bitcoin’s price must be accounted for and reported to the IRS. These rules are indeed unnecessarily burdensome — many Bitcoin users make several transactions a day, and it’s downright unproductive to spend an equivalent amount of time calculating whether those transactions realized a profit and by how much.
It’s good that Mr. Parks recognizes the burden that these regulations put upon law-abiding citizens, but he takes the issue and completely blows it out of proportion. Instead of calling for the IRS to change its rules and allow for more leniency, the article takes a decidedly anti-Bitcoin approach by assuming the regulations are set in stone, the IRS will crack down on Bitcoin tax evaders by sending them to jail, and the community will be utterly unable to adapt.
Sorry Mr. Parks, but your argument falls apart on multiple grounds.
Potential Tax Modifications
First of all, the IRS rules were just issued in March as a last-minute guide for Bitcoin users who wanted to pay taxes, but didn’t know how to calculate it. Treating Bitcoin as property was the best way for the IRS to use the digital currency’s volatility to the government’s advantage — extreme swings in Bitcoin’s value means extreme profit realizations by some users, and the IRS wants a cut.
But the agency probably didn’t consider the fact that Bitcoin is increasingly being circulated at a grassroots level in relatively small amounts. While there will always be the big time players who trade several whole coins at once, the beauty of Bitcoin is that it empowers regular people to transact small amounts amongst each other — $10 worth of coins for a small job here, $20 worth of coins for a bigger job there, and so on. The IRS classification of Bitcoin as “property” completely ignores its usefulness as, yes, a currency.
It’s unfeasible for Bitcoin users to log every single transaction, with the current exchange rate at the time, and analyze that rate to calculate the amount of realized profit. This would be an accounting nightmare for anyone who genuinely wants to pay their fair share of taxes. So if the IRS really wants a slice of the Bitcoin pie, they had better make it easier to comply with regulations. There’s a real possibility that the tax agency will modify guidance to make complying with the law easier, instead of trying to fit a square peg in a round hole by calling Bitcoin “property.”
Bitcoin Can Adapt, If Needed
For the sake of argument, though, let’s assume that Mr. Parks is right and the IRS will bring down the hammer on anyone who doesn’t perfectly follow the rules. People start going to jail for not reporting the fact that they bought Bitcoin at $500 and then got some good deals on Overstock.com because the value rose to $660. Somehow the IRS manages to analyze the blockchain and attach real-world identities to all those sneaky people with their valuable virtual money. And perhaps most preposterous, let’s also assume that the IRS has the resources to send federal agents to arrest all of those people who were somehow identified.
This is the ridiculous scenario that is cooked up in the Wall Street Journal, in which the IRS is an omnipotent and omnipresent entity that has unlimited resources at its disposal. But for the sake of argument, let’s take this absurd reality as a given.
Even in that nightmare situation, Bitcoin would still survive through adaptation. It’s a programmable currency, meaning clever computer experts can build useful programs around it. If the community really needed to start logging every single transaction in a “profit calculator,” a developer (or multiple developers) could simply build a program that does everything automatically. This imaginary “smart wallet” would remember when coins were received, at what price, when they were spent, and at what price. Calculating profit in dollars would then be done instantly in the background, like a TurboTax for Bitcoin.
Keep in mind that burdensome IRS regulations are nothing new; this agency has been harassing the business community for a hundred years, but the market finds a way to adapt. New careers are created that help regular people deal with the burden of tax reporting — this is why businesses like H&R Block remain successful. So, contrary to Mr. Parks assumption that an IRS crackdown would be “the end” of Bitcoin, it would actually just serve as a catalyst for the market to adapt.
Of course, Mr. Parks didn’t consider any of these points when he made his argument that IRS rules would kill Bitcoin. It’s possible that the article was never meant to serve as real journalism in the first place, and that it was merely a calculated hit job against Bitcoin because its price has been rising rapidly in the past two weeks.
Forgive me for being cynical of the author’s motives, but this is the same publication that butchered a quote by Erik Voorhees back in February during the Mt. Gox fiasco. Voorhees did a substantial phone interview with the Wall Street Journal in which he focused on the big picture and how Bitcoin would recover from the Gox scandal. However, the reporter only used a single quote by Voorhees about his own stash of Bitcoins in Mt. Gox: “That’s gone now. There’s no chance of getting that back now.”
Therefore, it shouldn’t surprise anyone that the Wall Street Journal continues to misrepresent reality when it comes to Bitcoin. We should let them wallow in their ignorance — Bitcoin will continue growing regardless.