Bitcoin doesn’t threaten U.S. position as a tax and customs jurisdiction

Back on 16 November I posted a brief post opining on whether the federal government would go after Bitcoin, the cryptocurrency that has appreciated immensely in value this year. I wrote that if anything, the Federal Reserve would consider issuing there own digital currency. Federal Reserve Bank of New York president William Dudley alluded to the central bank issuing its own digital currency back on 28 November although nothing definitive has been set.

Readers should bear in mind that the primary role of the United States government is to conduct a resource extraction and protection scheme over its physical jurisdiction. To carry out these main functions it taxes citizens and businesses. Bitcoin is property and where an investor enjoys gains from the sale of that property, the United States Treasury will be there to collect. According to a 2013 report by the General Accounting Office, right now the biggest tax problem surrounding cryptocurrency is ensuring that taxpayers either investing in or using Bitcoin for transacting commerce are aware that they may be liable for taxes.

Fortunately for taxpayers investing in or using Bitcoin, the Internal Revenue Service does not have the resources to implement a tax compliance approach specific to virtual economies and virtual or cryptocurrency. The GAO recommended that at the least the IRS use a low cost information distribution approach, its website, to make taxpayers aware that they may be liable for income taxes as a result of investing in cryptocurrency.

Whether you agree with Warren Buffet’s assessment on Bitcoin, something that isn’t real and producing no dividends hence scheduled to implode, what’s real is that the Internal Revenue Service is ready to collect.

My instincts tell me the feds won’t go after Bitcoin … for now

The financial press has been focusing on Bitcoin’s rapid appreciation in value of late. The value of a single Bitcoin eclipsed the $7,000 mark a couple weeks ago. At the time of this writing, Bitcoin.com reported the cryptocurrency is selling for around $7,171 while its “fork”, Bitcoin Cash, is selling at $1,181.

Supply and demand primarily drive the price the currency. I guess it also helps that over 100,000 merchants accept the coin. A payment system driven by blockchain provides Bitcoin owners additional certainty about who actually owns a generated coin at a particular time. Also the near instantaneous payment is an attractive feature.

In my business, I focus on political threats and I see the Federal Reserve taking a parallel approach to Bitcoin as a payment system. One possible route is issuing its own digital currency supported by an enhanced payment system. A report filed last September by CNBC described a recommendation by the Bank of International Settlements that central banks consider issuing their own digital currencies.

Also, the Federal Reserve is in the process of revamping the payments process system. Bitcoin competes with at least two prongs of the Federal Reserve’s payments system: clearinghouse services and coin distribution services. Federal Reserve governor and Fed chair nominee, Jerome Powell, currently serves as co-chair of the Federal Reserve’s payments improvement oversight committee. I expect given Bitcoin’s growing popularity, the appeal of blockchain, and the concerns about using cryptocurrency for fraudulent purposes that should Mr Powell become Fed chair, improving the payments system and increasing the Fed’s ability to compete with innovative payment systems will remain a priority.