Bitcoin, Taxes & Statehood

bitcoin currency state taxation tax

Bitcoin: Stateless Currency

In our earlier post about the taxation of bitcoin, we pointed out the fact that bitcoin taxation brings up a number of potentially problematic, complicating issues. For one, we mentioned that there could be issues with bitcoin’s basic classification as “investment property” given that it is a digital currency. There could be many, many other issues presented by the taxation of bitcoin, some superficial and some fundamental. One of the most important – and most interesting – fundamental issues with bitcoin taxation is related to its status as a stateless currency. As discussed before, bitcoin is essentially a self-perpetuating currency system based on complex verification processes which are managed by bitcoin users; and because bitcoin verification processes are so difficult and its structure is so finely developed, there is no need for bitcoin to be managed by a central authority. What we is have a truly independent medium of exchange which is capable of operating freely outside and over traditional boundaries of nation and state.

But the stateless aspect of bitcoin brings up a critical question: given that taxation is essentially forcible compliance with the financial demands of a state, how does bitcoin factor into the taxation paradigm? Let’s put the matter this way: how can property be taxed if it’s derived from a system which is designed to avoid taxation? Bitcoin and the U.S. dollar are based on two totally dissimilar value systems, and simply retroactively applying preexisting tax laws to bitcoin fails to address this basic discrepancy. If bitcoin continues to rise in market value – and many reputable financial experts predict that this will happen – it seems likely that this fundamental issue will receive more and more attention. At some point, those who seek to tax (or otherwise control) bitcoin may be forced to ask the question: why are so many people flocking to this digital currency in the first place?

Historically, populations have depended on currency as a medium of exchange because currency allows large quantities of value to be shifted much more easily. And states have imposed taxes on their populations because they’ve had the means to do so, and also because states have had a hand in establishing the legitimacy of a currency. We have faith in the U.S. dollar because it comes with the imprimatur of the U.S. government; it is “secured” by its affiliation with the state. And of course the U.S. dollar and other currencies around the globe benefit from various efforts to ensure that any digital transfer of currency be guarded by the most advanced cryptographic processes available. But bitcoin is a system unto itself because it is originally based upon and perpetuates itself through its own highly sophisticated cryptographic verification system. It does not have the “legitimacy” of statehood because it has no need for it. It exists outside, above and around statehood, rather than coexisting side by side.

What if many of the issues associated with bitcoin are unsolvable because they’re not really meant to be solved? What if the fundamental issue with bitcoin is the fact that it’s not intended to fit into any existing state system, no matter how much force is used to make it otherwise?

Image credit: btckeychain

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Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

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