Since Bitcoin’s launch in 2009, and it’s subsequent rise to fame, there has been a growing debate among government officials on how to best deal with the digital currency. Some have ignored it, causing digital currencies in those countries to operate in legal limbo, while others have simply banned it, forcing it underground. However, some government officials have recognized Bitcoin as part of a growing market and have decided to address it by subjecting it to some sort of tax status. The manners in which governments have decided to classify Bitcoin have differed — and in doing so has resulted in different kinds of taxes being imposed on the cryptocurrency.
Generally, tax law is a convoluted mess of statutes that is characterized by boring and dry nomenclature that is sure to cause any layman’s eyes to glaze over. Tax codes are also usually stricken by bureaucratic redundancies that lead to tax codes being thousands of pages long, making them difficult for any one person to understand, even if they could withstand the mind-numbing language of the laws.
Usually, though, taxes are separated into different categories that affects how much something is taxed and even how many times it will be taxed. This is important as different goods can be used for different reasons, and if these goods are reused for different ends, they can become subjected to a variety of different taxes, resulting in an accumulated cost that could become a significant burden for consumers. Additionally, there can be a problem of misclassifying goods and applying the wrong taxes. This specifically has become a problem for Bitcoin, because of a reluctance from governments to recognize it for what it is — or what it is generally used as — a currency.
Australia Suffers from Improper Bitcoin Taxation
A recent example of bitcoin being misclassified by a government agency occurred in Australia. In August 2015, a government report issued by the Australian Senate Economics and References Committee concluded that Bitcoin should be made a legal currency in relation to its tax status. The report, titled “Digital currency—game changer or bit player,” recommended that Bitcoin be treated as a money or foreign exchange under Australian tax law. The recommended reclassification was made specifically with Goods and Services Tax (GST) purposes in mind, a tax designated to barter transactions dealing with non-money commodities.
However, this reflected a reversal to a previous ruling made by the Australian Tax Office (ATO), which stated cryptocurrencies were ‘intangible assets,’ or “neither money nor a foreign currency,” making it liable for the GST. The report addressed this ruling and stated that the ATO had placed “An additional burden on Australian digital currency businesses.”
The original ATO ruling was highly anticipated and ultimately came at the dismay and expense of Australian cryptocurrency businesses and users. Many digital currency startups warned that the ruling likely meant that cryptocurrency businesses would relocate to other countries with more favorable tax regulations. Consequently, others feared that if the cryptocurrency industry were to retain a presence in Australia, it would likely be forced underground, pushing almost all bitcoin activity into the black market.
In essence, the commodity ruling, which subjected bitcoin and other digital currencies to Australia’s GST, created a situation where both consumers and businesses employing bitcoin would be double-taxed. Because most businesses and consumers use bitcoin as a currency rather than a consumer good, they would be taxed for both its use and the subsequent goods and services they buy or sell with the currency. Although taxes are named differently depending on the country, generally taxes like the GST are taxes designated to commodities or to the transfer of goods not considered money. Goods that are taxed directly are taxed in proportion to their monetary value or in the case of Value-Added Taxes, which is what the GST is, the tax is directed to the monetary difference between purchase and sale. The value Added Tax is normally considered a capital gains tax, because it taxes the profit or the difference in value between moment of purchase and moment of sale. To illustrate how this works, just think of a shirt being purchased for $20 and then later sold at $30 for a $10 profit; the $10 difference is the subject of a capital gains tax.
Commodity taxes or VATs may be a practical way to tax properties, bonds, or other assets without much problem. However such taxes can create problems if they are imposed onto a currency. These kind of taxes are imposed onto activities that deal with goods that are not also subjected to sales or consumption taxes, so the unintended consequences of taxing these activities are minimized.
However, if a currency is taxed as a commodity, it can lead to something known as double-taxation. That is, two separate taxes being imposed onto one activity or trade. Money is not a consumption good or something that is valued by itself. Instead, money is something that is used as a means to an end by its very definition. Money is valued for its purchasing power, which means that is valued by what it can buy, which is directly affected by how many people accept it as a form of payment. Thus, the use of money is something that is always subjected to a consumption tax, as it is the vehicle by which people buy consumption goods. Therefore, as it concerns the tax designation of Bitcoin, if it is designated by a government as anything other than a currency, it will likely result in being subjected to both consumption taxes on the things bought and sold with it and, in the specific case of a VAT, a capital gains tax on the monetary difference of its value from when the bitcoin was bought and once it was sold.
Countries that have ruled cryptocurrencies as commodities or properties have, in effect, put people and businesses using Bitcoin at a disadvantage. As with the GST in Australia, the ruling often means that just by using Bitcoin, both business and individuals will accrue increased costs via double-taxation. Double-taxation also creates a barrier-to-entry, limiting bitcoin and other digital currencies from entering the market and competing with other currencies. This barrier creates a disincentive for consumers and producers to use Bitcoin, which will restrict its growth and use-value, or push the currency into the black market.
Ironically, laws and taxes are typically imposed onto Bitcoin with the intention of protecting consumers from malicious agents. However, black markets increase the chance of violence, because the justice system is no longer at consumers’ disposal, which makes it harder for people engaged in black market activities to resolve disputes peacefully.
Disregarding the fact that those concerns are completely bunk and mostly motivated by ignorance or political reasons, laws and heavy taxation does normally push economic activities into the black market, because consumers want to avoid legal punishments or excessive costs. Just as drug laws meant to limit drug useage doesn’t actually stop or limit drug use, laws and heavy taxation meant to change the behavior of consumers or protect them from the alleged dangers of bitcoin will, in fact, do neither. Laws and excessive taxation cannot change the laws of economics. Although superficially it may seem laws stop people from doing certain things, those activities have really just gone underground. If there is a demand for something, people will pursue their needs and wants regardless of the law.
In essence, if governments want to help bitcoin markets grow, they should properly designate the cryptocurrency as a currency. This way, Bitcoin will only be subjected to taxes dealing with sales and consumption, like any other currency. Not only will this alleviate the cost of double-taxation for Bitcoin users and businesses and help grow their economies, it will also provide a safe environment for trade to be facilitated.
What do you think is the proper tax designation for Bitcoin, or should it be taxed at all? Let us know in the comments below!