To ask what is a Bitcoin, is to ask what is money. An ancient, yet confused topic, which saw the limelight for the last time more than a century ago, just as America exited the Civil War. In 1870, the US Supreme Court was tasked with adjudicating whether a newly enacted law, the Legal Tender Act 1862, which compelled the acceptance of government printed money for the repayment of debts, was in contravention of Article I s.10 of the US constitution, which still stands unmodified to this day and explicitly states: “No State shall… make any Thing but gold and silver Coin a Tender in Payment of Debts.” Chief Justice Chase, who formulated the Legal Tender Act, was Secretary of the Treasury at the time of the enactment and supported its passing, casted the deciding vote and gave the majority opinion for the Supreme Court which concluded that:
An act making mere promises to pay dollars a legal tender in payment of debts previously contracted, is not a means appropriate, plainly adapted, really calculated to carry into effect any express power vested in Congress, that such an act is inconsistent with the spirit of the Constitution, and that it is prohibited by the Constitution.
On the same day as the court’s decision, the then President of the United States replaced two chief justices. A year later, the new Supreme Court declare the act constitutional. A number of cases followed, with the matter fully settled in 1884 when a lone dissenting voice, after quoting historians, analyzing the writings of the convention and appealing to the authority of the founding fathers, decried:
History cannot name a man who has gained enduring honor by causing the issue of paper money… There have been times within the memory of all of us when the legal tender notes of the United States were not exchangeable for more than one-half of their nominal value… this inborn infirmity no mere legislative declaration can cure.
The Great Depression soon followed, two world wars and the Great Recession, which gave rise to Bitcoin, the nascent revolutionary technology that is now facing regulatory scrutiny as government agencies struggle to classify it as money or property by applying old laws to new inventions leading to contradictory decisions and widespread confusion.
One example of confusion is an intermingling of currency with legal tender, two entirely different concepts. One based on daily use and the other an artificial legalese construct which seems to have forced tax agencies to declare that since Bitcoin is not legal tender, it is not money, but property. The judiciary however seems to disagree.
It is clear that Bitcoin can be used as money. It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses.
The argument was taken forward by Robert Faiella in an unrelated case. Mr Faiella is accused of transmitting money without a license via the sale and purchase of bitcoins for third parties. He argued that since bitcoins are not a currency, he was not transmitting money, therefore was not breaching any statue. Judge Rakoff, after consulting an English dictionary for the definition of money and citing Judge Mazzant with approval, stated:
Bitcoin clearly qualifies as money… Bitcoin can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.
Ross Ulbricht, accused of running a billion dollar drug operation, tried the same argument but failed. Shavers revived his objection in light of a recent IRS ruling which states the Bitcoin is property, but it was again dismissed. More will surely try, but judges have stated again and again in crystal clear terms that there is no doubt that bitcoins – and by association cryptocurrencies – are a currency.
Few would disagree. That Bitcoin meets all requirements for the definition of money has been shown by Overstock’s estimates of millions of dollar worth of sales in Bitcoin and by Newegg, which run out of stock due to a discount offer for purchases with bitcoins. However, all English speaking tax authorities, with the exception of Britain, have puzzlingly declared Bitcoin to be taxable as property rather than currency despite all the evidence to the contrary.
The IRS issued a notice on March 25th 2014 declaring Bitcoin to be property for tax purposes, without much justification, analysis or commentary, save for stating that it is not legal tender, therefore it cannot be taxed as currency.
Legal tender is a specific, clearly defined and a very limited concept which states that a certain currency must be accepted for payment of debts. It is silent on the definition of currency itself. It remains unclear, therefore, as to why an artificial legalese concept, which has already successfully been challenged by congress itself as shown earlier, should have any bearing on Bitcoin taxation. We wondered if IRS wished to address the above criticisms, but there has yet been no response.
The Australian Tax Office (“ATO”) has taken the same approach. It recently issued a guidance, which is currently accepting public comments until the 2nd of October, where it declares Bitcoin to be property. In response to numerous questions, an ATO spokesman stated that:
The Australian Taxation Office (ATO) has applied the existing taxation law of Australia to the facts of Bitcoin and published the information for the benefit of the community… In summary, the ATO’s view is that bitcoin is neither money nor a foreign currency, and the supply of bitcoin is not a financial supply for goods and services tax (GST) purposes. Bitcoin is, however, an asset for capital gains tax (CGT) purposes.
The ATO consulted carefully with crypto-currency experts, industry associations, law and taxation experts and a range of affected parties in developing the advice in the guidance paper. If the community feel that the existing law does not give the intended outcome for the tax treatment of bitcoin then they can make representations to members of Parliament to have relevant law amended.
Marianne Robinson, a Compliance Solutions Manager at DLAPiper and a legal expert in compliance and governance issues, explained the apparent contradiction between the judiciary and the tax authorities as arising due to the application of different laws as follows:
Different laws have their own definitions. For GST purposes in Australia the word ‘money’ has a very specific definition linking it to the currency of a country so Bitcoin for GST purposes does not qualify.
However, the decision by IRS, ATO and the Canadian Revenue Agency to tax Bitcoin transactions as property, even when they are used as currency, can be very detrimental to Bitcoin users and businesses as it “triggers a number of disadvantages” – Robinson says, and “It could send Australian companies off shore to avoid incurring additional GST liabilities,” such as the possibility for double taxation, the loss of rebate and the added compliance and record keeping costs.
London, which seems to be engaged in a fierce competition with New York over the title of the Financial Capital of the World, has taken a different approach. Her Majesty’s Revenue and Customs was the first tax authority to issue a guidance on Bitcoin taxation. Following widespread criticism, it scraped VAT on Bitcoin and now seems to be treating cryptocurrencies like any other foreign currency. The UK Digital Currency Association, commenting on the Bitcoin Tax Briefing by the British authorities, stated at the time that:
The published guidelines are some of the most sophisticated and forward-thinking issued by tax authorities anywhere in the world. The briefing suggests that cryptocurrencies should be treated almost identically to other currencies, in terms of taxation. This gives further legitimacy to digital currencies and could lead to a gold rush of digital currency businesses to the UK, further cementing its status as the world’s capital for innovation in financial technologies.
HMRC however stirred clear of classifying Bitcoin as either property or currency. When we asked for clarification, an HMRC spokesman stated that “we do not treat [Bitcoin] as currency for tax purposes. They are not legal tender.” They did not however state that bitcoins are property and fell short of clearly stating Bitcoin’s classification for tax purposes.
A spokesman for the office of the Chancellor of the Exchequer stated that the HMRC guidance provided much needed clarification and was widely welcomed by the Bitcoin community. When pressed to classify Bitcoin as either currency or property for tax purposes, he suggested that we wait until the budget of 2015 when new Bitcoin measures are expected to be announced.
In any event, HMRC’s and the Treasury’s lack of a definitive statement on Bitcoin’s classification until at least 2015 is unlikely to make any practical difference as “The taxation rules HMRC have introduced for cryptocurrencies are almost exactly the same as those for legal tender” – a UKDCA spokesman said.
Furthermore, the international nature of Bitcoin may have the added benefit of jurisdictional competition between world capitals for the best tax environment for Bitcoin businesses. In particular, English speaking nations, lacking a language barrier and to a great extend a cultural barrier, may find their businesses to be very mobile.
Certain nations, by artificially taxing Bitcoin and other cryptocurrencies as property when they are clearly used as currency, may unwittingly or otherwise create a burdensome tax environment that may force businesses, which are remorselessly judged by the market rather than artificial constructs, to find a more favorable jurisdiction. London has undoubtedly seen the opportunity and seems to have taken full advantage by standing out as the only English speaking nation to listen to its constituents and backed down from treating it as property, remove the VAT on transactions, and apply foreign currency tax rules to Bitcoin. Others may follow, but the process is likely to be a long and difficult.
Although the Australian Tax Commissioner recently stated that the definition of “legal tender” could be changed, an Act of Parliament by the Australian legislative is necessary as, according to Robinson, “The ATO is bound by the wording in the relevant tax laws.” In the US, momentum might be building to change the classification led by Congressman Steve Stockman, who, following an April announcement that he plans to introduce the “Virtual Currency Tax Reform Act” to change the classification of digital currencies from property to currency, stated that “Bitcoin is a nascent industry… We need to encourage it, not discourage it”. Little seems to have progressed since then, however, with Congress and Parliaments understandably focused on much more pressing issues.
A great public congressional and parliamentary debate may be necessary to change the artificial construct of legal tender which is ripe for challenge as the benefits of a monopoly over currency are widely disputed amongst economists and a public debate over the nature of currency is long overdue. However, as new inventions clash with old laws, it remains to be seen whether legislators and executives of government agencies can adapt in a timely fashion to retain their competitive edge by addressing the many complaints over Bitcoin taxation.
As Chinese exchanges compete with American exchanges for the same customers in equal terms, as Bitcoin businesses raise hundreds of millions of dollars and as the number of Bitcoin users increases fivefold in one year from one million to five million, the countries that get it right are likely to be highly rewarded and those that get it wrong are unlikely to be forgiven. For the free market gives no favors.
London seems to have recognized the opportunity created by a new solution to an old problem and seems to have embraced the wind of change. Many are now wondering: will the others follow?
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