Whenever a bit of bad news hits the Bitcoin community, there’s always at least one individual who pops up and claims that “this is actually good news.” In the case of the IRS ruling on Bitcoin, that lone individual is Chamath Palihapitiya. Chamath is a well-respected former Facebook executive who doesn’t hold back his excitement when it comes to the possibilities created by Bitcoin. When you combine all of the holdings of all the different investment vehicles controlled by Palihapitiya, you get just under 100,000 bitcoins. While there have actually been a few others who have simply stated that the Bitcoin IRS ruling was “not that bad”, the points made by Chamath in regards to it actually being good news at CoinSummit actually make a lot of sense. Although this ruling could have some bad implications for bitcoins as a currency over the short term, it will eventually lead to a democratization of various tax tricks that the wealthy elite have been using for years.
Avoiding Taxes with Property
The main point that Chamath was making throughout his comments on the IRS decision was that bitcoins can now be used in a “tax loophole” due to the fact that they are now considered property. A “like-kind exchange” is a type of exchange where one asset is traded for another. Palihapitiya notes that billionaire American businessman John C. Malone is well-known for using these kinds of asset swaps in an effort to pay little to no taxes. The basic outline of how this type of exchange works is outlined on Wikipedia:
By way of example, let’s say a taxpayer exchanges an old asset worth $20,000 in which the taxpayer had a basis of $14,000 for a like-kind asset. Assuming the exchange qualifies for non-recognition (based on how the taxpayer held the old property and how the taxpayer intends to hold the new property), the $6,000 realized gain will not be recognized, and the taxpayer’s basis in the new asset will be $14,000. Because the new asset likely has a value of $20,000 (in an arms’-length transaction the two assets would be deemed to have equal values), the $6,000 unrecognized gain is preserved in the new asset. Thus, in any like-kind exchange, the exact amount of any unrecognized gain or loss is preserved in the basis of the asset acquired in the exchange.
This is the main reason that Chamath Palihapitiya believes that declaring bitcoins as property is actually a good thing. Sophisticated individuals have been using these kinds of discrepancies in the tax system to lower their tax liabilities for many years, and this is not likely to change in the near future. Tax reform is a hot issue in Washington these days, but no one is really holding their breathe when it comes to Congress actually passing anything when they can’t even agree on a budget. It seems that the IRS could have done much worse than simply assign bitcoins to the “property” category.
Streamlining Tax Advantages with Smart Contracts
The difference between using bitcoins as property to avoid some taxes when compared to more traditional assets is that bitcoins are also programmable money. This means that smart programhmers and engineers will be able to place a variety of different smart tax-avoiding concepts into the Bitcoin wallets that average people can use on a daily basis. This means that the tax loopholes that have only been available to the rich in the past will now also be available for the average American. In the near future, many people could be using wallets that are optimizing their tax forms for them behind the scenes. There will still be some bitcoiners who like the idea of using this technology to avoid paying taxes completely, but the ones who want to pay their taxes will be able to use an automated accounting system to completely streamline the process; not to mention the fact that they’ll also be able to avoid some extra taxation along the way.
Reporting Every Purchase with Bitcoins?
The main issue that most people have had when it comes to the IRS’s ruling as it relates to the usage of bitcoins as a currency is that nobody wants to report every single transaction they make after noticing a rise in the price of their bitcoin holdings. Chamath points out that these kinds of accounting issues can also be programmed into future Bitcoin wallets, but I’d like to also throw my own two cents on this matter. The reality is that, as of right now, bitcoins are not a currency. The units of account on the Bitcoin blockchain are really more of a commodity right now, so, in a way, the Bitcoin IRS ruling actually makes sense.
Although there are some people, myself included, who like the idea of using bitcoins as a currency right now, it can’t really be a useful currency without a more stable value. Until that future value plateau is reached, wherever it may be, I don’t necessarily have a huge issue with bitcoins being referred to as property. At the end of the day, the bitcoin is not going to disrupt the dollar at any point in the near future. It needs to take down the fiat currencies in Venezuela, Ukraine, Argentina, India, and other developing countries before we can even think about it going after the dollar or euro.
You can watch Chamath Palihapitiya’s entire interview from CoinSummit below: