A bitcoin address is just a container for some amount of BTC. Holding an amount of currency isn't taxable, and exchanging currency often isn't taxable either. (I'm generalizing across jurisdictions, but I think what I'm saying is true for most of them.)
If you move money from one pocket to another, or one savings account to another (that you own), that's not taxable. Very many transfers between bitcoin addresses is just like that: the 'change' from a transfer goes to a new address owned by the same person.
Even when the addresses are owned by two different people, the transfer often isn't taxable. You don't pay a tax when you pay a bill, but that's a currency transfer between two parties. Even when you buy something it isn't necessarily taxable; in many jurisdictions many products are sold tax-free based on either the type of product or where the buyer and/or seller are based.
I don't think there's a way to enforce taxation on bitcoin that's not already being used to enforce cash sales taxes and cash income, despite the tracability of the coins, because the address owners may not be identifiable, and the nature of the transfer is definitely not identifiable from the blockchain.
In Canada, even if you destroy all paperwork and tell the taxman that you don't remember anything, the law permits them to look at your assets and decide how much you owe. Then it's your burden to prove otherwise. Is it different in the US? Hell they could even force exchanges or code mainteners to build in a tax system.
Yup, same in the rest of the civilized world. People scaremongering about Bitcoin and taxation really have no idea how taxation works.
Sure, there will be small amounts of fraud— there always is— but if cash didn't kill taxes, Bitcoin sure won't. The incentives are just setup to make tax fraud at any real scale unattractive.
Nobody can force opensource code maintainers to build anything. More importantly, nobody can force all exchanges to run any particular code; exchanges can exist in any political jurisdiction.
Whilst way you say may technically be true, the government could just declare this:
Each person must publicly declare the bitcoin addresses that they hold. Any legitimate business accepting payment in bitcoins can only receive bitcoins from other registered addresses, else they are black flagged and no longer a registered address.
Now, your average business and the banks are not going to circumvent these rules. The Banks will probably give their business customers payment gateways that enforce these rules without the business having any choice. Black market bitcoins will still exist, they will just be useless as "normal" currency and will be completely separate, with no way to cross over. Since all transactions are public it is trivial for the government to enforce these rules.
You'll still be able to run your exchange in some other political jurisdiction, but unless the Government white lists your addresses, nobody will be able to spend those coins on legitimate businesses in your country.
Even if it was technically possible[1], I don't think it's any more feasible than forcing citizens to publicly declare the serial numbers of dollar bills that they hold.
[1] By design, Bitcoin addresses are supposed to be single-use. Reusing them is a security risk and not recommended (recent android vulnerability is a good example - it only affected reused addresses). Every transaction done with the standard client usually creates a new address (to send the change), which is not even visible in the interface. Merchants accepting Bitcoin usually create a new address for each invoice, etc. etc.
In other words, the way Bitcoin is used is fundamentally incompatible with the public declaration of addresses. If the government has the power to change this, it might as well make Bitcoin completely illegal and not bother.
It's trivial to make a wallet program that would report the new addresses as it makes them, one for each new transaction. That's really not a big limitation.
>Any legitimate business accepting payment in bitcoins can only receive bitcoins from other registered addresses, else they are black flagged and no longer a registered address.
This particular implementation wouldn't actually work. Anyone can send BTC to any address, so it would be easy to poison the well.
(But I suspect some similar scheme could be feasible. You might be able to enforce the rule on BTC->$ withdrawls? I wonder about mixers, though.)
This particular implementation wouldn't actually work. Anyone can send BTC to any address, so it would be easy to poison the well.
You could easily have software that would automatically turn over to the government any coins sent from addresses that are not registered. It's like if you found a briefcase full of money: you'd turn it over to the police (or maybe you wouldn't, but that's what you should do). With software, it could just be automatic.
If you refuse to run software that does this, or you don't turn over coins received from blacklisted sources within some period of time, you get blacklisted.
Except that because of ECC you will eventually leak your private key if you reuse the wallet for too long. So now you need to report every new wallet. Good luck with that...
The ZeroCoin extension to BitCoin has already been developed, but not implemented, to take care of this exact problem. ZeroCoin effectively destroys Bitcoins only to have them recreated in a new address with no connection to the originating address. These "transactions" have zero traceability (provided there are a few of them happening each block), thus the name ZeroCoin.
However, a government can probably make it very difficult to impossible to get money in and out of an exchange for it's citizens, if that exchange chose not to implement whatever features it requires.
I'm not sure that's an accurate representation of how things work in the tax world. You don't pay a tax when you pay a bill, but it's likely the recipient of your money includes it as income on their tax return. Same goes for any seller - whether or not a sales tax is involved. If you were to transfer a large amount of money from your bank account to a friend's, your friend would likely have to count that money as income on their tax return (as a gift).
The way the US tax code is set up, any income is taxable unless there's an exception for it.
If I gift my friend $X, and then he gifts it right back to me, and we proceed to do this back and forth ad infinitum, is it the case that the IRS would eventually bleed that money to $0?
It's possible they could take that position, but I suspect you or your lawyer would be able to come up with a way out of most of it. For example, you could argue they were a series of interest-free loans, so there was no income to anyone (other than the forgiveness of any interest the IRS would impute to the loans). Or maybe there's an exception in the tax code for the situation you describe - I'm not a tax attorney :)
And as ebiester noted, there's an exemption for gifts under a certain amount.
I'm trying to think of a way to "test" this, like set up a couple of accounts and programmatically transfer money back and forth. I imagine most banks/processors have some sort of mechanism to limit transactions that would be considered suspect (such as automated back-and-forth transfers). But the lower limit's not a problem -- by repeating the transaction, you'd be contributing to the limit of $/year, even with a miniscule amount.
The bank doesnt report you. It is up to you to report yourself as receiving a gift. The entire US tax system works on self reporting and the fact that during audits if you have wilfully lied you will go to jail. So you can transfer some amount a million time and then just say you transferred it once and the IRS will probably never even look into it.
You are thinking of the inheritance tax. If I recall the gift tax and the inheritance tax interact, but you only pay the inheritance tax once, when you are dead.
Well, it'd probably get you flagged for investigation as an unusually incompetent money launderer, but I suspect you could convincingly argue that it's not taxable.
Nobody hoards large sums of cash. Cash is deposited into a bank, and the bank loans it out to someone who spends it. That's how banks make money, and why they are able to pay you interest on your deposit.
I'm curious where you think they put all that currency. You could argue they're hiding it from the tax authorities by putting it in a safe deposit box, but by definition nobody knows how much cash there actually is in those boxes, and of course raising taxes on such cash hoards isn't going to affect such.
> Banks stopped making most of their money from deposits a long time ago.
Banks make money from charging you for the privilege of using your own money.
Monthly account-maintenance fee. ATM fee. Fee if you don't have direct deposit. Fee for cashing checks. Fee for using a teller. Fee if they process debits before credits so as to push you into overdraft even though, by chronological transaction order, you never overdrafted.
They don't make money by accepting deposits and making loans; they make money by squeezing fees out of people who don't have much money.
Unlimited debit/atm/teller/billpay/cheque/dd/dw transactions, no minimum limit, no requirement for direct deposit (but if you use it, its free too), no monthly fee.
Congratulations, you've got a relatively customer-friendly bank. If you think you can generalize from that to banking in general, you need to read up on what banks in general do these days.
Key bank has free checking and free atm usage and free teller usage. Perhaps you should transfer your checking account there, especially since they're offering $200 for new accounts.
> they make money by squeezing fees out of people who don't have much money
They do make money from people who don't pay attention to their balance - regardless of whether they are poor or not.
> They don't make money by accepting deposits and making loans
That perplexes me since they constantly try to sell me loans.
first of all, you're arguing semantics, and you know very well that there are many fractional reserve bank accounts with lots of accumulated cash available for withdrawal at any time. that is a working, popular, valid definition of "hoarding cash".
second, do not underestimate the amount of cold, hard, paper (polymer?) cash hidden in safe deposit boxes distributed around the world. you can bet your bottom dollar (har har) that this cash isn't being lent out to commercial banking clients and mortgage buyers. it's sitting in boxes, unused. in a certain sense, it's an anti-inflationary savings mechanism.
that's not even counting the gold, platinum, pearls, diamonds, precious gems, and etc.
I understand fractional reserve banking. It's a percentage (I think around 10%) of the deposits the government requires a bank to keep on hand. The rest of the deposits are all loaned out back into the economy.
Note that the government requires this reserve because otherwise the bank will loan it out, i.e. the bank doesn't actually desire to keep cash on hand. Neither do rich people. Even drug lords don't want cash hoards, it's why they launder it.
It's not splitting hairs over semantics. People who have money in the bank do not have a cash hoard that they are withholding from the economy.
As far as people keeping assets in safety deposit boxes, nobody has any idea how much is in them, so it's rather pointless to talk about them. I do find it hard to believe that Apple's billions in "cash" is really a hoard in a safety deposit box that's withheld from the economy.
>that is a working, popular, valid definition of "hoarding cash".
Not in the sense we are discussing of it being withheld from the economy.
(For fun, watch Breaking Bad, where one of Heisenberg's biggest problems is trying to convert cubic feet of cash into something he can spend.)
You are making assumptions on a system you know nothing about (otherwise you wouldn't have written what you wrote).
Read about how this tax work before complaining about it, please. It's only for generally big amounts of money, and your mortgage and other stuff is subtracted, making it a non-issue for almost everyone. And you can fine invest the money instead.
Seems like a horrible tax because it's not your property. It doesn't matter if the person in question has many resources or few, those resources are not yours to steal (or "tax", or whatever euphemism for aggression you want to use).
If you insist of using politically biased terms like "steal" for it, conversely your opponents can just as easily justify reaching for Proudhon and his "property is theft".
I agree, the thought of merely holding money being a taxable event seems weird (speaking as an American). That said, it's a great way to ensure that people don't hoard cash and instead spend it or invest it (in theory, keeping the economy moving).
Increasing the amount of available reserves doesn't really transmit to inflation as it's constrained by demand for loans. The loanable funds model which says that increases in reserves leads directly to increases in loans doesn't really apply under a floating-rate non-convertible currency regime.
It's actually sort of the opposite. Interest based money is designed so that the numeric value grows over time. A tax on holdings makes its numeric value decrease over time. See http://en.m.wikipedia.org/wiki/Demurrage_(currency)
Both inflation and demurrage reduce the purchasing power of money held over time, but demurrage does so through fixed, regular fees while inflation does so through expansion of the money supply by a central monetary authority distributing newly issued currency or through endogenous money creation (such as fractional reserve banking).
In the Netherlands, all assets over €21K (roughly $28K) are taxed at 1.2 %. This includes cash, bonds, stocks, real estate held for investment, paintings held as investments; everything that is not for personal use (so cars and yachts are not included, nor are second homes for personal use).
I'm considering to open an account with a Norwegian bank, say Bank Norwegian, as a low risk investment. What is currently the untaxable annual income? I believe it used to be 30K NOK a few years ago.
(For Americans) If you earn income in bitcoins, you still have to pay tax in USD. If you earn income in Euros, you still have to pay tax in USD. Bitcoin does not absolve you of your tax obligations, even thought it might help you to evade them.
But do you pay based on what the bitcoin was worth in USD when you made the transaction, or when you pay your tax bill. Which exchange does that valuation come from?
Believe it or not, we've had taxes for a long time on non-dollar-but-store-of-value things whose values fluctuate over time. Bitcoin does not present any sort of radical new challenge to the tax system.
Ok, I had a feeling that would be already settled but a lot of people seem to think you should be paying taxes now and I don't see how can that can be done without knowing which of the many exchange rates to use.
The interesting part would be what exchange rate you would use. The IRS publishes rates for major currencies, but Bitcoin is so volatile that a single yearly exchange rate could dramatically shift things one way or another.
Ignore my ignorance in crypto stuff, so, what's stopping us from creating a hundred accounts in one computer and having a couple of bitcoins in each one of them?
Or even spread in one hundred shared peer-to-peer bank services?
Nothing stops you from create hundreds or even millions of bitcoin addresses, which can act as "accounts."
Edit: A bitcoin address is a 160-bit number. That number is associated with a public and private key. The only way you can spend bitcoins stored in an address is if you know the private key of that address.
I just wondered to myself how long it would take you to use up all the addresses if you created a trillion per second.
3.6e+17 times the current age of the universe. So, it looks like there are enough addresses for you to really go nuts, if you like. Block chain might get a bit bloated though.
Addresses are not added to the block chain unless they receive Bitcoin. There are no checks in place to ensure the uniqueness of the address, since it's virtually impossible to generate the same address twice, let alone an address with a positive balance.
If you move money from one pocket to another, or one savings account to another (that you own), that's not taxable. Very many transfers between bitcoin addresses is just like that: the 'change' from a transfer goes to a new address owned by the same person.
Even when the addresses are owned by two different people, the transfer often isn't taxable. You don't pay a tax when you pay a bill, but that's a currency transfer between two parties. Even when you buy something it isn't necessarily taxable; in many jurisdictions many products are sold tax-free based on either the type of product or where the buyer and/or seller are based.
I don't think there's a way to enforce taxation on bitcoin that's not already being used to enforce cash sales taxes and cash income, despite the tracability of the coins, because the address owners may not be identifiable, and the nature of the transfer is definitely not identifiable from the blockchain.