If bitcoin is ‘digital gold’ it should be taxed like gold

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As the US government searches for ways to finance its growing debt and deficits and seemingly ever-growing spending, a puzzling anomaly exists. Investors have flocked to bitcoin and other cryptocurrencies while enjoying a preferential tax rate on long-term profits over gold bullion. It makes no sense if, as its supporters like to say, bitcoin is “digital gold”.

In 2019, the Internal Revenue Service (IRS) issued Notice 2014-21, which qualifies cryptocurrencies as “property” for tax purposes. Meanwhile, gold bars and equivalent exchange-traded funds (ETFs) are treated as “collectibles”, such as coins, gems, jewelry, works of art, stamps. , toys, comics, sports cards, etc.

Assets are generally not taxable until point of sale, when an investor “realizes” a gain or loss. If bitcoin or gold is bought and sold within 12 months, the proceeds are taxed as ordinary income at a maximum of 28%.

But if bitcoin is held for more than 12 months, all gains from a sale are taxed at the prime long-term capital gains rate, up to a maximum of 20%. However, gold bars held for more than 12 months are still taxed up to a maximum of 28%.

The revenue implications of this tax preference for bitcoin are significant, if not huge. If the IRS treated bitcoin like gold, it would result in billions of additional tax revenues. The value of cryptocurrencies around the world has grown from nothing to over $ 3 trillion in a decade. Some of these massive gains by US investors would be subject to some form of higher taxation.

Investor appetite for bitcoin and gold is expected to increase as inflation escalates and prices rise. As the growing demand for bitcoin increases in value, the tax implications of its different treatment of gold will also increase.

What is the reason the IRS favors bitcoin?

If gold and bitcoin are, in fact, alternative currencies, then our current tax policy is irrational. It makes no more sense than a policy that taxes profits from trading euros more lightly than profits from trading yen.

For better or for worse, the tax code is a baton that the government uses to influence behavior. Usually, favorable tax treatment exists if the government considers something to be a public good and wants to promote it. For example, tax policy promotes homeownership by allowing mortgage interest to be deducted.

Yet there is no valid reason for public policy through taxation to favor investment in bitcoin and cryptocurrencies, which tend to be speculative, over gold, which is a proven measure and a reservoir of value.

The rationale for taxing gold and collectibles at a higher rate than capital gains in goods like bitcoin is “that collectibles were primarily owned by the wealthy and earnings from these items collection have motivated neither innovation nor economic growth “. This justification no longer makes sense, if it ever was. Either way, this reasoning would also apply to bitcoin.

The rich use bitcoin and other cryptocurrencies as storehouses of value, just like they do with gold

Billionaires such as Elon MuskElon Reeve MuskHouse Democrats push for social spending plan vote on Friday McCarthy delays swift passage of spending plan with lengthy ground speech Musk plans first SpaceX test flight into orbit in January PLUS and Cuban Mark CubanMark CubanMark adamant on vaccinations: “If you work for me, I demand that my employees be vaccinated” ‘Shark Tank’ investor Barbara Corcoran apologizes for comments on Whoopi Goldberg on ‘ The View ‘The NFL player said he will get the shot if he can make a profit PLUS openly embrace their cryptocurrency holdings. These are just a few of those who have gone public with their support. Ten people own around 6% of all bitcoin. These are known as “whales”.

So, bitcoin and cryptocurrencies are storehouses of wealth for the rich, much like gold.

Bitcoin and other cryptocurrencies are no more productive than gold

Although technologically innovative, it is not clear whether bitcoin drives economic growth compared to other productive uses. In contrast, the (physical) mining industry as a whole, excluding oil and gas workers, employs 182,900 in the United States. These are real jobs with real economic benefits for society.

According to one account, 4% of Americans quit their jobs because of cryptocurrency gains. Good for them, but is this really what we want as a society?

Measuring the productive impact of bitcoin and other cryptocurrencies is less clear because they are “mined” or discovered digitally by individuals. Of the 21 million bitcoins that exist, 18.7 million, or 89%, have already been mined, so while there is an economic boost from bitcoin mining, it is in theory very time-consuming.

Tax policy should put bitcoin at a disadvantage and deflate the bubble before it bursts

Instead, tax policy should favor bitcoin and other cryptocurrencies rather than favor them.

Gold is easier to monitor, tax and regulate, relatively speaking. It cannot go through a metal detector without detection or completely avoid the possibility of random inspection of bags or cargo.

Bitcoin and other cryptocurrencies, which can be stored on a USB drive, are more obscure and elusive, and can be used to evade creditors and enable criminal enterprises, such as those involved in sex trafficking and money laundering. silver. While privacy advocates can praise it, it costs a lot.

In addition, the multi-trillion dollar cryptocurrency market is increasingly posing a systemic risk to the global economy. The more it grows, the more the rest of the world economy exerts itself on it. A sudden drop reflecting the meteoric rise of bitcoin would lead to other assets, including housing and the stock market, as crypto investors are forced to sell their non-crypto holdings to cover their losses.

The energy and environmental impacts of cryptocurrency mining are also widespread. Digital “mining” is extremely energy intensive to the point of straining electricity networks, and therefore a source of environmental concern. According to one estimate, crypto mining operations consume more energy than the whole country of Argentina. Tax policy should be against this.

Correction of the tax anomaly

Taxes on cryptocurrencies should be comparable to those on gold and collectibles. Congress could achieve this through legislation, or the IRS could simply issue a revised notice and ruling regarding the tax treatment of bitcoin and other cryptocurrencies.

As the old saying goes, “If you want to be treated like a woman, act like one. In fiscal terms, this could translate to: if bitcoin and other cryptocurrencies are to be valued as “digital gold,” they should be taxed as if they really are gold.

Chad Bayse is a lawyer and judge advocate for the Navy. He was adviser to Attorney General Jeff Sessions Jefferson (Jeff) Beauregard Sessions The Metaverse Is Coming – Society Should Be Wary Trump Criticizes Justice For Restoring McCabe Benefits McCabe Recovers FBI Full Board After Being Fired Under Trump MORE and Attorney-Advisor at the National Security Agency. He owns shares in Barrick Gold (GOLD), Kinross Gold (KGC) and Sibanye Stillwater (SBSW). He does not hold bitcoin or other cryptocurrencies. The views expressed in this article are hers and not those of the Department of Defense or the Navy.

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