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Thoughts on Bitcoin and Tax.

One of the more interesting thought experiments around Bitcoin is related to the idea of tax. How do you reconcile a cash-based internet currency with tax in a nation state? Is tax an old idea? How can you tax something if you can’t track it? 

There are a lot really Bitcoin enthusiasts that insist that tax is immoral. It is being forced on people. And that tax is the only reason why any governmental money succeeds: you must earn USD, because you must pay tax in it.

Let’s first look at this perspective. Let’s assume we still want tax in a nation. The benefit of providing social good through taxation in a fair and equal society means cheap healthcare, policing, education, upkeep, etc.

If someone chooses to earn their keep in Bitcoin because of it’s ease of use (freelance jobs through the internet for example), and you still want to contribute to the society you benefit from, how would you pay taxes?

There are 2 ways I see it. You can classify it as assets, which you then have to declare. Selling those assets for fiat, means you then pay capital gains tax. The problem with approach however, is that Bitcoin is a very liquid asset. To declare that I received 0.001 Bitcoin is unfeasible and pointless.

The other way is when you convert it to fiat, you declare it as income (or foreign income). And then get taxed according to income brackets. This is easier for the individual, but the problem with this is, you can function start functioning in a society without having to cash out. There are pubs, sites, grocery stores, etc starting to accept Bitcoin. See the upcoming crowdfunded documentary, Life on Bitcoin.

With the second idea, you could simply monthly declare the Bitcoin at the current exchange rates as income. The government would then still insist on the taxes for that income. You are then REQUIRED to convert the specific amount to fiat and pay the government. Are there any other ways? What do you think?

For the 2nd though experiment, it goes a bit into tin-foil hat territory. Do we still need tax? I’m asking this question not because I think we do not need tax, but rather I think it’s an important question to ask. Technology like Bitcoin forces us to contemplate it at least.

An interesting perspective to this (through discussion on Twitter with Len v. Heerden). A government has nothing do with Bitcoin. They provide no benefit to the functioning of it. Thus, why do we need to give the government value when I earned Bitcoin without the use of my government? If I was being paid in Rand, then sure. They provide the facility of currency in the country. It’s an interesting point, because it sort of pits a nation’s currency against Bitcoin (or global currencies). The government must provide incentives to use Rand over Bitcoin, without trying to force its citizens to use it. They shouldn’t hyper-inflate it. They should create incentives for people to buy Rand, such as saying: if you want small business support we only pay you in Rand. A public park will only be built by paying the contractors in Rand. Tax then sort of becomes like the monthly fee to participate in the benefits that your nation provides. If your nation sucks, then you don’t have to pay it. It’s still a difficult viewpoint to process because public goods can’t so easily be separated.

From my perspective, I don’t see how we can provide benefits for the commons without some form of taxation. However, I do think there are some clues to how this could be feasible. Bitcoin is such an example. We THINK we need centralised creation of benefits, but as can be seen with a well-thought out system like Bitcoin, we don’t. Are there incentives, technologies, machines and systems we can design to benefit humanity without the need for money to siphon to the top and back down again?

For example, what if there is a way to incentivize people to perform policing duties? Conducting acts of good and lawful protection of citizens, and you will be rewarded. The acts of good and lawfulness are mathematically enforced by some protocol? Spitballing here. There are gaps in this argument.

What if we could utilize the latent knowledge in a community, and have people teach one another instead of relying on the idea of a school? Is it possible to induce equality in a decentralized system like this? Will equality even be an issue?

Decentralized systems have always failed because we lacked ways to police it. And Bitcoin has in a way solved that philosophical problem. Can variations of it be used in other forms?

All these are interesting questions! What are your thoughts?

Excuse me of I might have gone a bit too tin-foil here. I don’t usually like ascribing to extreme view points, but it is more for a thought experiment than anything else.