Cross Post: Bitcoin investors should be taxed like any other investor

Despite its name, cryptocurrency isn’t just money. It could also be debt or equity and so it should be regulated and taxed in the same way as other finance.

The tokens investors get when they buy a cryptocurrency, like Bitcoin, can be used to buy into blockchain startups (businesses that use the same online ledger as cryptocurrencies). When blockchain startups issue shares in their businesses using cryptocurrency, it’s called an initial coin offering. For investors, this is like any other equity investment.

Cryptocurrency can also be used to finance specific assets, like debt. So what we have is a single financial instrument that has the advantages of both debt and equity.

So startups issuing their own tokens for investment purposes should have to comply with the same rules and regulations that startups issuing more traditional instruments must comply with. Cryptocurrency investors should be taxed on the same basis as traditional investors.

Why cryptocurrency is a mix of money, debt and equity

Money is very often defined by its functions: a medium of exchange, a unit of account (used to represent the real value or cost of any economic item), and a store of value (that can be saved, retrieved and exchanged at a later time). The early consensus about Bitcoin among economists is that it’s not money.

At best cryptocurrencies are a medium of exchange. But many economists doubted that Bitcoin, given its volatility, could ever serve as a unit of account, let alone as a store of value.

So if cryptocurrency isn’t money, is has to be something else. It could be an asset of some sort.

Usually if investors acquire or sell an asset, it would be liable to tax, such as the GST. This means people using Bitcoin would be taxed twice when using it.

It would be taxed when the person buys the Bitcoin and taxed again when they used it to buy something. Luckily the federal government realised this was a bad idea and moved to repeal the double taxation of Bitcoin.

Clearly the federal government’s view is that cryptocurrency is not legal tender – so don’t try pay your income tax in Bitcoin anytime soon. And there are important differences between money, specifically legal tender, and cryptocurrency.

Cryptocurrencies tend to strictly rules bound. How they’re created, when they can be earned, how they’re distributed and how many there ever can be, is all determined by rules. In fact, users like strict rules.

By contrast government controlled money is not rules bound. Government employs substantial discretion in exercising control over money. So while the US dollar has the words “In God we trust” printed on it, this system actually requires substantial trust in government.

This trust has been repaid by a substantial reduction of value over the past century. It seems that government-backed money may also be a poor unit of account and store of value.

Debt and equity are financial instruments used to raise money to finance economic activity. It is something of a puzzle to financial economists why firms use debt in some instances to raise finance while using equity in other situations.

An important 1988 paper by the 2009 economics Laureate Oliver Williamson provides a possible answer to that question. Williamson argues that debt, being a strict rules bound financial instrument, is best used to finance general assets, while equity is best used for so-called specific assets. Specific assets are those assets that cannot be cheaply or easily redeployed from their current use to alternate uses without a substantial loss of value.

As it turns out Williamson had speculated about the existence of such an instrument (that he labelled “dequity”) and then rejected that instrument as being unworkable. The reason dequity was unworkable was due to opportunism – investors simply could not trust dequity issuers.

The ledger that cryptocurrencies use – the blockchain – is a actually “trustless” technology because it’s decentralised. It allow users to see each other’s ledgers and transactions, negating the need for a trusted third party to manage risk. Instead it relies on cryptographic verification.

With the absence of the ability for investors to game the system, cryptocurrencies are the dequity Williamson first imagined and it could become an efficient financing mechanism.

How dequity should be regulated

The idea of regulating or taxing cryptocurrency finance may not be to the liking of many crypto-enthusiasts who are likely to argue that traditional rules and regulations are very onerous. They are correct, of course. Yet the solution to over-regulation is not a carve-out for special interests but rather regulatory reform that reduces the burden for all business.

The good news for crypto-enthusiasts is that some governments appear willing to engage in genuine regulatory reform and tax competition to attract investment in this space. For example, the Singaporean government is relaxing existing regulation to accommodate cryptocurrency. Its proposed framework would require applicable companies to obtain a license from the Monetary Authority of Singapore, and divides payment activities into several categories.

But regulators should really regulate cryptocurrencies in much the same way as they do existing financial instruments. It shouldn’t be given special treatment.

The ConversationDespite all the complexity of cryptocurrency it really is simple: it’s a financial instrument that combines all the advantages of money with debt and equity. It’s none of those well known concepts in isolation, but a viable and workable hybrid of all three.

Chris Berg, Postdoctoral fellow, RMIT University; Sinclair Davidson, Professor of Institutional Economics, RMIT Universityand  Jason Potts, Professor of Economics, RMIT University.

This article was originally published on The Conversation. Read the original article.

This entry was posted in Cross Post, Cryptoeconomics. Bookmark the permalink.

18 Responses to Cross Post: Bitcoin investors should be taxed like any other investor

  1. RobK

    I thought the ATO had issued a ruling that crypto currency had to be declared like any other income/asset? Or was that over turned?

  2. Neenee

    Cryptocurrency is borderless. When it is held anonymously in crypto wallets it is beyond the control of any government. Governments can seek to outlaw crypto’s, but that will only drive them offshore or underground where they already thrive on the dark web. I do not see that any government can regulate any cryptocurrency, unless it is one initiated by government itself with built-in reporting back to government. Ideally, from the viewpoint of a citizen, governments should replace their currencies with blockchain crypto’s and compete with the unregulated offerings. Government initiated crypto’s could become the new “gold standard”.

  3. Ez

    The tokens investors get when they buy a cryptocurrency, like Bitcoin, can be used to buy into blockchain startups (businesses that use the same online ledger as cryptocurrencies). When blockchain startups issue shares in their businesses using cryptocurrency, it’s called an initial coin offering.

    Does this comment show there should be a distinction between cryptocurrencies?
    Mediums of exchange vs assets.

    Aren’t ICO’s from a startup purchased (or backed) by another cryptocurrency; such as Bitcoin or Ethereum, themselves (generally) obtained in exchange for fiat currency.

    How much difference is there between the above and converting AUD to USD, then using USD to purchase shares in an IPO on the NASDAQ?

  4. max

    There is no discussion in the Bible of the proper limits of taxation. Taxation should therefore be discussed in terms of achieving other biblical goals and enforcing other biblical principles.
    The supreme biblical goal of taxation is to finance a civil government that is incapable of doing more than the Bible says it should. If it is capable of doing more, it will. This is basic to fallen man: to be as God (Gen. 3:5). The state should be limited in a way analogous to the limits placed on the king in Deuteronomy 17. So, the biblical goal of modern politics is to shrink the state — all branches — to levels consistent with the biblical concept of civil government: negative sanctions only. The welfare state must be defunded.
    Taxation therefore should be discussed, above all, in terms of limiting the expansion of the state, especially the central government.
    There is no other mention of the income tax in the Bible. Conclusion: tyrannical governments prefer to tax income.

    One supposed limitation on the central government is the structure of federalism: maintaining local political sovereignties. It has not worked, because federalism has been undermined.

    The Articles of Confederation (1781) had the correct approach: no taxation of individuals by the national government.

    So, a practical application of biblical civil government is this principle: no concurrent taxation. Each level of civil government above the local must tax only that level of government beneath it. Tax increases above the local level of civil government must come at the expense of intermediate civil governments — politicians and bureaucrats — and not at the expense of the people.

    The first and most important goal of taxation is to see to it that only a local government taxes people and businesses directly. This keeps higher levels of government out of the pocketbooks of residents. If a business does business inside a local jurisdiction, it pays a tax locally. This is why a sales tax is ideal. A business collects the sales tax from local residents and sends the money to that jurisdiction.
    Biblical principle of taxation: Every higher level of civil government must tax only the next lower level. No tax should be paid directly by residents to any level of civil government above the city or county, whichever local voters have chosen as the originating tax jurisdiction under which they live. All higher levels must tax only the next lower level. The Federal government taxes the states; the states tax the counties; the counties tax cities or county residents.
    Implementation: A flat rate income tax at this level is not prohibited biblically, just so long as it does not reach the 10% level (I Sam. 8:14, 17). However, it is unlikely politically to remain biblically restrained. Voters will seek to tax higher-income residents at a higher rate: a denial of the rule of law (Ex. 12:49). A sales tax is much better for both personal privacy and judicial equity: an inherently flat tax. Everyone pays the same. A sales tax also does not tax capital and profits, which in turn spurs investment and economic growth.
    https://www.garynorth.com/public/2315.cfm

  5. Speedbox

    Cryptocurrency is borderless. When it is held anonymously in crypto wallets it is beyond the control of any government.

    Yep, and many keep their currency in “cold storage” which means that their crypto wallet is actually held in a device similar to a standard USB. Without giving a long-winded explanation, this means that a crypto wallet can be truly borderless and anonymous as it is carried with you like your normal wallet (or purse). Using your device, you can buy/trade/sell your currencies from any computer anywhere around the globe. Untrackable and 100% secure.

    I thought the ATO had issued a ruling that crypto currency had to be declared like any other income/asset?

    Although it may have changed, the ATO have said that CGT may be payable on crypto currency profits but whether any CGT would be payable is subject to various conditions.

  6. Suburban Boy

    The authors would benefit from considering how concepts such as “asset” and “equity” are understood by accountants.

    In accounting concepts, “asset” is defined as: A resource controlled by an entity as a result of past events; and from which future economic benefits are expected to flow to the entity. It follows that money is a type of asset. A statement that a cryptocurrency may be an asset instead of a form of money is a non sequitur.

    Also, the statement that selling an asset usually results in GST gets no closer to understanding the situation. What actually results in liability for GST is a “supply”, which is defined in tax law to includes goods, services, rights, information and entrance into certain obligations – but with many exceptions, of course. Whether creating, buying or selling a cryptocurrency is a “supply” for GST purposes is a question for tax law and cannot be deduced from economic or accounting principles.

    As for “dequity”, instruments that combine characteristics of both debt and equity have been used for many years (Benjamin Graham catalogues over 200 types of these hybrids in the first [1934] edition of his Security Analysis). Among the types are instruments that create claims on particular assets of the issuer, or particular types of assets, some of which would be classified as “specific assets” and others as “general assets” (using the terminology of the article).

    Classification of particular instruments as “equity” or “debt” often depends on who is doing the classifying. For example, Australian banks issue instruments that are classified as equity for the purposes of prudential regulation, but are treated as debt instruments by taxation law.

  7. BoyfromTottenham

    Another interesting aspect of this ‘digital currency revolution’: http://www.zerohedge.com/news/2017-09-25/forget-taxes-what-if-estonia-made-more-money-selling-services
    This article is about Estonia perhaps offering ‘e-residency’ to foreigners, who could then set up ‘e-businesses’ in the country. The possibilities are fascinating!

  8. mareeS

    Bit “coin” like Renewable Energy certificates, and strata title flats, are only as good as the paper they are written on.

    We have gone back to cash transactions now, which is probably why the government is in horror and trying to heave on people who have reverted to themcash economy.

    We get a solid monthly sum from our SMSF, and being tax exempt, we can do what we wish with it. For home and yard maintenance, cash is king, likewise for IT requirements, and to assist the kids with their needs.

    The tradies and contractors will give 25% for cash in hand. We win, they win, all off the books.

    This is why no government has ever defeated the black economy, because it evens out to fair deal without rentseekers and public servants and “facilitators” in the mix, skimming off their bit.

    Which leads me to say why I took us out of rental apartment property years ago once I did the sums. If you don’t own land, you are just buying blue sky and paying managers and other middle people to skive off you.

    As my late and much-lamented father-in-law said to me years before he died, buy land…nobody is making it any more.

  9. Empire GTHO Phase III

    As my late and much-lamented father-in-law said to me years before he died, buy land…nobody is making it any more.

    Land reclamation is used extensively in places like Singapore and Hong Kong.

    China has created new islands and an airbase in the South China Sea.

    Modern technology and the voracious nation state has rendered the proverb meaningless.

    Bit “coin” like Renewable Energy certificates, and strata title flats, are only as good as the paper they are written on.

    We have gone back to cash transactions now, which is probably why the government is in horror and trying to heave on people who have reverted to themcash economy.

    Your cash i.e state monopoly fiat currency, may be inflated to junk worth by the state very quickly. The war on cash is ultimately a tactic in the hunt for taxes. Burying wads of polymer notes in the back yard won’t help you when collapse comes.

  10. Bruce

    Last time I looked, here in Oz, nobody actually EVER owns the land on which their “dream home” is built.

    Furthermore at ANY time, our beloved leaders can simply “resume” the land and effectively tell you to go to Hell, or fight them in court, which is essentially the same thing. You will be systematically ground into the dust, then your friends and family will be given the same treatment, just to make sure the message gets across.

    “Freehold” has a heavy-duty “choker-chain” firmly attached.

    The only things of REAL value are information, small gold bars, non-perishable pharmaceuticals and ammunition.

  11. Tel

    The value of Bitcoin is backed by stealth and lack of trust, once it is regulated it becomes largely meaningless.

    Of course various other crypto-currencies also exist, almost every nation is working on them, and they will make sure they keep control and regulation over those… which comes with some advantages and disadvantages to the user.

    The thing is that new cryptos can be created quickly and easily and that’s already happening all over the place… so the question remains how many will be regulated and by how much. For the end users, if there’s no penalty in using a less regulated currency then they will all choose that one (duh!) so good money drives out bad… unless governments can think of a way to beat shit out of people who try it (and let’s face it, at the end of the day, that’s the one thing governments are good at).

  12. Snoopy

    For the end users, if there’s no penalty in using a less regulated currency then they will all choose that one (duh!) so good money drives out bad…

    Actually what happens is the reverse. The existence of bad currency causes people to store wealth in good currency which reduces the amount of good currency available for transactions. So bad money drives out good. Gresham’s Law.

  13. Ƶĩppʯ (ȊꞪꞨV)

    ATO has fucked up as usual. Bitcoin is exactly a private currency, government just don’t like a bit of competition. It should not be subject to CGT unless you are a professional trader.

  14. John Constantine

    Land, subject to their left introducing crippling taxes on capital is no longer safe.

    A Stalinist councilor, of a rural shire that recently had a crack at a fifty percent increase of farm rates, famously announced to the outraged public gallery:

    “Suck it up Princesses”.

    Land is a decade away from being a crippling liability.

  15. Rich

    how do you intend to regulate that which cannot be tracked?

  16. rickw

    Despite its name, cryptocurrency isn’t just money. It could also be debt or equity and so it should be regulated and taxed in the same way as other finance.

    Regulation delivers a false sense of security.

    Taxation should only ever be levied on the individual and then sparingly.

    WTF is your point? You want to make criptocurrency as much as a mess as the traditional financial sector?

  17. Neenee

    Another great advantage of cryptocurrency is that it doesn’t just exclude governments from transactions; it also excludes banks.

  18. Yohan

    Technically crypto currencies are not money, debt or equity.

    They are solutions to cryptographic puzzles. That it. Every single form of crypto currency is this. New coins are created by solving (using computing power) those cryptographic puzzles.

    So ask the ATO how they would tax people buying and selling solutions to cryptographic puzzles.

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