Bitcoin "Private Money"

With a rush of  people fleeing the various effects of Fiat currencies, especially from China, Greece and Cyprus, digital currencies such as Bitcoin have become part of the financial landscape, with ~ USD$8,000,000,000 in capitalisation today.

The above statement, may sound like, I am a supporter of BitCoin, far from it, I see a number of issues with BitCoin, a hard supply cap, the significant first mover advantage, and liquidity at the Fiat currency interfaces, are but a few, but the discussion around BitCoin and its treatment as a currency or property, needs to be both rational, and have some basic is reality.

The Bitcoin with a hard supply cap, has a built-in deflation, while most western countries including Australia require an underlying inflation rate. The purpose of inflation is to drive people to invest their money into something productive, it also pays of national debt. Deflationary currency undermines productivity, and essentially provides a disincentive to be productive, as all new value created drives down the value of existing property. But I digress..

So back to Oz, the ATO has been grappling with the question of whether to classify Bitcoin as money or property for years, just like the rest of the world.

Bitcoin is effectively pseudonymous and potentially anonymous.  But, it’s important to understand the difference between “anonymous” and “tax fraud.”  Knowingly or intentionally refusing to report or pay taxes on income earned is by definition – tax fraud.  Whether you’re likely to be caught is an entirely other argument.  Mixing the two is a mistake that we shouldn’t make.

The furphy about tax evasion and Bitcoin is just that, tax evasion occurs today inside all of the Fiat currencies worldwide without exception.

Many people believe that if the ATO “doesn’t know who owns the BitCoin” and if their wealth is “entirely in BitCoin,” then the ATO can’t touch them, on the assumption that the ATO does not know who owns a BitCoin. The problem with this argument is that it is short-sighted and factually incorrect. But it is a fact that inside the BitCoin domain there is little or no transitional knowledge, beyond a peer-to-peer exchange.
As an example, John Doe owns a million BitCoins, and spends AUD buying houses, cars ect..The ATO has all of John's AUD transactions from Johns Fiat bank account, and calls and asks where did this money come from?  John can’t explain where the money is coming from and is slapped with a tax bill. The ATO does not need to identify the transactions inside of BitCoin, does not need to know a single BitCoin holder address to affect its tax collection obligations.

Hence in practice, the only way "States" like Australia, have control over Bitcoin flows,and any associated Tax treatment, is to treat BitCoin as Unit of Account, similar to how the ATO treats foreign exchange currencies, and use the banking system (AUD Fiat Currency) to track it once it "leaves" the Bitcoin world.

One can simply forget about the techo waffle of treating BitCoin as property, and tracking Bitcoin addresses (a joke), this is a reaction to Bitcoin being a non Fiat currency, and the need for "States" to have treaties around the control of "Currencies" nothing to do with the reality of BitCoin transactions.

Probably the most thought though classification of Bitcoin comes from Germany, who treats it as unit of account or "Private Money".

"On 19 August 2013, the German Finance Ministry announced that Bitcoin is now essentially a "Unit of account" and can be used for the purpose of tax and trading in the country. It is not classified as a foreign currency or e–money but stands as "private money" which can be used in "multilateral
clearing circles". Then they lost it, with capital gains and sales tax.

The Solution, must be simple..
FX Transactions
Bitcoin trading has FXGains ect.

Non FX Financial Transactions
Financial transactions have Capital Gains using Bitcoin FXrates same as any currency, as Bitcoin is a non Fiat currency, there is no currency tax, just normal taxes within the actual financial transaction which use Bitcoin as the foreign currency.
Bitcoin is always a foreign currency for all parties.

Where to Tax
For this to work, taxes are applied to all transactions which pass outside of the Bitcoin world (currency), i.e at the point of entry into any entities domiciled Fiat currency. All "States" have the ability to track all such transactions today, so also nothing new required.

This matches the existing cash economy today.

There are no taxes inside Bitcoin (same as no GST on bank transactions ect), this is constant as there is no taxes with "Cash" transactions today.

Bitcoin is just a non fiat currency, all the same currency rules should apply, simple.

The classification of Bitcoin as "Private Money" gets around a lot the treaty issues and matches more closely with the real world..

Australia either plays in the big pond, or becomes irrelevant as a significant number of Chinese, Russians (Cyprus) and Greeks have already voted with their feet and left the Fiat currencies.



Approach
Keep it simple, require minimal changes, i.e reuse as much as possible of existing legislation and infrastructure, and address issues as they evolve..



1. Bitcoin's deflation problem
2. A unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money.^[1] It lends meaning to profits, losses, liability, or assets.


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