Napoleon Bonaparte once quipped that fame and glory is fleeting
but obscurity is forever. As it turns out, that's a fitting
description of bitcoin's illustrious past and probable future.
Besides wild price swings, government bans, massive security
breaches, and fraud, the $8 billion bitcoin market's latest hurdle
is something nobody (except for Marc Rich) can escape: taxes.
The latest IRS ruling that now taxes bitcoins as property and
not currency is significant. It means that virtual bitcoin miners
are forced to include the fair market value of all their bitcoins
as gross income on the date of receipt. This is exactly the kind of
adverse tax ruling that nobody in the bitcoin religion, especially
Andreessen Horowitz, wanted to see. Remember all the crazies who
were spending $17 million a day for a shot at mining $4 million
worth of bitcoins? Ouch.
Furthermore, the IRS ruling will drastically reduce the volume
of bitcoin transactions because now bitcoin holders will have to
calculate potential capital gains when they use bitcoin to buy
something. For example, buying a $100,000 Tesla with bitcoins
bought for $50,000 would trigger a tax bill of $50,000 in capital
gains for the car buyer and $100,000 of gross income for the car
Bitcoin taxed as property versus currency, essentially means
similar taxation as stocks. Bitcoins held for more than a year are
taxed at a maximum capital gains rate of 23.8% compared to the much
higher 43.4% top rate for short-term gains. Of course, most people
playing the bitcoin lottery face losses.
When bitcoin was trading above $1,000 toward the end of 2013, I
told listeners of my podcast and ETFguide readers that bitcoin's
plan to overtake traditional currencies like the dollar
(NYSEARCA:UUP), yen (NYSEARCA:FXY), euro (NYSEARCA:FXE), and pound
(NYSEARCA:FXB) was terrific hype. Since then, bitcoin prices have
crashed more than 50%.
, I recently caught up with Cullen Roche, Founder Orcam Financial
Group and the Pragmatic Capitalism blog. He offers up another
perspective on the future of bitcoin.
What about the argument that bitcoin is a threat to the
traditional banking system (NYSEARCA:KBE)?
A new UBS report titled "Bitcoins and Banks" said:
"The two main threats that Bitcoin poses to banks are
disintermediation and competition over transaction fees. For
disintermediation, widespread bank insolvency and/or deposit
taxes and levies could drive customers to use Bitcoin in lieu of
traditional bank deposits. In the case of transaction fees, if
Bitcoin transaction fees are consistently lower than existing
fees, banks may see increased competition in this space. We do
not regard either of these threats as real, given Bitcoin's
limited viability as a currency."
Bitcoin advocates correctly argue that credit-card transactions
are too costly. A merchant will pay a 2%-3% transaction fee per
sale with credit and those costs are frequently passed on to
customers. But bitcoin isn't the solution. Here's why: Bitcoin
adopters can lose 50% to 100% of their money from price volatility,
lack of security, and fraud. Losing most of or all of your money
for the potential savings of 2%-3% on a payment transactions isn't
a good risk/reward ratio.
And now here's what I think is one of the greatest paradoxes
about bitcoin: It's growth into an $8 billion marketplace is
fueling the even faster expansion of competing technologies seeking
to dethrone it. In fact, the sheer number of bitcoin competitors
and alternatives grows by the week (See graphic above), here are
just a few:
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