Just in time for tax season!
A lot of people in the crypto community seemed to express various degrees of shock and agitation regarding the IRS’ new ruling that Bitcoin and other digital currencies would be taxed as property. Is this surprising? In almost every way Bitcoin behaves like gold, more than it behaves like a fiat currency. This is one of the reasons that I think it ultimately will be regulated as a digital commodity, and fall under the perview of existing exchanges and regulatory bodies set up to control the commodities markets. The ruling also disregards transactions under $600, and certain other circumstances. So that cup of coffee or Xbox One you wanted to get doesn’t become a burden to account for at the end of the year.
So what does this mean? Well, every time you spend some Bitcoin it might be a taxable event. That might be a pain in the butt, until you realize that every event on the Bitcoin network is catalogued in the Blockchain. It will be trivial to leverage that technology to do very sophisticated accounting of an entities spend/receive. I expect to see basic accounting and auditing software that utilized the Blockchain shortly. It is an idea whose time has come. At the most basic level I have done this for Coinlock, tracking transactions in, noting USD spot rate at point of entry, and noting cost when converted into USD.
The very wealthy have numerous tax tools available to them, many of which are based on the idea of sheltering, trading, and swapping property. Bitcoin-as-property could open up a world of tax planning driven by software that has never been accessible to the average person. This gets even more interesting as physical assets, tangible commodities, and redeemable contracts get issued on top of Bitcoin. Software can easily account and modify for digital currency events, but lets take it a step further. Why not have software agents automatically and continually optimize property ownership? Why not build accounting software that operates in real time to create an optimized tax profile, denying, modifying, purchasing and redeeming property as necessary to do so? That is the power and promise of programmatic money systems, where open-source and independently audited code can operate on your behalf to initiate, prevent, and auto tax-plan financial transactions.
I can see that happening in two different models. The autonomous corporation as championed by Ethereum and Bitcoin 2.0 Blockchain companies (MasterCoin, Colored Coins, and Counterparty) to name a few. Imagine an accountant-as-a-service distributed on a network of miners. Paid directly in crypto to dig through your financial history, automatically shuttling property into trusts and shelters. It seems far fetched, but a simpler model running a software agent as a service or locally on the Blockchain could perform similar work on your behalf. Ultimately programmatic money should reduce human labor, should improve the quality of life of billions of people, and create the construction of some truly revolutionary financial services.
The fact of the matter is that Bitcoin as property is great. Let’s hope that rule sticks. The amount of insight we can give software when all monetary transactions are parse-able is staggering. and combined with this ruling and some smart software could save us all a lot of money. Turbo tax shouldn’t be a once a year software, it should be constantly running, looking for opportunities to save, a silent private for-hire tax assassin.