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Why Bitcoin Can No Longer Work as a Virtual Currency, in one Paragraph – The Atlantic

Why Bitcoin Can No Longer Work as a Virtual Currency, in one Paragraph

A single bitcoin no longer functions like a $20 bill.

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      Some see the budge as helping to bring the medium into the mainstream. Now that bitcoins can be taxed, they’re reportable, and the legal ramifications of buying and selling a coin are clear.

      The IRS’s decision, however, may end one of the excellent fantasies of Bitcoin. The U.S. government will now subject owners of individual bitcoins to capital gains taxes: What they build up on buying or selling a bitcoin, they must pay taxes on.

      That’s a big deal, perhaps fatter than it seems, because—as a fresh blog post by Georgetown Law professor Adam J. Levitin explains—it means Bitcoin can no longer function as a digital currency.

      To tax Bitcoin as property, he says, demolishes its fungibility: One Bitcoin can no longer be exchanged for another.

      This was one of the original intents behind the service. Bitcoin aimed to function as a kind of digital money, meaning it had to work as a unit of account, a medium of exchange, and a store of value. In switch roles, that means:

      As a store of value, Bitcoin’s price had to be predictably stable, such that you could neglect to spend a single bitcoin and know its value would not fluctuate frantically. In late 2013, many argued that Bitcoin’s quickly rising price kept it from functioning as a dependable store of value, but there were no technical or regulatory reasons it couldn’t function as such eventually.

      As a medium of exchange, Bitcoin must be commonly desired. People must want to have Bitcoin; others must want to spend it. (Thus, it avoids the ‘coincidence of wants’ problem—in order to trade, both people don’t need to want something the other person has. Instead of trading rent for food, for example, you can rent living space from a landlord with money, and your landlord can use that money to buy food.)

      Eventually, as a unit of account, Bitcoin had to have a standard numerical value to be used to measure profits and lodge debts. It had to be divisible (which it was, since smaller units of bitcoin could be traded); it had to be verifiable (which it was—this formed the basis of its cryptosecurity), and eventually, it had to be fungible, meaning that every bitcoin was the same as every other bitcoin.

      And that’s where it gets interesting.

      Something like a $Ten bill, for example, is fungible. The $Ten bill you got from an ATM is the same as the $Ten bill you got back as switch at the ice fluid salon is the same as the $Ten bill you (on a very fortunate day) find on the street. It does not matter which $Ten bill you spend.

      So $Ten bills, in other words, are interchangeable. This is why we don’t use horses, bananas, or hand-painted ceramic ashtrays as currency. (The hand-painted ceramic ash-pot you got from an ATM is unlikely to be of the same quality as the one you found on the street. This is also why art doesn’t make a good currency.)

      “So,” asks Levitin, “what does this have to do with Bitcoin?”

      The price at which a particular Bitcoin was acquired (and this is traceable) determines the capital gains on that particular Bitcoin when spent. If I spend Bitcoin A, which I bought at $Ten, but is now worth $400, I’ve got a very different tax treatment than if I spend Bitcoin B, which I bought at $390. […] This means Bitcoins are not fungible, and that makes it unworkable as a currency.

      If I have to figure out which particular Bitcoin in my wallet I want to spend and what the tax treatment will be, Bitcoin just doesn’t work as a commercial medium of exchange.

      It still works as a speculative medium, Levitin writes. But one bitcoin, per Levitin, no longer equals one bitcoin no longer equals one bitcoin. Every bitcoin you own is a little different.

      Why Bitcoin Can No Longer Work as a Virtual Currency, in one Paragraph – The Atlantic

      Why Bitcoin Can No Longer Work as a Virtual Currency, in one Paragraph

      A single bitcoin no longer functions like a $20 bill.

      Most Popular

      The Very first White President

      • Ta-Nehisi Coates
      • Five:00 AM ET
    • The Awkward Truth About Campus Rape Policy

      • Emily Yoffe
      • Sep 6, 2017
    • Why Glad People Cheat

      • Esther Perel
      • Sep 6, 2017
    • Americans Have Given Up on Public Schools. That’s a Mistake.

      • Erika Christakis
      • Sep Five, 2017
    • Have Smartphones Demolished a Generation?

      • Jean M. Twenge
      • Aug Three, 2017
      • Robinson Meyer
      • Mar 26, 2014
      • Technology
      • Share
      • Tweet
      • &#x2026

        Some see the stir as helping to bring the medium into the mainstream. Now that bitcoins can be taxed, they’re reportable, and the legal ramifications of buying and selling a coin are clear.

        The IRS’s decision, however, may end one of the superb fantasies of Bitcoin. The U.S. government will now subject owners of individual bitcoins to capital gains taxes: What they build up on buying or selling a bitcoin, they must pay taxes on.

        That’s a big deal, perhaps thicker than it seems, because—as a fresh blog post by Georgetown Law professor Adam J. Levitin explains—it means Bitcoin can no longer function as a digital currency.

        To tax Bitcoin as property, he says, demolishes its fungibility: One Bitcoin can no longer be exchanged for another.

        This was one of the original intents behind the service. Bitcoin aimed to function as a kind of digital money, meaning it had to work as a unit of account, a medium of exchange, and a store of value. In switch roles, that means:

        As a store of value, Bitcoin’s price had to be predictably stable, such that you could neglect to spend a single bitcoin and know its value would not fluctuate frantically. In late 2013, many argued that Bitcoin’s quickly rising price kept it from functioning as a dependable store of value, but there were no technical or regulatory reasons it couldn’t function as such eventually.

        As a medium of exchange, Bitcoin must be commonly desired. People must want to have Bitcoin; others must want to spend it. (Thus, it avoids the ‘coincidence of wants’ problem—in order to trade, both people don’t need to want something the other person has. Instead of trading rent for food, for example, you can rent living space from a landlord with money, and your landlord can use that money to buy food.)

        Ultimately, as a unit of account, Bitcoin had to have a standard numerical value to be used to measure profits and lodge debts. It had to be divisible (which it was, since smaller units of bitcoin could be traded); it had to be verifiable (which it was—this formed the basis of its cryptosecurity), and eventually, it had to be fungible, meaning that every bitcoin was the same as every other bitcoin.

        And that’s where it gets interesting.

        Something like a $Ten bill, for example, is fungible. The $Ten bill you got from an ATM is the same as the $Ten bill you got back as switch at the ice juices salon is the same as the $Ten bill you (on a very fortunate day) find on the street. It does not matter which $Ten bill you spend.

        So $Ten bills, in other words, are interchangeable. This is why we don’t use horses, bananas, or hand-painted ceramic ashtrays as currency. (The hand-painted ceramic ash-pot you got from an ATM is unlikely to be of the same quality as the one you found on the street. This is also why art doesn’t make a good currency.)

        “So,” asks Levitin, “what does this have to do with Bitcoin?”

        The price at which a particular Bitcoin was acquired (and this is traceable) determines the capital gains on that particular Bitcoin when spent. If I spend Bitcoin A, which I bought at $Ten, but is now worth $400, I’ve got a very different tax treatment than if I spend Bitcoin B, which I bought at $390. […] This means Bitcoins are not fungible, and that makes it unworkable as a currency.

        If I have to figure out which particular Bitcoin in my wallet I want to spend and what the tax treatment will be, Bitcoin just doesn’t work as a commercial medium of exchange.

        It still works as a speculative medium, Levitin writes. But one bitcoin, per Levitin, no longer equals one bitcoin no longer equals one bitcoin. Every bitcoin you own is a little different.

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