Currencies have traditionally been strictly controlled and regulated by individual countries, often forming part of the national and cultural identity. This is evidenced through the use of presidential portraits, shields, and national landmarks on banknotes and coins. The world saw one of the first evolutions from this local, nation-state model with the introduction of the Euro in 1999. Today, 18 countries use it as the official currency, with several others planning to adopt it in the near future. An even larger shift from the traditional model has come with the recent rise of digital currencies, and more specifically Bitcoin. Lacking the support or regulation of traditional financial institutions such as central banks, these currencies have touted their global and decentralized nature as one of the key benefits.
Within the last year, however, many countries have taken note of Bitcoin’s popularity and have taken varying approaches, choosing to ignore, regulate, or even ban the currency altogether. The United States Internal Revenue Service (IRS) recently Issued a notice explaining how current tax policies should be applied to use of Bitcoin. Essentially, since Bitcoin is not considered “legal tender,” in any jurisdiction it will not be viewed as a currency, but rather as property such as stocks and shares. Consequently, the capital gains tax will apply if Bitcoins are sold at an increased value. Those who receive Bitcoin as payment for goods and services, as well as miners who receive compensation for use of their computing power, will be subject to income tax. The IRS characterized virtual currency in this way:
“Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like ‘real’ currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but it does not have legal tender status in any jurisdiction.”
Other countries, such as canada and Australia, have followed a similar path of regulation and taxation. Some countries, however, especially in Latin America and Asia, have taken a more suspicious stance, issuing strong warnings and laying the groundwork for future regulation or or prohibition. Europe has been largely permissive with Germany having the most positive stance. In contrast, China has had barred financial institutions from carrying out Bitcoin transactions. Finally, the most hostile country toward Bitcoin is Iceland, which has made all Bitcoin transactions illegal. Many have hypothesized that digital currencies could lead to a global monetary decentralization, taking power away from governments. Al Gore even said that, “Regulation of money supply needs to be depoliticized…. especially as it applies to virtual currencies.” The problem is that governments often view digital currencies as a threat to their future stability and security. After all, a government’s function largely relies on its ability to levy taxes. A decentralized and largely opaque system such as Bitcoin would make financial transactions more difficult to monitor and tax. It remains to be seen, however, how successful governments will be in enforcing tax laws on virtual currency transactions when there is no reliable way to audit them.