The good news is that Australia is close to acknowledging the obvious: Digital currency should be treated as currency. The bad news is that this same thing hasn’t happened in the United States. Bitcoins can now be used to buy almost anything from coffee to surgery, but the government still doesn’t know what to think of this new innovation.
Treating digital currencies as currency relieves Bitcoin and other crypto-currency users and companies from many additional costs associated with its previous treatment in Australia. Previously Australia treated digital currencies as an intangible asset which included additional economic barriers such as the 10% Goods and Services Tax (GST). The Australian change wasn’t made just because of the obvious good public policy reasons- treat a currency as a currency. The change was made for the second best reason, at least for an economist, the change was made in reaction to Australia’s recent loss of a large Bitcoin company CoinJar. In December of 2014 CoinJar left Australia for the the UK to avoid the GST and take advantage of the decision in the UK to exempt digital currencies from their VAT. Therefore, Australia is making this choice in order to compete for business on the world stage.
In this global competition- soon all eyes will be on the U.S.
Currently, the U.S. treats digital currency as property. The IRS, in response to the growing market – that includes people getting paid in Bitcoin, produced a Guidance document in early 2014.
“The notice provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. “
This guidance was produced at approximately the same time that Australia started to look into changing their policies and the time that the UK decided to exempt digital currencies from their oppressive Valued Added Tax. What this means is that in the U.S. a lower amount of transactions are encouraged and according to the IRS Guidance users must calculate capital gains or losses on each transaction. For instance, using a common example, if Bitcoins bought for $1 are used to buy a $2 cup of coffee the Bitcoin payer would need to report $1 in Capital Gains and the Coffee Shop owner would report $2 in gross income.
This slight difference in treatment of currency and property means that Australia and the UK are better places to use bitcoins, better places to mine crypto-currencies, and therefore have higher potential for digital currency growth.
A change from property treatment to currency treatment is something that even this broken Congress might be able to accomplish. Bitcoin values have decreased since the 2014 Guidance by almost 50% and therefore any legislation should score as a revenue increase because Capital Losses from bitcoin would no longer be expected. This marginal revenue difference would also open up the market for digital transactions and put the US back in the lead of this global economic competition.
The US government currently appears to have only a few objections with digital currency. The primary objection seems to be the fact that because of the security protocols and the structure of digital currencies they are largely anonymous. At a recent congressional hearing, FBI Director James Comey called encryption or as he termed it, “going dark,” an issue of national security. We are at an age that governments around the world are attempting to collect as much data as possible and digital currencies threaten information collection. Additionally, most politicians just don’t understand digital currency. While the market is growing the adoption rate is highest among adults 35 and under. The average age of congress is 57 which is very reasonable given the demographics of the country, but not very likely to be early adopters of digital currencies.
Bitcoins and other crypto-currencies are here to stay. It is time to compete for their business. For now we can at least all rejoice that the global economy is working because when competition can drive change the overall system is definitely functioning. However, very quickly we need to focus on getting the policy right both globally and the in the United States especially. We need to compete, or we will get left behind as other countries around the world fight to dominate the digital currency future.