Ravshan S.K.

Bitcoin forgot its roots. Should we tax it?

Bitcoin was invented and became popular first within a crypto community whose members were predominantly influenced by the so-called “hacker culture”.

The culture was all about anarchy, decentralization, open source, denouncement of Wall Street. And even though the blockchain was called a “trustless structure”, where no one had incentive to cheat on the system, it was totally based on trust in the beginning. Think about times when there were only 10 computers in the Bitcoin system – why wouldn’t anyone do a 51% attack then? Mined bitcoins were worthless back then, why would nobody break the system? Actually, there is no game theoretic equilibrium that would explain early days of any new decentralized currency. Everybody in the crypto community actually contributed to decentralization altruistically.

There is no game theoretic equilibrium that would explain early days of any new decentralized currency.

How did this ideological movement turn into one of the greatest bubbles in history? The answer is obvious – when the very “Wall Street people” realized that cryptocurrencies are the new investment instruments. Needless to say, this caused great volatility and is continuing to drive away its initial intended users. A person will not buy bitcoins to pay for bread because the price is so volatile that it is more profitable to speculate on the currency rather than use it, as it was originally intended. Likewise, it is easier to pay 30$ wire transfer fee to send cash abroad, than to send bitcoins without commission but lose 100$ from price changes.

Apart from all of that, Bitcoin’s “proof-of-work” system is burning terawatt-hours of electricity to check the ledger, whereas in a centralized system, like bank, just one stamp would suffice.

All of these arguments bring the natural point – should bitcoins be taxed? They are not following their “anarchy” mission anyway, so taxing them would not mean that governments are overreaching. Ethereum is already moving to a Casper project, which will slowly get rid of “proof-of-work” completely and make Ethereum mining completely green. So, taxing Bitcoin would also improve the environment by saving electricity and punish it for forgetting its original purpose.

Bitcoin is not following its original mission, so anarchists should be cool with its taxation.

So, how should the bitcoins be taxed? By taxing the Bitcoin mining farms. Since the only source of new bitcoins is by mining, governments can easily identify the farms using electricity bills, inspections and similar usual tools. This should not be more difficult than for IRS to find tax evaders.

Moreover, all bitcoin exchange markets must be taxed, which easy to do. But this will require forbidding any uncertified Bitcoin exchange.

Finally, any shops who accept bitcoins should be obliged to disclose their public key so that IRS can track their transactions.

This will discourage speculators from participating in volatile transactions, this will force Bitcoin community to think about switching from “proof-of-work” to “proof-of-stake” structure, this will shrink the shadow economy, this will allow a room for decreasing taxes to the population which does not use Bitcoins. This will also promote green tokens. Last but not least, this will cause Bitcoin community to remember its original purpose of overthrowing financial institutions and not creating them.

Maybe Bitcoin community will remember its original purpose of overthrowing financial institutions and not creating them.

To sum up, Bitcoin is not doing the job of alternative currency it was supposed to do, and it is not planning to go green. Therefore, governments have every moral right to tax them without regulating the system itself. Because of Bitcoin’s own problems, this will not be considered as government overreaching.

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