As the U.S. government seeks ways to fund its swelling debt and deficits and seemingly ever increasing spending, a puzzling anomaly exists. Investors have flocked to bitcoin and other cryptocurrencies yet receive a preferred tax rate on long-term profits as compared to gold bullion. This makes no sense if, as its advocates like to say, bitcoin is “digital gold.” 

In 2019, the Internal Revenue Service (IRS) published Notice 2014-21, which characterizes cryptocurrencies as “property” for tax purposes. Meanwhile, gold bullion and equivalent exchange traded funds (ETFs) are treated as “collectibles,” like coins, gems, jewelry, art, stamps, toys, comic books, sports cards, etc. 

Assets are generally not taxable until the point of sale, when an investor “realizes” a gain or loss. If either bitcoin or gold is bought and sold within a window of 12 months, the proceeds are taxed as ordinary income at a maximum of 28 percent.  

But if bitcoin is held for more than 12 months, any gains from a sale are taxed at the preferred long-term capital gains rate, up to a maximum of 20 percent. Gold bullion held for more than 12 months, however, is still taxed up to a maximum of 28 percent.

The revenue implications of this tax preference for bitcoin are significant if not enormous. If the IRS treated bitcoin like gold, additional billions in tax revenue would result. The value of cryptocurrencies globally has mushroomed from nothing to more than $3 trillion in a decade. A portion of these massive gains by U.S. investors would be subject to some form of higher taxation. 

Investors’ appetite for bitcoin and gold is likely to grow as inflation heats up and prices rise. As increasing demand for bitcoin drives its value higher, the tax revenue implications of treating it differently than gold will also increase.

What is the rationale for the IRS favoring bitcoin?

If gold and bitcoin are, in effect, alternative currencies, then our current tax policy is irrational. It makes no more sense than a policy that taxes profits from trading euros more lightly than profits from trading yen.

For better or worse, the tax code is a bludgeon that the government uses to influence behavior. Usually, favorable tax treatment exists if the government deems something to be a public good and wants to favor it. For example, tax policy favors home ownership by having the home mortgage interest deduction.

Yet no sound reason exists for public policy through taxation to favor investment in bitcoin and cryptocurrencies, which tend to be speculative, over gold, which is a time-tested measure and storehouse of value.

The rationale for taxing gold and collectibles at a higher rate than capital gains in property like bitcoin is “that collectibles were mostly owned by the wealthy and that gains from those collectibles neither motivated innovation nor stimulated economic growth.” This rationale no longer makes sense, if it ever did. Regardless, this reasoning would apply equally to bitcoin.

The wealthy use bitcoin and other cryptocurrencies as storehouses of value just as they do gold

Billionaires such as Elon Musk and Mark Cuban openly espouse their holdings in cryptocurrencies. They are just some of those who have gone public with their support. Ten individuals hold roughly 6 percent of the entirety of bitcoin. These are known as “whales.”

So bitcoin and cryptocurrencies are storehouses of wealth for the rich, in a similar manner as gold.

Bitcoin and other cryptocurrencies are no more productive than gold

While technologically innovative, it is unclear whether bitcoin stimulates economic growth compared to other productive uses. In contrast, the (physical) mining industry as a whole, exclusive of oil and gas workers, employs 182,900 in the United States. These are real jobs with real economic benefits for society.

By one account, 4 percent of Americans have quit their jobs due to gains in cryptocurrencies. Good for them, but is this what we really want as a society?

Measuring the productive impact of bitcoin and other cryptocurrencies is less clear since they are “mined,” or digitally uncovered, by individuals. Of the 21 million bitcoins that exist, 18.7 million, or 89 percent, have already been mined, so even if there is an economic boost from bitcoin mining, it is in theory very temporal.

Tax policy should disfavor bitcoin and deflate the bubble before it bursts

Instead, tax policy should disfavor bitcoin and other cryptocurrencies rather than favor them.

Gold is easier to monitor, tax and regulate, relatively speaking. It cannot go through a metal detector without detection or entirely avoid the possibility of a random bag or cargo inspection.

Bitcoin and other cryptocurrencies, which can be stored on a thumb drive, are more shadowy and elusive, and can be used to evade creditors and to enable criminal enterprises, such as those involved in sex trafficking and money laundering. While privacy advocates may laud this, it comes at a great cost.

Further, the multi-trillion-dollar cryptocurrency market is increasingly asystemic risk to the global economy. The larger it becomes, the more levered the rest of the global economy becomes to it. A sudden drop mirroring the meteoric rise of bitcoin would bring other assets down with it, including housing and the stock market, as crypto investors are forced to sell their non-crypto holdings to cover their losses.

Cryptocurrency mining’s energy and environmental impacts are also widespread. Digital “mining” is extremely energy intensive to the point ofstraining power grids, and therefore a source of environmental concern. Crypto mining operations, by one estimate, consume more energy than the entire country of Argentina. Tax policy should disfavor this.

Fixing the tax anomaly

Taxes on cryptocurrencies should be on par with gold and collectibles. Congress could accomplish this through legislation, or the IRS could simply issue a revised notice and ruling concerning the tax treatment of bitcoin and other cryptocurrencies.

As the old saying goes, “If you want to be treated like a lady, act like one.” In tax terms, this could be translated as: If bitcoin and other cryptocurrencies are to be valued as “digital gold,” they ought to be taxed like they are really gold. 

Chad Bayse is an attorney and Navy judge advocate. He was a counselor to Attorney General Jeff Sessions and attorney-advisor at the National Security Agency. He holds stock positions in Barrick Gold (GOLD), Kinross Gold (KGC) and Sibanye Stillwater (SBSW). He holds no bitcoin or other cryptocurrencies. The views expressed in this article are his own and not those of the Department of the Defense or the Navy.

Source https://thehill.com/opinion/finance/582155-if-bitcoin-is-digital-gold-it-should-be-taxed-like-gold