FORTUNE -- It's been a busy couple of weeks for bitcoin enthusiasts, first as they dealt with the volatility brought on by the implosion of the world's largest bitcoin exchange, then as Newsweek fingered a 64-year-old California man named Satoshi Nakamoto as the creator of the virtual currency.
But compared to the question of whether bitcoin will ever achieve levels of adoption anywhere near the scale of government-backed fiat currencies, these stories are mere trifles. Bitcoin's biggest obstacle to success has always been receiving the blessing of the very governments that many of its supporters view as enemies one through 100.
Some governments, like China, have taken steps to combat bitcoin's use. In December, Chinese officials banned financial institutions from dealing with bitcoin though individuals are free to own them. The United States has taken a more hands-off approach, but it is inevitable that the Treasury Department, and especially the IRS, will have to take an official stance on the currency, and its position will have huge implications for the success of bitcoin.
Tax attorney Lee Shepard argues convincingly in a recent article in Tax Notes that "Bitcoin is not a currency," despite the protestations of some supporters. According to Shepard:
Users of Bitcoin should not think that it is exempt from taxation or outside the tax system. There's nothing that Bitcoin allows anyone to do that they can't already do in the regular banking system ... Libertarians, drug dealers, and tinfoil hatters like Bitcoin because it is not issued by a central government, but the irony is that it is more controllable and more traceable than the U.S. bank notes ...
Shepard points to a United States Tax Court decision from the 1970s that dealt with a company called Barter Systems, which allowed customers to trade in hard assets in return for "trade units" issued by the firm. This was during a time when inflation was high, which explains the appeal of these trade units. The U.S. tax court ruled that Barter Systems was required to report transactions involving these trade units and that the exchange "should be taxed on the fair market value of property received in exchange for trade units." Continues Shepard:
Bitcoin is analogous to the trade units considered in Barter Systems Inc. of Wichita. It is a privately issued medium of exchange accepted only in constrained circumstances and not backed by any promise of the issuer. Colvin treated the trade units as property in analyzing their use. The same analysis applies to Bitcoin.
If Shepard's analysis is accurate, then how bitcoin users would be taxed when they sell their bitcoins for goods or dollars would depend on whether that person is a trader, investor, or dealer. But one thing is for sure, the transaction would be taxed, as bitcoin transactions are easily traceable.
And if you're a bitcoin user that is buying and selling the currency on a short-term basis, as one would expect from a person using bitcoin like everyday currency, any gains you realize would be taxed as ordinary income -- as high as 39.6%.
One of the main appeals for bitcoin is the fact that it was designed so that there can only be a finite number of bitcoins created. This, of course, will help those who keep their wealth in bitcoin avoid the hidden tax of inflation. The United States has an explicit policy goal of devaluing its currency at a steady 2% per year, and that adds up to quite a bit over time.
But here's the rub: The IRS will value the gains you make on bitcoin vis-a-vis the dollar. The more inflation in the dollar, the higher your tax bill will be if you keep your wealth invested in bitcoin and transact often using it. There's also the issue of the high cost of record-keeping and reporting to the IRS an individual or company's frequent bitcoin transactions.
So, if you're interested in bitcoin as a currency for its ability to maintain value, you're also going to have to plan on paying a high price to the feds for the pleasure of using it.
The great contradiction inherent in bitcoin is that so much of its appeal comes from its supposed independence from the government, but it's increasingly clear that for the currency to be widespread enough for it to be a stable store of value, it will have to have to receive the blessings of governments across the world. And those governments are unlikely to cede their control over the monetary system anytime soon.
Two new studies find preferential treatment for banks with political ties to the Treasury Department.
FORTUNE -- Move over "too big." There's a new knock on the mega banks: "Too connected to fail."
Two studies published in the past few weeks tackle the issue of whether big banks get special privileges because of their connections to top regulators and Washington officials.
Both studies focus on the early days of the financial crisis. The MOREStephen Gandel, senior editor - Oct 28, 2013 5:00 AM ET
Traders are talking about the prospects of "dirty prices" and other default oddities.
FORTUNE -- On Thursday, the Treasury Department released a report anticipating what would happen if we have a debt ceiling default. One prediction: a financial crisis that could "echo the events of 2008 or even worse."
It's hard to see exactly how that could happen.
If Treasury bonds were to plummet after a debt default, that could cause other bonds MOREStephen Gandel, senior editor - Oct 4, 2013 9:49 AM ET
The government's bailout of Citigroup has finally ended. It was profitable, but it took a while.
FORTUNE -- Congratulations, taxpayers. Your Citigroup bailout is finally over.
On Monday, the Federal Deposit Insurance Corp. said it was selling $2.4 billion in Citi bonds. The bank debt is the last remaining piece of Citi (C) that is owned by any government agency tied to the bailout of the firm in the wake of MOREStephen Gandel, senior editor - Sep 10, 2013 5:00 AM ET
Here's one instance where you should give the Treasury an "F" for effort.
Correction: 5/24 12:57
FORTUNE -- A few weeks ago the Treasury Department put out its latest report of what the government's rescue efforts in the wake of the financial crisis cost taxpayers. The conclusion: Nada. In fact, the Treasury says that if you take a broad view of all the bailout programs, taxpayers actually are looking at a $9 MOREStephen Gandel, senior editor - May 21, 2012 1:59 PM ET
An outside critique of our analysis: "Surprise! The big bad bailout is paying off"
By Bob Eisenbeis, Cumberland Advisors
A recent column by Allan Sloan and Doris Burke in the Washington Post claims that the distasteful financial bailout not only worked but also generated a profit for the government of at least $40 billion and perhaps as much as $100 billion. Their conclusion is based on their working of the numbers, and the MOREJul 19, 2011 5:00 AM ET
Our recent analysis of the U.S. bailout caused quite a ruckus. Here is our response to the critics who say we omitted some key details.
FORTUNE -- When we wrote our story about the financial-system bailout turning a profit for taxpayers, my Fortune colleague Doris Burke and I (and our editors) decided that less was more. So we showed you our bailout numbers, but didn't give you much detail about how MOREAllan Sloan, senior editor-at-large - Jul 19, 2011 5:00 AM ET
The U.S. government's often maligned $14 trillion intervention not only staved off global collapse - but is making money.
With Doris Burke
FORTUNE -- The bailout of the financial system is roughly as popular as Wall Street bonuses, the federal budget deficit, or LeBron James in a Cleveland sports bar. You hear over and over that the bailout was a disaster, it cost taxpayers a fortune, we didn't really need it, it MOREAllan Sloan, senior editor-at-large - Jul 8, 2011 5:00 AM ET
When the government offered GMAC's old shareholders a free ride, how could they turn it down?
You would think, at this point, that there would be nothing left to be outraged about when it comes to government bailouts. But the more bailout rocks you turn over, the more well-connected players you find who aren't being forced to pay the full price of their mistakes. One of the little-noticed rocks I've MOREAllan Sloan, senior editor-at-large - Jan 19, 2011 5:00 AM ET
|Why casino workers hate Obamacare|
|Five predictions for the World Wide Web that were way, way, way off|
|Netflix faster on Comcast, following deal|
|Social Security is the best deal|
|The Deep Web you don't know about|