Two of the hottest topics surrounding Bitcoin are how it may or may not be taxed, and its anonymity (or lack thereof).
In this article we'll explore these issues, and see how they can work in combination to allow for an elegant political solution, a compromise that could please both the left and the right (and the middle, up, and down).
First, let's take the idea of Bitcoin taxes. As it stands, Bitcoin is being viewed as a financial asset, meaning you would owe capital gains taxes from any realized profit upon re-exchanging your Bitcoins for fiat currency. Additionally, you probably owe taxes on unrealized gains if you spend Bitcoins outright, but this particular detail is not as well-defined.
Some have argued that until you can pay your income taxes in Bitcoin, it won't be a "real" currency. But this always seemed irrelevant to me. For practical purposes, I can pay my taxes with anything that has value. The only thing standing between my prized camel and my completed 1040 is a quick sale, exchanging my camel for some US dollars, which then immediately go to the government. That is the whole point of having currency or money in the first place, so that you can exchange anything for anything else - taxes are no different.
What remains an interesting question is whether taxes are a good idea in the first place. Some say yes, some say no. Some call them unethical, others say they are necessary to support a complex civilization. It is between these two groups that I believe we can come to a really terrific solution, one that cannot be reliably executed with fiat currency... but can be with Bitcoin. But before we get there, we need to talk a bit about the digital currency's anonymity.
One of the greatest myths being propagated at the moment is that because Bitcoin is completely anonymous, it will attract criminals who want to use it for money laundering, drugs, weapons, and child pornography. Some great articles have recently come out rebutting this notion, reminding readers that cash is the truly anonymous currency - the longstanding choice of people who want to trade illicit goods and services. Bitcoin actually does a pretty poor job of being anonymous, because it wasn't designed to be anonymous. Satoshi made a trade-off between anonymity and network security, opting for using a distributed ledger, the Blockchain, to verify the provenance of every satoshi.
Yes, users are endowed with a level of privacy, provided they take certain precautions. But these measures are best accomplished when Bitcoins are staying still, hiding in cold storage wallets, the owners of which being difficult to ascertain. But it's incredibly easy to snoop on other Bitcoin users if they publish their addresses. I recall an example months ago when a user was offering 1BTC to the first dozen or so people to respond to this thread with their Bitcoin address. I immediately looked up everybody's addresses on the blockchain to see if anybody was careless enough to post one that had any significant amount of Bitcoins in them. You may not be surprised to hear that there were a couple of rich beggars in the group - and they certainly seemed caught off-guard when I said as much: "Wow, user12345, looks like you've got a lot of Bitcoin." "WTF! Don't say that in public, man!" See, not really anonymous. As soon as you can associate a particular address with a person's identity, you can learn all sorts of things about their finances.
But if Bitcoin isn't fantastically anonymous, maybe we can use that to our advantage. Is there anything that you can think of that you are not permitted to know about, even though it is probably very much your business?
This brings us to our compromise. Regarding the latest NSA wiretapping scandal, thanks to whistleblower, Edward Snowden, we've relearned just how little we actually know about where the government spends our tax dollars. In fact, even the NSA budget (independent estimates range from $10-20B) is classified. I personally take that as an egregious insult. In addition to having no say in where my tax dollars are spent, I'm not even permitted to learn what they are spent on.
Unabashed freedom-lovers like myself are not alone in this sentiment. Even progressive liberals are expressing discomfort with this level of government unaccountability. Suspend disbelief for just a moment, and imagine that Bitcoin has become widely adopted, even perhaps the new de-facto reserve currency. Here is what I would propose. Consider this an open letter to the progressives from a libertarian:
1) I don't think I should be taxed, but I will agree to it.
2) I don't think that taxes should be progressive (i.e. the more you make, the higher your tax rate), but I'll agree to it if we can simplify the tax code (thus reducing the billions of wasted man-hours spent every year in tax preparation, investigation, and enforcement) by eliminating all but one type of tax. I would prefer a consumption tax, but I'll even concede that if I must. We can have a progressive income tax.
3) You like democracy, but majority rule makes me nervous about individual liberties such as free speech. I would argue that the current US democracy doesn't really provide citizens with an effective use of their vote, so I propose a hyper-democratization of the tax code, something that gives people a louder voice in the political process. It would work in the following ways:
a) All income taxes can be paid directly with Bitcoin
b) By April 15th, everybody who pays income taxes receives an electronic ballot. On the ballot is listed government programs, to a certain level of granularity, i.e. education et al, defense et al, healthcare et al, etc.
c) Individuals cannot reduce their tax burden, let's say it's 20%, but they can decide to allocate their tax money wherever they want. Somebody who favors education spending can assign all of their contribution to that cause, thus alleviating any lingering guilt that a drone attack which killed innocent people in Afghanistan was somehow paid for, in part, by them.
If we were to implement this system, it might shift the role of the politician away from campaigning to win elections, towards campaigning to convince the public of the merit of certain programs. The populace would then have the power to eliminate unpopular programs with a "keystroke scalpel." The NSA saying "just trust us" or even more commonly, saying nothing at all, just doesn't cut it for many people. If they want to still operate on our dime, they should provide more justification than "we know what's best." Maybe they do know what's best, but they haven't made that case... today they don't have to.
The beauty of Bitcoin is that it would allow such hyper-democratization to occur. Not only would you be able to allocate your tax dollars where you see fit, but you would also be able to track them in real time, verifying that they are indeed used for their intended purposes. Obviously, much of the tracking and address analytics technology doesn't exist yet, but in time we will have tools which make this kind of oversight trivial, even for that average person.
So what do you think? If you don't favor taxation, would you be willing to put up with it if you could vote your dollars where you please? If you do favor taxation, would you be comfortable putting the fate of government expenditures at the whims of its citizens?