Fungible is a peculiar economic term. A fungible good is one that is mutually interchangeable with another of the same specimen. If you buy a pound of sugar, it doesn’t matter which pack you pick up from the shelf. Sugar is fungible. The same cannot be said of art pieces. An art piece gains value by its own inherent characteristics. In essence, if we had to trade, sugar would be an easier, more frugal mode of barter exchange than art pieces. A fair exchange would have demanded art pieces to be evaluated separately to understand their value and then use them in exchange of something equally valuable. Keeping that analogy in mind, Bitcoin is now to be treated as art pieces instead of sugar.
The United States government came up with the first legal ruling regarding Bitcoin, the cryptocurrency created by a programmer, or a group of programmers, known only by the pseudonym Satoshi Nakamoto. It will treat Bitcoin as property for tax purposes instead of as currency. This IRS ruling came before April 15, which means all Bitcoin trading that results in profit has to be reported as capital gains, and a tax will be levied on it.
Bitcoin was the first successful solution from decades of research in cryptography. Bitcoin is based on the existence of an Internet-wide distributed ledger in the form of a chain of blocks. These blocks are bitcoins themselves. Hence, when a person buys a bitcoin, he or she is essentially buying a slot into the ledger. Because this ledger is cryptographically encrypted and distributed, no one person can disrupt it.
This news brought about a mixed bag of feelings. Bitcoin traders are encouraged by the first legal recognition of Bitcoin but also believe declaring Bitcoin as property will destroy its frugal nature and limit its widespread usage.
According to the IRS ruling, if a person buys one bitcoin for $300 and sells it for $400 after the price appreciates, he or she must disclose $100 of capital gains during tax filing. It is the buyer’s responsibility to keep track of the price at which a bitcoin transaction is made.
Bitcoins can also be generated in a phenomenon called “mining.” Because it is a cryptocurrency, no single entity is in charge of generating bitcoins. Instead, anyone who can contribute computational power can create bitcoins. The maximum number of bitcoins in existence is limited to 21 million by cryptographic technology. All income generated from this practice is also taxable, and an entity indulging in “mining” as a trade or a business is liable to pay self-employment tax.
The fact that Bitcoin rates appreciate and depreciate, coupled with the new rules with which the IRS shall determine the capital gain on each Bitcoin transaction, takes away the fungible nature of a Bitcoin. Bitcoins then differ from each other based on the time at which each of them was transacted.
Being a digital currency solution is not easy. Holding money in digital form means hackers are on the lookout. Mt. Gox, the world’s biggest Bitcoin exchange, lost $500 million worth of bitcoins to hackers.
Yet, Bitcoin is getting wider acceptance by the day. Stripe, the mobile and online payments startup valued at $1.7 billion, gives smaller businesses an alternative to Paypal for their monetary transactions. Stripe is now looking into giving its clients the bitcoin alternative of accepting payments. Khan Academy, the online-classroom company, now has courses that explain the concept of a Bitcoin and how to make transactions in Bitcoin.
As more governments recognize and legalize Bitcoin, it is expected to stabilize. Although many are calling for applications to integrate the usage of Bitcoin, it remains to be seen how the currency will permeate into daily economics.
Bitcoin is a revolution of the cadre of the Internet. If it permeates the economy, it will change the way humans live. This leads to questions of what steps the government will take to increase knowledge of bitcoins among the general populace.