BitCoin is so too Fungible!

Via The Atlantic, I came across this argument that Bitcoin is doomed by yesterday’s IRS announcement that virtual currencies are "property" for tax purposes.

The gist: this ruling has destroyed BitCoin’s fungibility – i.e. that necessary property of currencies where one individual unit is as good as another. In the case of US dollars, this means basically that the serial number on a bill bears no practical relation to its value, for example. One Hamilton/Satoshi is as good as the next.

The reasoning here is that if BitCoin is property for the purposes of taxation, then of course when you try to sell one for USD, you’re posting a capital gain (or loss) based on whatever you bought it for. Which is to say, one Bitcoin is not like another, since which one of my (currently three, actually) I sell will depend on what I paid for it (and in my case, there’s about a $100 spread in the prices).

Which, I think, is all well and good and true, but unless I’m missing something, it’s only well and good and true when you’re trading BitCoin for dollars. So, if I buy a bitcoin and then sell that same BitCoin, it was an investment and I have to pay capital gains(/loss) on it. But if I just trade it to someone else for goods and/or services, is that still true? That is, do I have to then treat the goods and/or services I traded it for as property measured against the value in USD for which I purchased the BitCoin involved in the transaction?

The answer seems to be "sort of, but not really." The IRS has a short section on bartering, which basically just reminds you that there are forms to fill out for it. Whether the IRS is willing to follow this papertrail for day-to-day purchases remains to be seen, but if you’re doing business in BitCoin then yeah, you’ll need to keep up with this shit. Really, you just need to know the spot price of BitCoin at the times you made the transactions. It’s a silly form that needs a name and address and all that jazz, so this definitely imposes a nontrivial paperwork burden on people doing business in BitCoin – and yeah, I think that makes today’s plummet (BTC has dropped about $4 in the time I’ve been writing this – close to $60 all day) "rational," technically speaking.

BUT – and this is the point – I don’t think it amounts to BitCoin being "non-fungible." I still don’t care who gave me what individual BitCoin at the point of sale – all I care about is what those BTC were worth in (insert local currency here) at the time of sale. One BitCoin is still as good as another. Really, it’s no different than running a taqueria that accepts Mexican Pesos alongside USD.

Well, alright, except that I don’t need the name and address of people who pay me for tacos in pesos, but I suspect a lot of this can be automated. So, what it’ll end up being like is payment with credit cards, but without the unjustifiable transaction fee. Which, granted, takes away the "anonymity" pillar of BitCoin – but that was never an ironclad guarantee anyway. And in any case, I’d bet good money (AM betting good money) on the idea that the IRS will have to take that back in the end. There are enough people with enough money stored in BitCoin that I think we’ll get a pretty easy amendment to the tax code in the next year or two that creates a category between "thing" and "currency" for BitCoin.

But my speculations about tax code aside, it’s just not true that BitCoin has ceased to be "fungible" at the point of sale. At the point of sale, BitCoin are worth their spot price, just like a real currency. Meaning, BitCoin will function as a currency for practical purposes, even if it’s not taxed like one. Not only that, but it functions like one that the IRS has just made legally immune to sales tax, so there’s that!

meaning, in the short term, I think BitCoin is a great investment. Unfortunately, I bought a decent amount of them before the announcement, so my money may have to sit there for a while (since the announcement – both here and in China – means I paid too much for the ones I have) – but I’m confident enough in my analysis here that I’m going to wait for BTC to dip a bit below $500 and then buy another one. Because I think in the next month we’ll see it go back up to the $6-700 range.

One thing I do think – again, unfortuantely for me – is that the wild west days of crazy volatility are coming to an end. Which means, as usual, I got into this thing a hair too late to make easy money on it. But I didn’t get in too late to make money on it, and in any case, it’s a Very Good Thing for the Whole World if BitCoin goes legit. Calling $300 in loss (what I’m currently down) in exchange for a more transparent, democratic, harder-to-regulate banking system "chump change" is laughably inadequate, after all. I’ll gladly take the hit.

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