Getting paid in bitcoin

Here in Finland the tax authority (called Vero) keeps very close tabs on everyone's income. Banks report loan amounts and interest on savings directly to Vero. And Americans are usually shocked to find that everyone's earnings are publically available - that's right: provided you speak Finnish you can look up how much your neighbour claimed to Vero that they earned, and how much tax they paid (and subsequently you can shop them in to the authorities if they bought sports cars and foreign holidays whilst declaring a low income).

Let's forget about clandestine payments for a moment (in any case they are trickier than the media seems to think, and company accounts are in any case transparent up here).

So, if people start getting paid in bitcoins, what are the Finnish tax authorities going to do? Presumably they're going to demand that

• Bitcoin amounts earned are declared along with the euro to bitcoin rate on the date of payment
• Income taxes are paid on that amount
• When bitcoins are converted to euros, any profits are taxed at capital gains rates
• And alternately, any losses can be offset against other tax payments

But what happens if the bitcoins are never converted to euros, and are used to purchase goods instead? Someone might be paid 100 BTC today, at 100 EUR/BTC, and use them in 5 years time to buy a high performance sports car if the new rate is 10,000 EUR/BTC at that point. And Vero are going to want their share of the profits...

The only feasible solution I can see is for governments to move away from income tax and capital gains taxes, to a purely "value added tax" or "sales tax" approach, with different rates for essential goods such as staple foods (sales tax free?) and 50 foot yachts (50% 90%).

The perception of money

Back before I started looking in to Bitcoin, I'd watch television shows where gangsters or spies would be carrying around a suitcase filled with blocks of cash, and I'd think, "Wow, what a lot of money. That could get you a large house, or a sports car, or perhaps a small island off the coast of Greece."

Now when I see the same suitcase I can't help thinking, "Wow, a bunch of paper, printed by a government, valuable because people think it's valuable. And not as valuable now as it was when the program was being filmed."

Bitcoin has really damaged my suspension of disbelief. It's funny to think that for four decades I never really though about what cash actually was. Like most people, I just used it to buy groceries, and implicitly assumed it would be as valuable tomorrow as it was today.

That's why I think Bitcoin is going to be a game-changer: just like the internet, just like affordable cars, and just like the electric lightbulb. But with Bitcoin the real impact is yet to be seen.

"Pegging" Bitcoin to another measure of value

As the problem of Bitcoin's fluctuation in value over time continues to vex proponents of the cryptocurrency, I've seen several suggestions that Bitcoin should be "pegged to the dollar" or "pegged to gold".

What does it mean for a currency to be "pegged to gold"? It means that the government that backs the currency commits to exchange units of the currency for a fixed quantity of gold. This has a number of problems associated with it - the quantity of gold is relatively fixed (just like Bitcoins), but the government can always print more money. In practice the pegged currency has to be rather stable in the first place for the pegging to be successful, and the value has to be controlled carefully through printing more or buying it back with bonds.

And there we can immediately see the three problems in the "pegging" solution proposed for Bitcoin - a) you can only peg a non-volatile currency, b) you need to be able to control the production of the currency to affect its value and c) you need a backer who guarantees to exchange the currency for the item it's pegged to, and holds significant quantities of the item in store.

Bitcoin satisfies none of these.

What Bitcoin really needs to take off ...

Mt Gox gets slapped with a law suit by Coinbase, and the value of Bitcoins drops by 50%. The fact that Bitcoin's price (not value, note) is so dependent on one exchange is becoming a real problem, although there are probably some people making a fortune of the vast fluctuations. However, they're gamblers or insider traders. For the rest of us it's a dark art, and it's disturbing.

As I see it, there are two things that need to happen in the near future.

1. An established share trader like etrade.com needs to start offering a Bitcoin exchange. It should be trivial for them to set something like that - Bitcoin is still small potatoes compared to the trade volumes they handle, and their existing software and servers should be easy to convert to offering a Bitcoin exchange service.

2. A large generalised online retailer needs to start accepting them. If PayPal (and hence eBay) really takes them onboard, as was recently reported, or Amazon, or a far eastern retailer like Alibaba, then people can actually start buying stuff with them

At that point I would expect the value of one Bitcoin to steadily rise and rise and rise.

(I sold my Bitcoins at $138 a while back, watched the price rise, panicked and then bought them all back at $132. If only I'd waited one day more, I'd have 50% more. Oh well.)