Momentum remains strong for virtual currencies
in light of newly introduced legislation in the House of Representatives.
This week, Rep. Steve Stockman, R-Texas, introduced the "Virtual Currency Tax Reform Act," which would treat bitcoin
and other algorithmic vehicles as a currency, not a capital asset or property. As such, it would not be subject to capital gains or losses.
The legislation claims it is a currency, since it acts as a medium of exchange, a unit of account and/or a store of value. It negates a recent ruling by the IRS that suggests digital currencies may be treated as property and therefore subject to capital gains taxes.
In 2013, Stockman began accepting bitcoin donations for a Senate campaign, according to Forex Minute, a financial news website.
The primary function of digital currencies is to preserve purchase power parity over time and across geographical barriers. Its creation involves an effective and efficient allocation of resources that acts as a proxy for general economic activity. When the currency creation is economically feasible, its uses tend to be economically sustainable by encouraging prudent, long-term investment in land, labor and capital.
Long-term investment, as opposed to short-term arbitrage activity, provides the greatest economic multiplier, causing greater employment and income growth for the masses.
The value of this algorithmic currency would be determined by aggregate demand and supply globally, in lieu of appointed central bankers who can devise imprudent monetary policy that too often adversely affects the world, sometimes in very short order.
Future intervention during a crisis can involve currency purchases by sovereign entities rather than offering a virtually free supply. Highly accommodative monetary policy tends to manifest in large short-term arbitrage opportunities and less long-term investment. As a result, the quantities of costly competitive goods and services fall along with employment and overall income growth.
Inflation of essential commodities, such as food and energy, may result, since there is "too much money chasing too few goods." Hence, stagflation can take root, possibly leading to hyperinflation in extreme circumstances.
A virtual currency acts as a medium of exchange, or currency, in the transaction of goods and services while preserving purchase power parity (value store). Gains beyond inflation during the long run will not be large enough to warrant the extraordinary compliance costs. Treating digital currencies as a capital asset subject to capital gains and losses will not be tenable administratively. It would also increase market volatility, since a possible capital gain may trigger a tax liability that requires liquidation of other assets to make payment.
It took nearly four decades for the global economy to implode following the abandonment of the gold standard in 1971. It's time to implement a more sustainable currency creation model that can provide stable, long-term economic growth for much of the population.
The survival of virtual currencies as a medium of exchange and purchasing power store is predicated on a liquid, low-cost transaction platform that requires minimal compliance and administration.
An effective compromise can be reached between the IRS ruling and Stockman's bill. A balanced approach may involve a nominal transaction fee for all virtual currencies, payable to the same entity that collects the local government sales tax at the point of sale.
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