Bitcoin in the Real World: A Primer On The Rules

Bitcoin in the Real World: A Primer On The Rules

Somewhere nestled in the question of “What should a Bitcoin be worth?”  Is the question of whether it is or can be an actual currency.  With this in mind I wanted to do a several post series on how Bitcoin is (and isn’t) like a currency today.  I’m envisioning the following parts to this, though sometimes these things evolve as I write them:

  1. Bitcoin in the Real World: A Primer On The Rules
  2. Bitcoin as Money: Buying Things Online
  3. Bitcoin as Money: Buying a Sandwich In Person
  4. Bitcoin as Money: Giving Bitcoin to a Person
  5. Bitcoin as Money: Visiting an ATM
  6. Bitcoin as Money: Where Do We Go From Here?

So Is It a Currency?

Today, the answer is definitely not.  It’s true that it was originally envisioned as a currency by Satoshi Nakamota (the mysterious founder of Bitcoin), but today it is almost exclusively being traded as a speculative commodity.  That is to say that people are “buying” it in hopes that the price will go up and they can make money in their home currency.  There is a relatively low rate of people spending Bitcoin on actual goods, even lower of people paying employees in Bitcoin, and no one is paying their taxes in Bitcoin.  Traditionally, being able to do these three things is what makes a currency a currency.  I’m going to spend some time on the purchase of actual goods in future posts, so I’ll spend the rest of this one focusing on what it would mean to pay taxes in Bitcoin or be paid in Bitcoin.


Let’s start with taxes, since being able to pay your taxes in a currency is often listed as the primary definition of a currency.  Today, most countries either issue their own currency for this purpose or are part of a coalition currency (e.g. Euros or East Caribbean Dollars).  Since the vast majority of these are based on a fiat money system with a central bank having control over the money supply, they have an incentive not to allow alternative currencies; they want to ensure their currencies are used so that they can manipulate the money supply to avert financial instability.  While I think there is some possibility that the world will agree to make Bitcoin a universal currency (see this post where I explored it), that possibility is so remote and so distant that it’s not really worth discussing here.  For the time being I think we need to assume that Bitcoin cannot become a currency for taxation purposes in developed countries.

What is somewhat more feasible is one of the countries that doesn’t have its own currency either adopting Bitcoin or at least making it an option for paying taxes.  These countries do not have the motivation of needing their countries central bank to be empowered to consider and may prefer Bitcoin because it is difficult to steal and easier to track than physical money (particularly a foreign currency).  However, while this would lend some credibility to Bitcoin it won’t move the needle on establishing it as a currency globally.  The GDP of the countries that use the US Dollar as their currency is less than 2 tenths of 1 percent of the world’s GDP.

Note:  If you feel like a distraction: this article talks about countries without a currency, and this spreadsheet is where I calculated GDP.  I didn’t count the non-EU countries that use the Euro because their economies are closely tied with the EU so they are likely to desire any money supply manipulation done by the EU.

OK, Then How Does the IRS view Bitcoin?

That is a great question, because it also plays in to our discussions of how we can spend and earn bitcoin today.  The IRS offered guidance on Bitcoin in 2014 (along with other cryptocurrencies), listing it as property.  The primary ramification of this is that all Bitcoin transactions must be valued on the day of the transaction.  Additionally, when you move your money from dollars to bitcoin and back, it is treated as the purchase of property rather than an exchange of currency.  As we’ll see below on being paid in Bitcoin and in future posts on spending Bitcoin, this has complex ramifications.

Being Paid in Bitcoin

There are some companies that pay employees in Bitcoin.  They largely sit in two camps.  First, are international companies who pay small amounts for small freelance jobs.  These companies use bitcoin as a way to not have to deal with bank accounts and currency transfers.  These are the kinds of transactions that would help really make Bitcoin in to a currency.  However, they are rare and, because of the complexity and risk of wild swings in value, are only practical in very small use cases at this point.  The company BitWage was setup to pay employees in Bitcoin for these kind of tasks and so far in December they have paid over $1.5M in wages using Bitcoin.  While that starts to make a dent, it’s a small percentage of freelance work (which itself is a small percentage of the economy).

Second, there are a handful of companies that pay their employees in Bitcoin.  These are mostly cryptocurrency or blockchain startups where it is more a gimmick than a way of doing business.  Still, just for fun, what if my company decided to pay me in Bitcoin tomorrow?  Well, my tax world would start to get very complex.  Let’s imagine that I got paid 1 bitcoin per month.  Even if I were planning to spend my money in Bitcoin (which is awfully hard to do), I would still need to count my earnings in $US.  So if I got paid my one Bitcoin on October 1, November 1, and December 1 I would have had to record that I was paid $10,869 on 12/1, $6,727.30 on 11/1, and $4,404.31.  The complexity doesn’t end there though… what happens when I spend my earnings?  On every single expenditure (or withdrawl in to $US) I would need to effectively record the transaction as a property sale of the bitcoin.  That means I would need to figure out my cost basis for the Bitcoin I just spent and record the gain or loss on the transaction.  I would have to do that even if what I bought was something that was priced in Bitcoin.


So, we’ve established that Bitcoin isn’t a currency today.  We’ve also established that 99.8% of the world’s economy is motivated to keep it from becoming a currency.  Finally, we now understand that the rules for dealing with Bitcoin make it very difficult to use it as a day-to-day currency.  As depressing as that sounds, let’s move on over the next few posts and dig in to a discussion of how we CAN use it today and a discussion of what it would take to really move Bitcoin forward as a currency.