Since cryptocurrencies debuted with Bitcoin in 2009, advocates have raved about their portability, their resistance to inflation and financial fraud, and the fact that they aren’t controlled by a government.
Investopedia has the simplest explanation of how they work: “A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology — a distributed ledger enforced by a disparate network of computers.“
Their value is sustained by market demand, utility and relative scarcity — the same as with gold in the pre-1971 era in which U.S. currency could be exchanged directly for the precious metal.
The virtual funds can be transferred directly from individuals to individuals without going through a financial institution or exchange. They were launched in 2009 by “Satoshi Nakamoto,” a pseudonym for an individual or a group who still has not been firmly identified.
Cryptocurrencies are extraordinarily volatile, but as of this week they were valued at $1.4 trillion in total holdings, according to Yahoo Finance. About half of that is in Bitcoin. Wait-and-hold investors have seen the value of a single Bitcoin go from about $600 in August 2016 to $38,000 this month — a staggering gain.
So what’s going on here? Why is Bitcoin’s origin so mysterious? Why is a theoretical currency that legendary investors like Warren Buffett and Carl Icahn have called ridiculous such a hot property? The 1967 one-liner by “The Wizard of Id” cartoonists Brant Parker and Johnny Hart about the Golden Rule immediately comes to mind: He who has the gold makes the rules.
As a vehicle for the very wealthy to hide their assets from taxation, cryptocurrency is the most potent tool yet. Instead of using skilled tax lawyers to flummox the IRS in the U.S. or tax agencies in other nations, tycoons can plow real currency into cryptocurrencies that are so far all but unregulated.
At a time of record income inequality and rich folks’ chronic scheming on taxes, the rise of cryptocurrency couldn’t be more suspect. “Satoshi Nakamoto” is likely to be a skilled group of scientists hired by a billionaire or a consortium of billionaires to come up with the most sophisticated way yet to stiff their governments.
I’m not the first one to make this observation. But too much coverage of cryptocurrencies has a gee-whiz quality that never gets to the absolutely crucial point of who was behind their creation and how they have benefited from it.
In April, IRS Commissioner Charles Rettig said the rise of cryptocurrencies was one of the main reasons his agency collected $1 trillion less a year than it should be able to: “These are not visible items by design.”
Yet it is also an increasingly entrenched part of the regular economy. Microsoft, PayPal, Amazon subsidiaries Whole Foods and Twitch, Japanese retail giant Rakuten, Home Depot, car dealers and many other companies have accepted Bitcoin payments for years. But because of murky rules, governments often know few of the details. In 2017, after Bitcoin surged, a single Lamborghini dealer in Irvine sold 20 cars in a month. The odds that any of the purchasers paid taxes on their earnings is slim.
The first question the IRS asks on the latest version of the 1040 tax form is this: “At any time during 2020, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
In May, the Biden administration issued a Treasury Department report urging Congress to adopt much stricter rules on cryptocurrencies. For one example of many, it said that just as with cash transactions of $10,000 or more, the government should always be notified when such cryptocurrency transactions take place.
And tax avoidance is not the only huge reason a crackdown is needed. Given that cryptocurrency is what the dark web runs on — enabling illegal sales of weapons, drugs, stolen credit card numbers and more — the case for increased regulation is obvious and overdue.
But will it happen? Will the public’s support for the rich paying more in taxes and law enforcement’s support for cracking down on cybercrime translate into sweeping new laws?
I wouldn’t count on it. The new crypto rules proposed in the massive “infrastructure” bill before Congress are so weak that they’re expected to bring in only $28 billion or less in new annual revenue.
It’s been 20 years since The New York Times won a Pulitzer for chronicling all the ways the rich cheat on taxes — and efforts to fix the tax code have gone nowhere under Democratic and Republican leaders alike. Joe Biden says he wants to change that. But I doubt the guys who have the gold will let him.