In his failed bid to unseat Sen. John Cornyn, R-Texas, earlier this year, Rep. Steve Stockman, R-Texas, became the first politician to accept bitcoins as contributions toward a federal campaign.
The Federal Elections Commission has failed to establish rules either banning or permitting bitcoin use in federal elections. Its valuation exceeded $1,000 per bitcoin late last year and a growing number of businesses and individuals are embracing the bankless cryptocurrency. This fervor, though, has led to an increasingly polarized take on the notion of virtual currency, with those in favor arguing it has the potential to save the sagging world economy.
Those opposed to the bitcoin — such as U.S. Attorney General Eric Holder, according to his testimony before the House Judiciary Committee on Tuesday — argue that the virtual currencies can be used to “conceal illegal activities.” Due to their unregulated nature, it is easy to convert fiat or real currency to a virtual currency, use it for illicit means such as money laundering or the purchase of drugs or firearms, and then reconvert the bitcoin back to real currency without leaving an immediately noticeable money trail — all without having to report taxes.
In addition, situations such as the bankruptcy of Mt.Gox and the collapse of the Darknet’s black markets, like the Silk Road, have led many regulators and market observers to believe that cryptocurrencies are too open to valuation manipulation or theft, diminishing their usefulness as real currency.
Last month, in a first attempt to regulate the bitcoin and other virtual currencies, the Internal Revenue Service ruled that bitcoins are securities, like stocks, and should not be treated as currency for tax reasons. On Tuesday, Stockman, an advocate for the bitcoin and a politician who has built a reputation on being controversial, announced his intention to introduce legislation to return the bitcoin to currency status.
“This is a nascent industry. Along with 3-D printers and nanotubes, cryptocurrency is the future,” Stockman said in a statement introducing the “Virtual Currency Tax Reform Act.” “We need to encourage it, not discourage it. There is risk associated with every budding industry in America.”
The IRS ruling created a potential headache for the average bitcoin user. As securities, owners of bitcoins are now responsible for paying taxes on the capital gains of their bitcoins, or the increase in value from the time they acquired the bitcoins to the time they used them. As bitcoins are typically used as a replacement for money for everyday purchases, a bitcoin user would have to keep track of the acquisition dates and initial values of all of his or her bitcoins. The user would also need to keep track of the valuation of the bitcoin at the time of each of his or her purchases, figure out which bitcoins were used for each purchase, and keep a cumulative tally of the capital gains and capital losses. Without a software solution, such a task would be impractically complicated.
Stockman’s bill would nullify the IRS’ ruling, making cryptocurrencies actual currency for tax reasons. This would clear the way for states to impose sales taxes on the use of virtual currencies. The bill would also strike down the capital gains tax on virtual currencies.
Since the IRS imposed the property rule, trade volume in bitcoins has dropped. The National Australia Bank announced Thursday that it has found virtual currencies to be too risky and is severing all ties to them, and there are rumors that China will soon crack down on bitcoin use in the country. These factors have all contributed to knocking the valuation of the bitcoin below $400 — less than half its valuation in January.
Stockman, who favors the the removal of government control in the use of currency, has stated that he introduced the bill “to build awareness and create a consensus in the Bitcoin community around government regulation of virtual currencies… I don’t think anyone really has a flavor of what they want and I want to start the Bitcoin conversations.”