230 THE BiG DROP
rapidly for both legitimate and illegitimate transactions.
It’s worth pointing out that the U.S. dollar is also a digital
crypto-currency for all intents and purposes. While we may
keep a few paper dollars in our wallets from time to time, the
vast majority of dollar denominated transactions, whether in
currency or securities form, are conducted digitally. We pay
bills online, pay for purchases via credit card, and receive di-
rect deposits to our bank accounts all digitally.
These transactions are all encrypted using the same coding
techniques as Bitcoin. The difference is that ownership of our
digital dollars is known to certain trusted counterparties such
as our banks, brokers and credit card companies, whereas
ownership of Bitcoin is known only to the user and is hidden
behind the block chain code. Another difference is that dollars
are issued by a central bank, the Federal Reserve, while Bitcoin
is issued privately.
The future of Bitcoin and other crypto-currencies is uncer-
tain. One problem is that the value of a Bitcoin is not constant in
terms of U.S. dollars. In fact, that value has been quite volatile,
fluctuating between $100 and $1100 over the past two years.
This gives rise to tax problems. For example, if you acquire
a Bitcoin for $200 and later exchange it for $1000 of good or
serveries, you have an $800 gain on the purchase and sale of
the Bitcoin itself. From the perspective of the IRS, this gain
is no different than if you had purchased a share of stock for
$200 and later sold it for $1000. You have to report the $800
as a capital gain.
It seems unlikely that most Bitcoin users are reporting these
gains. Those who do not may be involved in tax evasion. The
IRS has broad powers to investigate evasion, and may require
counterparties to reveal information, including computer keys,
which can lead to discovery of the transacting parties.
Given the fact that the IRS has engaged in selective enforce-
ment against Tea Party activists and other political opponents in