Based on my analysis, I think that high volatility is probably here to stay for the foreseeable future. I don't think that it can be prevented, other than by growing the economy. I actually thought earlier today about writing something like the OP, before I saw this post.

I don't think that warning people will avoid it. However, I would advise people to act rationally rather than emotionally when speculating, and to expect further bubble(s) in the future.

It's VAT, from what I remember. That of course only affects parties that are registered for VAT purposes: if you're a private person paying for, say, services of a plumber, you do not need to charge him VAT. The plumber, however, does have to if he would have to charge in pounds as well.

However, when you receive Bitcoins as an employee, from their employer, other rules may apply and it still might be taxable as personal income, just like, say, fringe benefits.

The tax wiki page says
I would not be so sure about it.

Based on published articles and papers, for tax purposes, Bitcoin seems to be a commodity rather than security or currency. This seems to be the case both in the US (one article and one research paper) and EU (an article by a German lawyer). While this classification might change in the future, for the time being, it looks like it's a commodity.

From what I recall from the classes about accounting / taxation I took long time ago is that what you produce (commodities) is not taxed if you don't sell it. Let's say a company manufactures and sells widgets. In a tax period, it produces 1000 widgets and sells 10. It's not taxed based on the market price or cost of the 1000 widgets, rather on the difference between revenue and expenditures. Most likely, in this scenario, it would make a loss, so there should not be any income tax. If the market price or production cost of widgets changes, while this might affect your expenditures (for example, the law might say that you're supposed to value your reserves at actual cost, current cost or market price), this affects your expenditures side, but has no effect on your revenue.

So, I think that you should only pay income tax on the Bitcoins you mine if you either sell them or trade them for something else. If you just hoard them, there should be no income tax implication. It might become different if the legal classification changes and Bitcoins are treated as a security or currency (or an entirely new category). The first one, security, seems unlikely, since the miner is under no obligation to the bearer. The other options might happen though, there are precedents, for example gold is sometimes treated different than other commodities from legal point of view.

My impression is also that he does not get it. I'll give him a small credit though, he is correct in saying that in order to be successful, Bitcoin needs to cater to the needs of potential users, and he made some useful examples of how. But other than that, he missed it. Such as this one:


When I heard him say this, I was like duh? Plenty of people at the conference had Bitcoin on their phones. Poorly researched.

Bitcoin is open source and how it is developed does not mimick how centralised products are launched. Just like assorted pundits did not get linux 10 years ago, other pundits do not get Bitcoin now. Remember those articles and "research papers" about how linux has high TCO, is not user friendly and all that other made up stuff? They were wrong. Linux works. Bitcoin works. Obviously, it can work better in the future. And most likely it will. There is a steady demand for it, because the alternatives (Windows / fiat money) suck. They won't suck less merely because of what some pundit thinks.

I agree with DeathAndTaxes. Using gold/silver as money requires a specific legal framework in order to work to a larger extent than a simple exchange of physical goods. There is not even an agreement among gold standard proponents about basics, such as if FRB should be permitted or not. Two of the more popular models, Mises-Rothbard and White-Selgin, never even existed in reality. Even if Ron Paul wins and manages to push something through the congress, there's no way to resolve the issues, unless all legal tender laws, banking regulation and anti money laundering provisions were repealed and market was allowed to run its course. I'm not even talking about abolishing taxation. I don't see any of that that as very likely even with Ron Paul in office.

Maybe he'd be able to cut spending and stop the printing of money and allow the depression to come earlier, instead of having to end up in a hyperinflation. This probably wouldn't make him very popular among the public.

Meanwhile, Bitcoin is here and works. In a way it's tragic but that's the way it is.

Thanks, got the reply, looks like it worked.

How do I contact your support? I emailed to info@ but got no reply. Can I just assume you've been busy and will handle it eventually?

Well, I'm not sure here now, but the law probably says that one of the rates (date of purchase, date of import, date of paying VAT) is applicable.

Normally, the rate that is taken is the rate that is published by the central banks (in your case, the ECB), so there's no ambiguity. Since the ECB does not publish "official" exchange rate for Bitcoin, the one prevailing on markets should be used.

I would use the spot price from the exchanges. Since the volatility is so high, for the purposes of tax calculation probably precedents would have to be set.

Also, after having thought about it for a while, what you paid for probably was not an import levy, but VAT. Most goods imported into EU are not subject to import levies, but almost everything is subject to VAT.

This is good news. It can be used as a precedent in case there are questions about legality of Bitcoin. I presume they took the exchange rate from the time of paying the tax, right? 2.99 EUR / BTC is about what it's now.

You can create dead man switches that will take care of your Bitcoins if you or your loved ones are physically coerced.

DeathAndTaxes,

in the previous thread, I provided about 7 quotes which explain that the reason why demand deposits are considered a part of the money supply is that they act as money substitutes. You ignored that and claimed that I did not provide any references. It is your position that is not shared by economists. In fact, it leads to absurd conclusions and invalidates the concepts of money supply and money velocity.

The reason why M2 is sometimes considered as a part of the money supply even if it is not a money substitute is that it can be converted into demand deposits (M1) at zero maturity, which increases M1. But this is only possible if M1 is inflatable. With Bitcoin, this is currently not possible, since M1 is only Bitcoin itself, there are no Bitcoin substitutes (and, possibly, never will be).

People in general do not take a Mt.Gox code instead of Bitcoin, if not for anything else than because it's technologically incompatible with it. More generally, it does not decrease transaction costs, and even if was able to match the transaction costs, there is no particular reason to accept it at a different rate than the reserve ratio of hypothetical FRB-Mt. Gox.

Unlike gold or fiat money base (central bank reserves + cash), Bitcoin can have all kinds of forms, so Bitcoin debt instruments need to compete with these forms of Bitcoin. This gives Bitcoin an advantage in the transaction costs, therefore Bitcoin debt instruments will possibly never act as Bitcoin substitutes. At least not in the typical forms, there is still a potential for things like Ripple.

I already spent so much time explaining this, so I'm not going to repeat again because you'll ignore it anyway. You parrot what you read, but do not understand it.

The nominal interest rate already reflects inflation.

People value having things earlier more than having them in future. This is called time preference. If it was not true, people would not tend to consume, i.e. they would be misers. If money exists, time preference results in the formation of the interest rate.

The productivity increase by your project which needs to be > 8% in real terms. But that's not the same as 8% nominal return.

But this does not necessarily mean it's bad. Investments made below the real interest rate are a waste of resources, even if the interest rate is positive.

Capital yields is not the real rate of interest, it is merely a factor influencing it. But apart from that, I get your point, yes, this would be a problem.

I don't necessarily claim that the connection is linear, there are other factors influencing it. I'm talking about real interest rate rather than capital yield.

The reason hoarding pushes prices up is that the amount of available money drops, not because the productivity increases. This is merely another factor influencing the outcome.

My goal is not to prove that a pure debt-based system like Ripple or LETS is bad (in fact, after reading Greco, your posts and thinking about it, I'm developing some curiosity for them). My goal is merely to show that inelastic money supply / deflationary economy is not, per se, a problem. The main problem is government interference in money.

Personally, I don't mind any of the three options. I was already at the London Bitcoin Meetup as well as in Prague. I've been to Berlin before on other occasions and I'm also fluent in English, German and Czech .

Maybe if I find enough time I might be able to have a presentation too, about economics of Bitcoin, I've been researching it intensively.

I know DeathAndTaxes has me on ignore, but just for the others:

"Bitcoin demand deposits" are not liquid, almost noone accepts them instead of real Bitcoins. In a lot of cases, transferring them is not even technically implemented. What they rather have is zero maturity: you can redeem them into real Bitcoins, which you then transfer to some other Bitcoin user. Zero maturity, however is an inadequate condition for a debt instrument to be included in the money supply.

I tried to explain it several times, apparently unsuccessfully.

FRB means that someone (let's call them "bank" for simplicity) issues debt instruments in nominal value larger than the reserves they have.

Money supply is defined in different ways, but the best one is the total nominal value of whatever is used as a medium of exchange.

In order for FRB to affect money supply, the debt instruments issued must be accepted as a medium of exchange (for simplicity, we'll assume this occurs at par). Having zero maturity (being redeemable on request) is an insufficient condition.

The reason why debt instruments are sometimes accepted as a medium of exchange instead of whatever is used for reserves is that they decrease transaction costs. For example, a paper bank note might be easier to carry around than a gold coin, or it might be easier to transfer the balance electronically than to exchange gold physically. With a monetary system based on physical commodity such as gold, or central banking (central bank reserves plus currency serving as reserves), this reduction of transaction cost is an inherent aspect of the system.

With Bitcoin, the debt instruments issued against Bitcoin reserves do not, in general, reduce transaction costs. Therefore, they are, in general, not accepted instead of Bitcoin. Therefore, they are not a part of the money supply. It is hypothetically possible that an unusual type of debt instrument decreases transaction costs, for example Ripple and OpenTransactions. I'm not sure about the latter one, but the former one has the potential to increase the money supply (of Bitcoin).

If you think it's too complicated, think about apples and oranges. If I want to buy an apple, and the seller persuades me to accept an orange instead, for me, these two act as substitutes, i.e. I can eat either an apple or orange to achieve the same purpose. However, because people do not, in general, accept oranges instead of apples, this seller persuading me to accept an orange instead of an apple does not mean that oranges affect the supply of apples.

DeathAndTaxes disagrees.

Nagle made some interesting points (e.g. about SEC, GLBSE) and I think these have merit. But he still does not understand what Bitcoin actually is, he's comparing it to stocks, which can lead to misleading conclusions. But I don't blame him, understanding the consequences of Bitcoin is very complicated, I have been researching it for about half a year and find out something new almost every day.

On the other hand, Bitcoin may still yet fail, however it wouldn't be for the reasons typically presented by Bitcoin detractors.

Let me quote one of my favourites:

I have been thinking about this for a while.

Entrepreneurs invest into projects as long as these two conditions are fulfilled:

• the project provides a higher nominal return than the rate of interest that occurs at that time on the market
• the project provides a higher real rate of return than the rate of deflation

Of course, there is an auxiliary condition: the rate of inflation/deflation must be known to the market participants, and current neo-Keynesian system is based on the assumption that the central bank can trick people into believing the inflation is lower than it actually is. With Bitcoin, however, this is not a problem, since the money supply is highly predictable.

Some economists argue that under deflation, this results in a suboptimal growth, because not all projects that are possible are undertaken. This however neglects to take into consideration what interest rate is: it's a reflection of the time preference of the market participants. If money is loaned below this rate, it means that scarce resources are used inefficiently, in a way that does not satisfy the needs of consumers.

While this does not necessarily mean that a deflationary currency is optimal, it means that deflation does not apriori pose a problem, as long as it's lower than the free market interest rate. If this condition is not met, admittedly, I can see how it would cause a problem, because some projects which would satisfy the time preference of consumers would not be undertaken.

This might be the case in Israel, but in EU there is a directive "VAT on electronic services". Merchants outside of EU selling certain electronic goods/services to EU citizens must register for VAT and collect it. Whether this applies to Bitcoin is unclear. Exchanges are probably not affected, since they are not the seller.

George Selgin knows a lot about money. He also knows about Bitcoin and is intrigued but skeptical about it. Michael Suede as well as myself emailed with him about it.

All of the above and more.

Mt. Gox codes, however, are not in general accepted instead of Bitcoins as a method of exchange.

The reason why such instruments do not increase the money supply is the same that deciding to buy an apple instead of an (originally desired) orange does not increase the supply of oranges: for people other than those involved in the transaction, they do not, in general, act as substitutes.

What you describe is a reduction of the size of the Bitcoin economy and an increase of the size of the "Mt.Gox Bitcoin code" economy, rather than an increase of the money supply (of Bitcoins).

Paper money and demand deposits (or another credit instrument) in fiat act as substitutes (of each other). A necessary condition for this is that demand deposits (via cheques, ATMs, EFT) often reduce transaction costs compared to paper money. Mt. Gox codes denominated in Bitcoin do not (and, possibly, never will) reduce transaction costs, and are not, in general, accepted in Bitcoin-denominated transactions.

Money velocity and money supply are two different variables.

And I suggest you read more in-depth books about money supply, it does not matter whether you choose Keynesian, monetarist or Austrian, since they all support my position.

The definition of M2 as quasi-money includes that a redemption of instruments belonging to M2 increases M1. For redemption of fractional reserve M2 instruments to increase M1 this requires that there exist fractional reserve M1 instruments. With Bitcoin, they do not (even though they are hypothetically thinkable, if there was a M1 instrument that decreased transaction costs, such as Ripple).

Let me repeat that: the existence of fractional reserve M1 instrument is a necessary condition for Bitcoin-denominated debt instruments to affect the money supply of Bitcoins.

But unless someone else than the loan taker accepts these virtual bitcoins as if they were real Bitcoins, this would not affect the money supply. Conversely, unless people in general accepted these virtual bitcoins in the first place, the loan taker would not accept them either, and your business model would not work.

And the reason why this would be a pyramid scheme is that there would be no other use for these virtual bitcoins than to get people to give you real bitcoins.