USD is backed by the fact that IRS only accepts it for taxes...

[Rassah]

I'm sure I'm not the first to have thought of this, but...:

I'm still hearing arguments flying around how,
     "Bitcoin isn't backed by anything but people collectively believing is it worth something,"
     "Well, USD isn't backed by anything either, and only has value because people believe it does, too"
     with the usual final retort of, "USD has value/is backed because it is the only way to pay the IRS taxes."

Well, what makes the IRS any different from any other merchant that only accepts specific currencies? The only reason the IRS collects money is for the government to spend it on other stuff. It doesn't do it to prop up the currency. And the only reason the government directs the IRS to collect USD is because the government, like the rest of us, also believes USD has value. There is nothing to prop up USD's worth other than our collective belief, and if the USD value drops significantly, or even becomes worthless, you can bet that the government (and military, and everyone else) will want something else instead, and will direct the IRS to start collecting something else instead of USD. So, really, saying "But you can pay taxes with it!" is a fallacy that assumes the IRS is some separate body in charge of determining currency value, instead of just another merchant/business collecting whatever value it believes in, with the same goal of being able to spend it later.

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[BkkCoins]

I always thought this was a dumb thing to say about what backs the USD. Only people who are so thoroughly enthralled with paying tax would see it as a benefit. The Fed prints money endlessly and the great part is you can pay it back to them in taxes. Oh, yippee. Of course they only take their own Mickey Mouse bucks for tax. Same with every other country. I'm fairly sure that's not the reason I ever accepted any USD from anyone.

Bitcoin are backed by the knowledge that the IRS won't even know you have any. Sounds much preferable to me. Especially considering I'm neither American nor live in the US. I haven't paid any tax in over 10 years anyway so it's a perfect fit.

[2_Thumbs_Up]

I'm sure I'm not the first to have thought of this, but...:

I'm still hearing arguments flying around how,
     "Bitcoin isn't backed by anything but people collectively believing is it worth something,"
     "Well, USD isn't backed by anything either, and only has value because people believe it does, too"
     with the usual final retort of, "USD has value/is backed because it is the only way to pay the IRS taxes."

Well, what makes the IRS any different from any other merchant that only accepts specific currencies? The only reason the IRS collects money is for the government to spend it on other stuff. It doesn't do it to prop up the currency. And the only reason the government directs the IRS to collect USD is because the government, like the rest of us, also believes USD has value. There is nothing to prop up USD's worth other than our collective belief, and if the USD value drops significantly, or even becomes worthless, you can bet that the government (and military, and everyone else) will want something else instead, and will direct the IRS to start collecting something else instead of USD. So, really, saying "But you can pay taxes with it!" is a fallacy that assumes the IRS is some separate body in charge of determining currency value, instead of just another merchant/business collecting whatever value it believes in, with the same goal of being able to spend it later.

The difference between IRS and any other merchant is the use of force. While you have the choice of paying any other merchant in their prefered currency, you are forced to pay IRS in their choice of currency. That is the essence of the "backed by taxation"-argument. It's an answer to why inferior fiat money is being used when there are superior alternatives. Dollars do not have any inherent properties that make them good as money, but their government enforced "not going to jail"-properties are valueable to most people. So just like people are prepared to pay for the "get out of jail free"-card in monopoly, they are prepared to use dollars for regular transactions because they know they will face the ultimate choice of paying dollars to IRS or go to jail.

[misterbigg]

The only reason the IRS collects money is for the government to spend it on other stuff.

Actually, income tax just barely pays for the interest on the debt. Most of government spending comes from borrowing and printing.

The reason that income tax exists is maintain the ruse - if the government financed itself completely through printing (entirely possible) then it would become immediately clear what's going on. Income tax allows allows politicians to play favorites with the tax code.

[nevafuse]

USD is backed by lots of things.  Stability, easy transfer, and availability come to mind.  The IRS is pretty low on that list.

Now I highly doubt the IRS would switch to a different currency.  The whole govt relies on being able to have control over USD.  If the USD lost its dominance, the whole govt would collapse - including the IRS.

[DeathAndTaxes]

Actually, income tax just barely pays for the interest on the debt. Most of government spending comes from borrowing and printing.

US Spending is out of control but that is an obviously false statement.  In 2012 interest on the debt is~$350 billion.   Income taxes is ~$1,700 billion.  If you add in social security (which is just another tax IMHO) it is more like $2,600 billion.

To the OP, the value of a fiat currency comes from (among other things) where it is accepted.   The IRS is no different in that respect that Bass Pro shop.  Both accept USD and those both add value to USD.  However the IRS is pretty huge.  It "accepts" > $2.0 trillion a year.   When you consider US GDP (which is ~100% USD transactions) is $15.0 trillion the IRS "accepting" USD is a pretty significant source of demand.   Downstream since the US govt only accepts payments in USD then any spending by the US Govt will also only be in USD and any entity which looks to engage in commerce with the federal govt will be creating demand (forced or otherwise) for the currency.  So while the IRS may not be special it certainly is large.

TL/DR saying the IRS isn't special would be like someone on news that Amazon started accepting Bitcoins saying "Amazon isn't special they are just a merchant like any other".

[Rassah]

The different between IRS and any other merchant is the use of force. While you have the choice of paying any other merchant in their prefered currency, you are forced to pay IRS in their choice of currency.

You actually don't have the choice of paying any other merchant in YOUR preferred currency. You have to pay it in THEIR preferred currency, or not get the service at all. Same as with IRS.

Dollars do not have any inherent properties that make them good as money, but their government enforced "not going to jail"-properties are valueable to most people. So just like people are prepared to pay for the "get out of jail free"-card in monopoly, they are prepared to use dollars for regular transactions because they know they will face the ultimate choice of paying dollars to IRS or go to jail.

I could argue that the main difference between government and merchants is who has the bigger guns. While a merchant can't stick you in jail, if they don't like your currency, they can kick you out of a hotel or your apartment, refuse to sell you food, and refuse to sell you lifesaving medicine, which could all result in punishments similar to what a government can dole out. So, bigger guns, bigger say in what everyone needs to pay. And, similarly, if your merchant only accepts euros while you only have dollars, you can always just exchange your dollars for euros, just as you can always just exchange your bitcoin for dollars when paying the IRS. Again, really nothing special here except for the personal preference of the biggest merchant on the block.

[Rassah]

The only reason the IRS collects money is for the government to spend it on other stuff.

Actually, income tax just barely pays for the interest on the debt. Most of government spending comes from borrowing and printing.

Details, details... 

[LegalEagle]

The US Dollar is legal tender, which means that you are legally required to accept it for the repayment of debt.  Failure to accept it results in a breach of contract.  This also adds some "intrinsic" value to the US dollar.

Note:  This does mean you are legally required to accept it as payment for goods or services, including credit extended for goods or services.

[2_Thumbs_Up]

The different between IRS and any other merchant is the use of force. While you have the choice of paying any other merchant in their prefered currency, you are forced to pay IRS in their choice of currency.

You actually don't have the choice of paying any other merchant in YOUR preferred currency. You have to pay it in THEIR preferred currency, or not get the service at all. Same as with IRS.

Read my post again, because that is EXACTLY what I said. And it's not the same, because in the case of IRS it's not about using their currency or not getting the service, it's about using their service or go to jail. At the end of the year you need dollars, or you will go to jail. That creates demand. The "not going to jail"-property of dollars is valuable.

I could argue that the main difference between government and merchants is who has the bigger guns. While a merchant can't stick you in jail, if they don't like your currency, they can kick you out of a hotel or your apartment, refuse to sell you food, and refuse to sell you lifesaving medicine, which could all result in punishments similar to what a government can dole out.

But unlike government they don't have any incentive to refuse payment in other currencies as long as the payment minus the transaction costs exceed the value of what they're selling, because they don't have a monopoly to protect.

So, bigger guns, bigger say in what everyone needs to pay. And, similarly, if your merchant only accepts euros while you only have dollars, you can always just exchange your dollars for euros, just as you can always just exchange your bitcoin for dollars when paying the IRS. Again, really nothing special here except for the personal preference of the biggest merchant on the block.

Yes, you could do all your daily businesses in gold, and only buy dollars at tax day. But then you will suffer some transaction costs. The fact that you absolutely need dollars at tax day creates artificial costs for all alternative currencies. That's the reason there is still some demand even for hyperinflationary currencies. If you don't contribute to the demand at all you will face the risk of jail time.

[beckspace]

if the government financed itself completely through printing (entirely possible) then it would become immediately clear what's going on.

Then maybe the amount of the government income that comes from printing is far greater than the one coming from taxes. I wonder if there's a way to calculate the percentage in some countries: The amount of money printed X the amount of tax collected in any fiscal year. I'm sure there's a pattern.

Income tax allows allows politicians to play favorites with the tax code.

Very clever. Less taxes! (more printing)

[FreeMoney]

"What's so great about your money?"

"It's easy for powerful people to watch what we do with it and they take what they want."

[franky1]

USD is not backed by taxation laws..

its backed by minimum wage laws. employee's with employee contracts need to be paid in native FIAT .. so the dollar is backed by labour time.

secondly there are many cases where the IRS has accepted gold and silver as forms of payment. google has the answer.

[asdf]

I haven't paid any tax in over 10 years...

Please, share your wisdom.

[BkkCoins]

secondly there are many cases where the IRS has accepted gold and silver as forms of payment. google has the answer.

I was wondering about this myself. If you're willing to go thru the hassle of getting arrested the IRS will probably extract payment in any way they can find via confiscation.

I haven't paid any tax in over 10 years...

Please, share your wisdom.

No wisdom. I live as a tourist in a country where the only people who pay tax are the ones working for large corporations. Everyone else is below the tax threshold (officially that is, this whole country works under the table). A key element here is that this country does not tax foreign income or holdings unless brought into the country. And not being American that greedy government can't make a claim on any worldwide income.

(btw I'm not breaking any tax laws. I choose to live simply in a place where the cost of living is low. So I never have to spend much. Anyone can live like this if they prefer it to the rat race.)

[HorseRider]

I am not an America, but I guess if you always hold the Bitcoin and do not sell it, the unrealized gain need pay no income taxes. that's a very important way of delaying paying tax legally.

[nybble41]

While a merchant can't stick you in jail, if they don't like your currency, they can kick you out of a hotel or your apartment, refuse to sell you food, and refuse to sell you lifesaving medicine, which could all result in punishments similar to what a government can dole out.

There is no comparison. The merchant can refuse to sell to you, but doesn't claim the right to actively harm you. If you ask for help and the merchant refuses, you are no worse off than you were before. The government, on the other hand, does claim the right to harm you; taxes are but one example. The government can and does leave you worse off, whether you want to interact with it or not.

Back on-topic, the effect of the IRS's demand for USD is similar to the effect of a merchant's demand, with two glaring exceptions. First, the IRS is far larger than any mere merchant, and thus has a proportionally greater effect. Second, you can't choose not to "do business" with the IRS. If any other merchant insisted on USD you would have the option of shopping elsewhere, or going without. Not so with the IRS.

On the other hand, the IRS only creates demand for as much USD as is actually paid in taxes. What that is quite a lot, it remains a minority of the total USD in circulation. The larger effect of the IRS, or rather the tax code, in propping up the USD is that other currencies are subject to capital gains taxes and the like--even if their actual purchasing power is the same, and the increase in nominal USD value is entirely due to devaluation of the USD. (This is yet another way in which inflation is a hidden tax.) Minimum wage laws and other USD-denominated price floors also contribute; the influences are not mutually exclusive.

Note:  This does mean you are legally required to accept it as payment for goods or services, including credit extended for goods or services.

No, you do have to accept it as payment of debts, such as credit extended for goods or services, but you are not required to accept it where no debt exists. If you require payment up front, before the goods or services are provided, then you can insist on any form of payment you wish.

Put another way, if you are a party to a contract, and you break that contract (for example, by refusing to pay in the specified currency), the courts will permit you to pay the damages you owe to the other parties for the breach of contract in USD, regardless of what the contract said. A private arbiter could insist on similar conditions; alternate forms of payment are sometimes necessary, such as when there is dispute over damage to or loss of an irreplaceable item. If you won't accept standard forms of payment, the arbiter won't hear your case.

[Rassah]

The US Dollar is legal tender, which means that you are legally required to accept it for the repayment of debt.  Failure to accept it results in a breach of contract.  This also adds some "intrinsic" value to the US dollar.

Note:  This does mean you are legally required to accept it as payment for goods or services, including credit extended for goods or services.

Check again. While yes, it must be taken settle any debts, a merchant is not obligated to take it for goods and services. And even the debt thing varies by jurisdiction.

employee's with employee contracts need to be paid in native FIAT .. so the dollar is backed by labour time.

It doesn't need to be fiat. Employees can be paid in foreign currency, or by other means. The only thing that the IRS cares about, is that you pay them taxes on the US-dollar-equivalent of the value of what you've earned. A foreign company can hire someone here for minimum wage and pay them in Yen or Euros if they wanted to. It's just too much of a headache. Also, I think minimum wage actually depresses the dollar value. A hamburger used to cost $1 worth of labor, now it's worth $3. The minimum wage employee has more money to spend, but now so does the manager who sold the burger, the farmer who sold the ingredients, the store clerk who sold the employee groceries, and so on. It ripples through the system, and although everyone now has more dollars, the actual value owned by each person remains the same.

I am not an American, but I guess if you always hold the Bitcoin and do not sell it, the unrealized gain need pay no income taxes. that's a very important way of delaying paying tax legally.

In America you have to pay capital gains on everything that's not in your tax-deferred retirement funds. Stocks and bitcoin, if they grow in value, must be partially sold off to cover taxes. You can avoid not paying taxes on bitcoin earnings if you don't tell anyone about them, but it's not legal

[Rassah]

There is no comparison. The merchant can refuse to sell to you, but doesn't claim the right to actively harm you. If you ask for help and the merchant refuses, you are no worse off than you were before. The government, on the other hand, does claim the right to harm you; taxes are but one example. The government can and does leave you worse off, whether you want to interact with it or not.
Back on-topic, the effect of the IRS's demand for USD is similar to the effect of a merchant's demand, with two glaring exceptions. First, the IRS is far larger than any mere merchant, and thus has a proportionally greater effect. Second, you can't choose not to "do business" with the IRS. If any other merchant insisted on USD you would have the option of shopping elsewhere, or going without. Not so with the IRS.

Look at the bigger picture here. We live under this government, the government renders services for us, and then charges us with a bill. If we do not pay the bill, it comes after us. If you live in an apartment or a resort, the business renders services for you, and charges you with a bill. If you do not pay the bill, they can come after you. True, we have a government to protect us from the business coming after us with guns or throwing us in private prison, but the overall set-up is practically the same. Even down to the point where if you don't want to do business with the resort, you can choose not to. Don't want to do business with the IRS? Don't live on their "property." (Personally, my family has refused to "do business" with the Soviet Union) From a "giving the USD value" point, they really do seem to work the same: provide a service, serve you with a bill, collect whatever currency they can themselves use. And I guess just like any other business, they wouldn't care what $1USD was worth, or how much of it you needed to pay for a basket of goods, as long as the value was stable, and had SOME value.

[jim618]

Another aspect not mentioned so far is that one of the purposes of taxation is to reduce the purchasing power of producers so as to leave some real goods for the government sector to claim.

In Economics 101 there is often a baker who produces 100 loaves of bread every day. If the baker exchanges those 100 loaves for other goods or money and pays no taxes all the benefit of their labour goes to them. There are no 'spare' loaves to be claimed by the government sector.

By imposing, say, a 10% 'loaf tax' the baker can only consume/ exchange 90 loaves of value every day. The other 10 real loaves are then a surplus that the Loaf Tax Collector can pick up every morning and redistribute as they like. Whether the loaves are handed over directly or a fiat amount corresponding to their value is taken does not matter.

Government does not actually need tax revenue (it could burn all taxes collected and simply print more) but it needs to prevent producers consuming 100% of the fruits of their labour or there are no spare real goods for them to claim.