Community validation requested-- about bitcoin for publication

[Matthew N. Wright]

Although "Bitcoin Discussions" may be a better place for this thread based on the topic, I thought that regulars of this board would be more active and critical and therefor more useful in either confirming or denying the following claims.

I am intending to put some information in our publications that I would like to run by the community first for validity and opinion. These publications will be intended for merchants who may be interested in accepting Bitcoin. Additional points you may have are also welcome.

Understand that these do not necessarily reflect my personal opinions and much of it was collected from websites and forum discussions about Bitcoin. This thread is intended for fact collecting/validating purposes only. Please be nice.

• Un-regulated - At this time, Bitcoins do not yet meet the legal definition of a security under U.S. federal securities law; which therefore means they lie outside of the SEC’s ability to regulate and control them. This could change later with the creation of new Bitcoin laws however. Countries aside from the U.S. may already consider Bitcoin a security based on a variety of reasons.
• Tax-free - As Bitcoin is not recognized as a legal currency or security (although it can be readily and freely exchanged and traded between individuals and organizations), it also cannot yet be taxed in itself. Income earned through the exchange of Bitcoin to other currencies however could be taxable under existing Capital Gains Tax laws.
• Efficient - As Bitcoin is a completely digital currency, auditing and bookkeeping is virtually effortless.
  
• Theft-proof - Bitcoin is a digital, unreproducible currency and thus is stored through digital means. If properly encrypted, no theft of bitcoins is possible by malicious individuals.
• Un-counterfeit-able - Bitcoin is created through 256-bit SHA1 encryption. It cannot be produced through any other means than originally intended and thus cannot be counterfeited, unlike every existing currency to date.
• Virtually Un-confiscatable - Bitcoin data, although voided once used, can be copied in stored in multiple locations for backup purposes in case a particular copy is lost. If encrypted properly, this makes it virtually impossible for government bodies or malicious groups to confiscate funds retained in Bitcoin without your direct involvement and/or passwords.
• Actual value transfers - Because Bitcoin data is what contains the value of a bitcoin, transmitting a Bitcoin is the equivalent to actually sending gold through wires. The value is carried with the transmission, unlike in paper currencies where the face value simply represents a commodity.
• Not artificially inflatable  - The nature of Bitcoin being produced at a known, steady rate with an eventual maximum quantity, makes it impossible for bankers, governments nor anyone else to use fractional reserve accounting or artificial credit expansion to artificially inflate the money supply or make more of them.
• Virtually impossible to regulate - The peer-to-peer network nature of Bitcoin transactions makes it impossible to shut down the use of the currency. The only way to stop Bitcoin transactions of any kind would be to shut down the entire Internet (and even then, private and manual transactions would still be a possibility).
• Impossible to ‘salt’ or ‘shave’ - Due to the security behind Bitcoin, it is impossible to shave value off of a Bitcoin as can be done with any other physical or digitally represented currencies. As such, it is more trustworthy than even a gold based economy (gold can be impure or counterfeited with tungsten bars).

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[Stephen Gornick]

Un-regulatable - Bitcoins don’t meet the legal definition of a security under federal securities law; which therefore means they lie outside of the SEC’s ability to regulate and control them.

The issue has not been addressed by any courts in the U.S.  Additionally, the U.S. is one nation.  There are 192 others. [update: 193 others  http://www.foxnews.com/world/2011/07/14/un-admits-south-sudan-as-13rd-member/ ]

For within the U.S., there is this:
 - http://www.lextechnologiae.com/2011/06/26/why-bitcoin-isnt-a-security-under-federal-securities-law/

Un-confiscatable - Bitcoin data, although voided once used, can be copied in stored in multiple locations. If encrypted properly, this makes it impossible for government bodies or malicious groups to confiscate funds retained in Bitcoin.

Being forced to turn over passwords or encryption keys is described here:
  - http://www.eff.org/wp/know-your-rights
Then again, depending on which government or malicious group you have in mind, there is also:
  - http://en.wikipedia.org/wiki/Rubber-hose_cryptanalysis

[JoelKatz]

I agree with everything you said with moderate confidence except bitcoin not being a security. That's a much closer call. I think it's probably not under current US law, but courts could rule either way. It depends on how you parse the word "value".

[Anonymous]

Un-regulatable - Bitcoins don’t meet the legal definition of a security under federal securities law; which therefore means they lie outside of the SEC’s ability to regulate and control them.

The issue has not been addressed by any courts in the U.S.  Additionally, the U.S. is one nation.  There are 192 others. [update: 193 others  http://www.foxnews.com/world/2011/07/14/un-admits-south-sudan-as-13rd-member/ ]

For within the U.S., there is this:
 - http://www.lextechnologiae.com/2011/06/26/why-bitcoin-isnt-a-security-under-federal-securities-law/

Un-confiscatable - Bitcoin data, although voided once used, can be copied in stored in multiple locations. If encrypted properly, this makes it impossible for government bodies or malicious groups to confiscate funds retained in Bitcoin.

Being forced to turn over passwords or encryption keys is described here:
  - http://www.eff.org/wp/know-your-rights
Then again, depending on which government or malicious group you have in mind, there is also:
  - http://en.wikipedia.org/wiki/Rubber-hose_cryptanalysis

You don't have to turn over any keys if the government doesn't know you have any BitCoins to begin with.

[Matthew N. Wright]

Updated "unregulatable" to "uregulated" (as that's certainly the case) and put in a note about how that's merely the current state; as this changes the "Non-taxable" claim slightly, that was updated as well with a more neutral approach and better details.

Request for comments: Is there any way you can be taxed by US law currently for a profit on a currency exchanged (Forex, etc)? I realize that the purchase and sale of stocks is taxable, but what if you are going on a business trip and you change your currency from USD to JPN, then back again, and happen to have an extra $10USD due to the market rate change? Would you be required to report that in your taxes under any circumstances?


Updated "Un-confiscatable" as "Virtually Un-confiscatable" and changed the details to be more realistic of a worst case scenario.

[Anonymous]

Request for comments: Is there any way you can be taxed by US law currently for a profit on a currency exchanged (Forex, etc)? I realize that the purchase and sale of stocks is taxable, but what if you are going on a business trip and you change your currency from USD to JPN, then back again, and happen to have an extra $10USD due to the market rate change? Would you be required to report that in your taxes under any circumstances?

That goes under a Capital Gains Tax under US law.

[Matthew N. Wright]

You don't have to turn over any keys if the government doesn't know you have any BitCoins to begin with.

Agreed, more or less. This information however is geared towards merchants and therefor follows a slightly different mindset/code of ethics. Business owners who require licenses in order to do business will probably not advertise their acceptance of Bitcoin without fully understanding their taxation requirements of it. As so, I hope to be as informative as possible with this information.

That goes under a Capital Gains Tax under US law.

Updated "Tax-free" segment to reflect Capital Gains Tax laws.

[onesalt]

Bitcoins are only 100% secure up to the point you use them, once you try and use them they're open to all sorts of security flaws that aren't any fault of bitcoins but a fault of the system.