Taxing Bitcoin? IRS gets involved

Once again: is bitcoin a currency, and do currency rules apply? Or is it a capital asset and do those rules apply?

The Wall Street Journal is reporting that a large Bitcoin exchange Coinbase has been served with a so-called “John Doe” warrant in search of those people attempting to evade taxes.  A number of privacy advocates are upset at the breadth of the warrant, because it demands access for an entire broad class of people, and not specific people.

Bitcoin is used for all sorts of nefarious purposes, including online ransoming.  Tax evasion would be the least of its problems.  Were Coinbase a bank, they would be required to inform the federal government of transactions greater than $10,000 or of those individuals believed to be structuring transactions to avoid the $10,000 filing requirement.  These are anti-money laundering provisions that go hand in hand with tax enforcement.

And so my question: if it is wrong for the federal government to make such a demand of Coinbase, is it also wrong of them to make the same demand of banks?  If it is not, then why should Coinbase be treated differently?  And if Coinbase is not treated as a bank, is Bitcoin then not a currency?  If it’s not a currency, should it be treated as a capital asset for taxing purposes?  If that is the case, how would the IRS be able to enforce the reporting requirements associated with assets?

The alternative seems to be to trust people to not launder through Bitcoin.  If history, including recent history, is any measure, that’s a bad idea.  Either way, Bitcoin has already shown that privacy has its downsides.

Why I don’t Eat Beef

Those of you who know me well know that I don’t serve beef at home and do my best to avoid it on the road.  I don’t normally talk about why; most people assume it’s for religious reasons, because I also avoid pork.  But it’s not for religious reasons, nor is it for health reasons.  It’s for the environment.

Back in 1999 the Union of Concerned Scientists came out with a book entitled The Consumer’s Guide to Effective Environmental Choices.  This was based on a report that was roughly entitled, “Paper or Plastic: Who Cares?”  The number 1 thing that UCS said that one could do for the environment was to drive less and buy an efficient car.  The number 2 thing one could do was to eat less meat, and most specifically beef. Well now CNN has an article about just this.  Borrowing a graph:

Carbon footprint of beef

In that article, the author calculates that eating 1.27 lb of beef has the same carbon footprint as a 70 mile drive in a car that gets 21 mpg.  In other words, that number goes up with a more efficient vehicle. He argues that to help arrest the rate of global warming we need to eat less meat.

Even back in 1996, when the first UCS report came out, the one thing I could do for the environment was eat less beef. (I’ve since curtailed my driving, and Christine and I have reduced to 1 vehicle.)  The bad news is that lamb is probably just about as bad (wah!) and I will probably reduce but not eliminate my lamb consumption.

The above graph only looks at carbon footprint, and probably not all of it.  1 lb of beef requires about 1,800 gallons of water.  When I lived in California, this number seemed unsustainably large, even while we were being hit with El Niño after El Niño.  In addition, cattle also cause grazing damage, although it may be possible to mitigate those effects.

Pigs are a different matter.  I stopped eating pork products when several Colorado counties became awash in pig effluvia.  It wasn’t scientific, but I figured I could do my part by simply reducing demand for the animal.

I’ve refrained from writing this sort of article.  This was a personal choice I made, and I really didn’t push it on anyone.  I’m doing so now – just this once – for my daughter, so that she and her generation have just a little less damage from our generation to repair.

Senators’ letter to Iran was reckless, but probably not illegal

The senator’s letter to Iran probably wasn’t illegal, but it was foolish.

Tom CottonA lot of buzz went on in the past week over a letter that Senator Tom Cotton of Arkansas wrote and 46 Republican senators signed.  Some have called the letter a violation of the Logan Act.   There are essentially three questions to ask:

  1. Did the Senators violate the Logan Act?
  2. Did they violate their oath to the Constitution?
  3. Was their letter a good idea?

CNN’s Jeremy Diamond has provided an excellent analysis of whether the Logan Act was violated.  In a nutshell, senators receive the same protection from the 1st Amendment of the Constitution that the rest of of receive.  As an inherently political act, the letter would receive the highest level of protection from any court.  CNN points out that in the over 200 years the Logan Act has existed there has been a grand total of one indictment and no actual prosecutions.  In short the the Logan Act is a paper tiger, and rightfully so.

The Act itself reads as follows:

Any citizen of the United States, wherever he may be, who, without authority of the United States, directly or indirectly commences or carries on any correspondence or intercourse with any foreign government or any officer or agent thereof, with intent to influence the measures or conduct of any foreign government or of any officer or agent thereof, in relation to any disputes or controversies with the United States, or to defeat the measures of the United States, shall be fined under this title or imprisoned not more than three years, or both.

One gets the feel that when President John Adams affixed his signature he was thinking in the same way that led him to believe that the title of the head of the new republic should be king and not president.  People every day talk with representatives of foreign governments, to provide them their perspectives.  Indeed successive administrations, including this one, have encouraged those dialogs, because they advance American values.

Some might argue that the senators who signed the letter had in some way violated their oath to uphold the Constitution, as if somehow they did that by conducting foreign policy.  The Constitution itself is mostly quiet about that.  Article II Section 6 does state that it is the job of the president to conclude treaties with other nations, on the advice and consent of other countries.  But it doesn’t say that others in government can’t speak to other governments.

And so we are left with the question as to whether it was a good idea to send any such letter to Ayatollah Khamenei.  Here the senators erred in two ways.  First, the Cotton letter itself advises the Iranians that any deal President Obama makes on nuclear development with the Ayatollah could be overturned with the stroke of a pen of the next president, because it doesn’t have the force of a treaty.  As it happens, most treaties can be abrogated with the same stroke of a pen by a future president, and so their argument that such an agreement should be brought before the Senate is largely moot.

But beyond that and more importantly, the senators have failed to understand it will not be the United states that enforces of any agreement in economic terms, but rather a coalition of countries, largely in Europe, who will decide to either buy Iran’s oil or not.  The fact is that oil is a commodity, and it will be sold at market prices, and Iran doesn’t care where the money comes from, so long as it comes.  Thus whether the next president backs out of an agreement with Iran matters only in as much as the Europeans also back out of the deal.  They will not tolerate intransigence or extremism, either by Iran or the United States, either in advance of an agreement or later.  If they believe that negotiations have been scuttled for other than security reasons, they may either make a separate deal on nuclear development with Iran, or simply let the sanctions they have in place lapse.  If they believe a president has backed out of an agreement other than for cause, the Europeans will not follow suit.

In addition, it would send a horrible message to the rest of the world if the next president did back out of an agreement without strong justification, because it would it would call into question the word of every succeeding U.S. president.  That’s very bad for America.

Therefore we have to ask why the senators sent the letter in the first place.  The only convenient answer is that all politics is local, and that they wanted to show that they were “tough”.  Certainly that is the image that Senator Cotton likes to project, and it certainly plays well with some parts of the population.  But that doesn’t make the letter the smart thing to have done from a diplomatic perspective.  We are at this point with a relatively moderate President Rouhani at the table because of effective economic – not military – measures.  Certainly we have to be wary of future versions of Mahmoud Ahmadinejad, but we should also be aware that much of the distrust between countries can give way to better understanding and an end to hostile behavior only when each nation recognizes that the other is not filled with crazy people.

Is Bitcoin Really Money Laundering?

For those who don’t know, BitCoin is an attempt at a new type of currency, one that isn’t linked to any nation.  In a way, bitcoin is a lot like gold or other commodities, only it differs in that you don’t actually have to ship anything around or even keep trading futures to stay in the game.  Still it accrues similar benefits as gold. In fact there is a bitcoin to gold price, based on milligrams of gold.  As you can see the number of milligrams one gets for a bitcoin has gone from about 300 in January to about 3,300 in October.  Bitcoins have clearly paid off for some people.

One of the other goals of bitcoin is that they be as anonymous as cash.  This is where the problems start.  Let’s say you want to sell a few bitcoins, and receive American dollars.  One question is simply this: do you have to list the sale on Schedule D?  I am no accountant, but I would think the answer would be “yes”.  Now let’s say that instead of selling them, you are just holding them, and let’s for the sake of argument say that you have $500,000 worth of bitcoins.  Do these represent foreign assets?  If so, you are required to file forms with both the Treasury (TD-F 90-22.1) and the relatively new IRS Form 8938.

Those who in any way behave like banks will find that the Treasury department expects them to do all the things banks do.  That includes reporting on suspicious transactions or any transaction over $10,000.

This hasn’t stopped people from attempting to hide transactions.  Here’s an article from CNN about a guy who attempted to do all sorts of nasty things with Bitcoins.  This led to a huge drop in their value, almost overnight.




So, now the question: are bitcoins here to stay or are they a passing fad (read: pyramid scheme)?   The entire technical premise of bitcoins is in fact that they can be anonymously traded.  The bad news for people with bitcoins is that because there is no single management point that has guns (thus differentiating them from a classic currency), unless the likelihood is that those with the guns will want to limit or prohibit this sort of transaction; especially in large quantities.

A similar situation arose in 2001 when the U.S. government began to crack down on those using the old mechanism known as Hawala, even though the mechanism is legal.  And so one question is simply this: are bitcoins really anonymous?  A researcher named Sarah Meiklejohn will present a paper at SIGCOMM this month on just what law enforcement capabilities there are.  Watch that spot.





iOS 7.0 Upgrades and Security

Well, here we are.  Another version of Apple’s iOS that is supposed to wow us with all sorts of new functionality.  That’s all great and everything but since I use my iPhone for work our work people have an internal page that shows what will work and what won’t with the current release.  They’ve performed both a great service to me and a great disservice to you.  For me, I’ll know when I can safely upgrade and have all of my work-based apps work.  For you, since I’m delaying my upgrade, it also means delaying any fixes to security vulnerabilities that could impact people elsewhere on the network.

Did Apple make a mistake by not making iOS 7 compatible with iOS 6? If their goals are to have a very secure operating system, then it’s quite possible.  But typically a company’s goal is profitability, and here an expanded platform with broader capabilities might suit the tastes of both users and developers in the long run.  And so once again, security may have taken a back seat.

It is possible that Apple could mitigate this situation directly by telling developers that the phone won’t run apps on the old platform after a certain date.  This might actually align both sets of interests: the public’s security interest and Apple’s interest in not having to support older interfaces.

This works until the value to the consumer  of laggards well exceeds that of the combination of those who have updated their software and the value of the upgrade itself to the consumer.  Once that line is crossed, people will stop upgrading their operating system, returning us to the state we are in, today.  Let’s all hope Angry Birds is up to date.