The future of bitcoin as a payment system is at risk as regulators are setting up roadblocks into how people can use the virtual asset in the real-life economy.
Bitcoin, since its conception has since been misunderstood by many regulators as questions on the validity and legitimacy of the digital currency has been piling up. However, in recent years, bitcoin is up for a massive come back as the future for bitcoin becomes clearer with the introduction of the Lightning Network.
Lightning Network is a secondary protocol layer that allows fast and instant transfer for Bitcoin users at a lower price. This means that the development of this technology allows users and businesses to exchange bitcoins as a mode of payment as the exchange rate becomes bearable for both parties.
This technology, which is already utilized by services like Bitrefill and Fold in order to facilitate the bitcoin payment with major retailers, has helped businesses in creating a more user-friendly and cost-effective experience for their users. Similarly, a new start-up, Lolli, also announced their plans of leveraged the power of Lightning Network to make bitcoin payment to the mainstream.
Amidst the growing popularity of bitcoin as a form of payment with many new start-ups and major corporations adapting to the technology, one major regulatory hiccup is still raining on the digital currency’s parade: taxation.
For one, bitcoin is technically considered as a capital asset and is therefore treated as a taxable event. This is the case in the United States and other countries. In other words, when you purchase something with bitcoin, you’re also selling the bitcoin as if there is an accrual of capital that happens during a transaction – even just for a transaction as trivial as buying coffee.
In simpler terms, you buying coffee is taxed and you paying bitcoin for the coffee you just bought is also taxed. And this is where the taxation issue for bitcoin becomes more complex.
ShapeShift CEO Erik Voorhees claims that implications of making Bitcoin payments are too much of a hassle and will burden many potential cryptocurrency users away.
“An average person on the street that wants to buy something for $20 with Bitcoin, they’re not going to care if they’re not reporting taxes on that. Those types of people, in terms of spending power, represent a very tiny amount. The actual [majority] of spending power generally comes from people, by definition, with more money. Those people tend to, by definition, care more about tax consequences,” explained Vorhees
“Even if they’re totally cool with the volatility, even if they totally understand the technology, even if they’re okay with a $5 fee on a $50 transaction — having to spend a while reporting and tracking that, and the risk of not tracking that correctly actually becomes the real cost.”
Meanwhile, Bitrefill CEO Sergej Kotliar raised the concern that when used as payments in lieu of existing currency’s like dollars, bitcoin could be used by citizens as a political statement.
“If you want to change a certain regulation, it helps to do things that will make an attacking regulator look silly. So, if the government goes after everybody who buys a cup of coffee for $5 [with Bitcoin], they’re going to look silly,” said Kotliar.
He clarified that he does not mean that everyone will go out and use Bitcoin to avoid taxes, but instead, this is more of a way in making regulators’ job a little more difficult.
Amidst the heated discussion surrounding the use of bitcoin as a form of payment, Coin Center has lobbied a regulation that, if successful, would resolve the deadlock in the bitcoin-as-a-payment debate. They have suggested legislation in the United States that would exempt bitcoin payments of less than $600 from capital gains taxes.
The rationale behind Coin Center’s suggestion is that the regulation can effectively even out the treatment for bitcoin similar to how other currencies like the euro and the Chinese yuan in terms of taxation.
However, with the recent political strife between cryptocurrencies and the American government with President Trump downplaying the value of bitcoin among other crypto money, this solution is up for strong resistance. Although the government could not necessarily implement an immediate ban on bitcoin, they can slow its progress down by not updating the taxation system to accommodate bitcoin payments.