Within days Japan is expected to explain its approach to regulating Bitcoin, and reports suggest the government is leaning toward saying it doesn’t consider Bitcoin a currency. One of the challenges governments have faced in dealing with the phenomenon is whether to treat Bitcoin as a currency akin to dollars and yen or a commodity more similar to gold and silver. Deciding one way or another will be a major factor in how Bitcoin transactions are taxed.
Japan’s hand was forced largely by the failure of Tokyo-based Mt. Gox, once the world’s largest exchange for converting Bitcoins into other currencies. In the wake of the failure, Tsutomu Okubo, an opposition legislator, wrote an open letter asking the government to clarify its approach, and Mt. Gox is required by Japanese law to respond. Okubo told the Wall Street Journal that he has been in discussions with the country’s banking regulator for about a year, and it doesn’t seem interested in being Bitcoin’s watchdog.
Bitcoins are a nearly unprecedented combination of commodity and currency. The intent of their creator, a person or group of people known as Satoshi Nakamoto, was to create a form of exchange that would be anonymous and impossible for governments to manipulate. So: currency. But to date Bitcoins have proven most useful to digital goldbugs who want to bet on the astronomical rise in their value, and it’s understandably hard to base a credible form of exchange on something whose value can double or halve over the course of a day. So: commodity.
Confusing matters more is that Bitcoin’s value as a commodity comes from the belief that it will, eventually, become useful as a currency.
Governments have been going different ways on this. The UK’s tax authority recently backtracked on plans to put a value-added tax on Bitcoin trading, saying that it was a currency for tax purposes. Other countries say that Bitcoins fall short of the definition for currency and have kept trading taxes in place (Singapore) or prohibited banks from handling Bitcoins (China).
“Considering the definition of an official currency as set out in law, it’s not that. It’s also not a payment instrument, because the law stipulates that a payment instrument must have an issuer responsible for its operation,” Paeivi Heikkinen, head of oversight at the Bank of Finland in Helsinki, told Bloomberg News. “At this stage it’s more comparable to a commodity.” There are no legal barriers to the country’s citizens using Bitcoins as a means of exchange, but they do have to pay capital gains taxes as Bitcoin investments gain value.
The U.S. is still considering how to regulate Bitcoin on the federal and state levels, and it could yet be treated as both a commodity and a currency, depending on the agency. As arguments continue to be made on both sides, some are apparently beyond the pale, though. When a man accused of carrying out a Bitcoin Ponzi scheme argued that he couldn’t be tried because Bitcoin wasn’t really money, a judge quickly slapped the argument down.