Recently, there was news that Congressman Warren Davidson of Ohio proposed the Bitcoin for America Act. This Bill would allow for voluntary payment of taxes in Bitcoin. The payment would not recognize any capital gain or loss from the transaction. Payments received in Bitcoin would be directed to the Bitcoin Strategic Reserve. I want to think through some of the implications should this become law. Before we do that, let me warn you that I didn't sit down to outline or draft this post. It's off-the-cuff.
First, the main implication of paying taxes with Bitcoin is that sending Bitcoin to the federal government would lock up Bitcoin. As a strategic reserve, the federal government would hoard it indefinitely like does gold. That means that there would be increasingly less Bitcoin in circulation, thus increasing its value over time.
What if we run out of Bitcoin? That wouldn't happen. As Bitcoin becomes more valuable, you need less and less of it to pay your taxes.
Self-employed people pay taxes quarterly. You could expect a bunch of Bitcoin to go out of circulation every quarter. And for those who pay taxes annually, we'd see a pump in prices once a year as a chunk of Bitcoin goes out of circulation.
Most responsible people have a tax account where they deposit cash so that they can pay taxes when their quarterly or annual bill comes due. Instead of a bank account, they would have a Bitcoin wallet. The practical effect is that as that savings is accumulating, it would have some appreciation. Let's say you put in $1000 and by the time taxes roll around, it's worth $1100. You'd have a $100 jump on next year's taxes after paying $1000 in Bitcoin.
After reading through the proposed Bill, it would make sense to have a dedicated Bitcoin wallet for federal tax payment to avoid having to figure out the cost basis. Tracking lots would be moot if all the Bitcoin in that wallet all goes towards paying taxes. If you use a hot wallet, then you would need to determine the cost basis to exclude any gains. Why complicate your life?
I also would not transfer Bitcoin directly from another wallet into the tax wallet. Instead, I'd cash out to USDC in the hot wallet, then swap back to Bitcoin into the tax wallet. This makes the maths easier for cost basis calculation in your hot wallet.
The ability to pay taxes with Bitcoin gives it more financial legitimacy. If you think it through, when the government issues bonds, they'd be backed by gold, bitcoin, land, and other strategic reserves. Banks would be less likely to consider Bitcoin a "risky asset" given that the safest asset, bonds, are backed by Bitcoin. We need more than this to fully transition to a new financial system.
We need to transition to peer-to-peer crypto payments, even if it's just in stablecoins. The biggest hurdle to adopting crypto is the constant need to on-ramp cash into crypto, and off-ramping back to cash. But if we're all using crypto, and getting paid in stablecoin, then we eliminate the on-ramp problem. With the government accepting Bitcoin as payment, on-ramping is less essential. We can simply conduct all our business in crypto as it is trivial to swap to Bitcoin for tax payments, more so than fiat to Bitcoin.
If the Bitcoin for America Act does become law, I think it moves us much closer to universal peer-to-peer transactions, including the ability to pay bills in crypto. Yet, I fear that it isn't enough on its own. We still need utilities and vendors to accept payment in some kind of crypto. I mention crypto instead of Bitcoin because once you are out of fiat, the difficult part, it is a trivial thing to swap between cryptos.
Mostly, we need to have the right to earn our paychecks in crypto, even if it's stablecoin. The banking system holds us captive so long as businesses manage payroll through banks. I suppose, by extension, we need accounting practices to evolve to facilitate the use of crypto for operating a business.
You often hear that we are still early in the world of crypto. Until it is ubiquitous, I agree. We still need crypto to be more invasive into the financial systems to the point it chokes out fiat.
