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Germany's finance ministry recently announced that the country has rethought its position on digital currencies and will, henceforth, recognize bitcoins as "units of account" and start taxing it accordingly as "private money."
The new classification is an attempt to close up some unofficial bitcoin tax exemptions. It states that purchases are now subject to sales tax and requires users to pay capital gains taxes on their Bitcoin investments. It's a bold move on the part of the German government—attempting to understand and regulate virtual currencies—but leaves a lot of unanswered questions. For example, how will the new rules be implemented? How will this affect online payment processors? Can't this all be avoided by simply moving a company's payment processing out of the country, as companies like Google and Amazon have?
Just days before Germany's announcement, New York's Department of Financial Services subpoenaed 22 Bitcoin companies, hoping to learn whether or not they observe financial regulations.
Taken together, the two actions set the stage for the kind of government-led inquiry into Bitcoin and its digital ilk that has been a long time coming. Upwards of 7,500 small businesses around the world accept bitcoins, according to Bitpay.com. Bitcoins have gained a reputation as the preferred currency for shady dealings on the deep web.
In Germany, the big question is whether the government—or any government—can derail or co-opt the crypto-currency revolution.
One of Germany's foremost crypto-economists is Joerg Platzer, a founding member of the Crypto Currency Consulting Group, a Berlin-based group "dedicated to developing and supporting the rise of a Bitcoin based economy." Platzer, a self-described "crypto-economist," studies and analyzes the global impact of free-market virtual currencies. He also owns the bitcoin-friendly bar Room77 in Berlin's hip Kreuzberg neighborhood—what he claims is the first brick-and-mortar establishment in the world to accept bitcoins.
So determined is Platzer that he has persuaded about 40 other establishments in the 'hood to accept bitcoins as well. Burgers, coffee, beer, records—all can be purchased in Kreuzberg with the virtual money. Platzer buys his kegs from a local brewer who accepts Bitcoins. He pays his employees in bitcoin when they request it. When he pays taxes, he converts Bitcoins back into euros. It's simple, he says.
We had a chat with Platzer after the government's announcement came down about what it means for bitcoin devotees in both theory and practice.
The German government has officially recognized bitcoin. What exactly does that mean?
It doesn't mean anything when you use bitcoin as a means of transaction. The statements from the government are, at least, insufficient, mutually contradictory and confusing. This is the funny thing: Everyone is reading this as, "Germany is accepting bitcoin." But it was never illegal here! What happens here is merely that the government is starting to look into it and trying to find out how they could regulate it and control it.
How is the government's new stance mutually contradictory, as you said?
The government said that capital gains on bitcoin are now subject to being taxed, if you speculate with bitcoins. The government says it will treat them like stocks or precious metals. That means you pay 25 percent flat tax if you've held bitcoins for less than a year. But no one can explain to me that I should ever prove to a person from the tax office that I was actually in control of a certain private key at a certain time or time span. You just can't prove it. We don't even know how to prove it.
The next question is, is value added tax to be paid if you buy bitcoins? The government said it should be subject to value added tax. But that's contradictory to the first statement when the government says it's subject to capital gains. You either pay VAT [value-added tax, or sales tax] on something because it's a good product or whatever or you pay capital gains taxes, which makes it an object of speculation that is treated differently by the tax office.
So taxing bitcoins is going to be tricky. But if the government wants to, can't it regulate bitcoin exchanges?
They will be able to regulate exchanges. But there are a lot of areas where there can't be any control or regulation. It's a very unlikely possibility that the government will be able to regulate bitcoin on a political level. If the bitcoin community, on a political level, could be convinced that we need [to implement traditional banking services like] revisable transactions and white listing and black listing and whatever the government wants, then the next crypto-currency would show up.
When Gutenberg invented the printing press, it took the monopoly of bookmaking from the church, which was only printing bibles. The government or church could have regulated his press, for example. But that wouldn't have stopped anyone else to make their own printing press and make whatever they want. If bitcoin would be on a political level turned into something than you can regulate then the next currency would show up, and it would be more resilient. I would bring the regulation discussion down to crypto-currency, not just bitcoin.
Overall, does the government's decision to start examining bitcoin make you more or less optimistic about the possibility of crypto-currencies remaining off-the-grid?
It's a step that had to be taken. I would rather have seen the bitcoin economy grown a bit more before this step, so that it would be more resilient. It's going to be very interesting. Nobody knows what's going to happen. In my opinion, the only thing they will find out is that they won't be able to regulate it. But it's only the beginning of the process.