Meldon Law

Meldon Law

BITCOIN, EXPLAINED

Over 400 years ago Turkish traders introduced the brightly colored Tulip flower to the Dutch and all the Germanic people wanted to get their hands on this “rare” commodity. The spark of Tulip mania or as the Dutch refer to as, “tulpenmanie,” is very similar to today’s Bitcoin rage: they’re novel, a limited supply, and potential for great wealth. During this era, the tulips contracted a “virus” called mosaic which didn’t kill or damage the tulip population per-say; but acted as a catalyst transforming their petals into flame-like colors. The color patterns varied which increased the rarity of an already unique flower. In turn, the tulips which were already selling at a premium began to rise according to the mosaic virus’s alterations and soon, everyone began to grow and deal in tulip bulbs in hopes to acquire great wealth. In essence, they were speculating on the tulip market which was believed to have no limits. The market-moving, bulb-buyers began to fill up inventories for the growing season which further depleted supply and increased the scarcity and demand. Soon, prices were rising so fast that people were trading their land, life savings, and anything else they could liquidate to get their hands on more tulip bulbs. Their dreams were not unwarranted as the originally overpriced tulips enjoyed a twenty-fold increase in value….in one month!… Sound familiar?

Bitcoin is a modern-day phenomenon championing to be “the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen.” Whether it is the public’s distrust of the banking industry after what occurred in 2008 or the United States’ government’s reckless spending habits, many believe and are hoping that digital, cryptocurrency remedies these systemic, ever-lingering problems. Just like the Dutch in the 1500’s, speculators are buying up Bitcoin to strike it rich; and like the Dutch, the numbers support their belief. Let this statistic marinade for a bit: If you were to make a $1,000 investment in Bitcoin in July 2010, that $1,000 would be worth more than $258 million in January 2018! In 2017 alone, Bitcoin has enjoyed gains exceeding 1,600%.

Users of the Bitcoin network use “Bitcoins,” a form of “cryptocurrency,” which in contrast to traditional forms of currency, Bitcoins are not issued by any government or central banking authority like the federal reserve. Instead Bitcoin’s are created by ‘mining;’ a process where ‘miners’ receive transaction fees and newly minted Bitcoins (fractions of Bitcoin) in return for verifying and recording payments on a public ledger called a “blockchain.” This blockchain keeps track of every bitcoin created and the person who owns it. Theoretically, this prevents hyperinflation as more Bitcoins cannot be created out of thin air like the US treasury.

Bitcoin advocates campaign the possibility that, “Bitcoin will be the future of currency,” while skeptics denounce cryptocurrencies making propositions such as, “But what is a bitcoin worth? You can’t buy things with it in the regular marketplace and has no inherent value.” While both arguments may have merit, it is undeniable the United States Government recognizes Bitcoin and cryptocurrencies.

For federal income tax purposes, the Internal Revenue Service (IRS) treats bitcoins as property and advises taxpayers that “general tax principles applicable to property transactions apply to transactions using virtual currency.”(IRS Notice 2014-21) In the criminal sector, Bitcoin is more akin to a currency which the government prosecute an individual for using cryptocurrency for money laundering. By way of example, in United States v. Ulbricht, 31 F. Supp. 3d 540 (S.D.N.Y. 2014), the “dark-web” owner of “Silk Road” whereby people from all over the world used the website as a channel or exchange to purchase illegal drugs online. Ulbricht was indicted for among other things, a money laundering conspiracy pursuant to 18 U.S.C. § 1956 stating in part, “Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity.” A necessary component of such a claim is the existence of a financial transaction. The Ulbricht Court interpreted the terms “financial transaction” and “monetary instrument” finding that “one can money launder using Bitcoin.” Moreover, the court stated:

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Blog URL: https://www.meldonlaw.com/blog/bitcoin-explained/

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