The risk with Bitcoin is that the government could simply change the definition of money. That is what they did to me back in 1980 because I was one of the three main market-makers in gold (perhaps the biggest). It was all a hunt for taxes, not concerning me but my clients. I have explained before why I retired from making markets in gold — the IRS declared me to be a BANK! When gold was legalized in 1975 and began trading on the COMEX in New York, the New Jersey Senate asked me to write the law on gold to make sure it would not be taxable to buy and sell gold bullion. I worked with Senator Foran and developed the language that “gold was not taxable unless converted to use.”
I was making the market to buy gold scrap from all the stores you see with “WE BUY GOLD” signs. They buy the jewelry and it has to be refined. To do that, you needed a minimum lot of 100 ounces, which was the contract size on COMEX. When gold was $800, that meant one 100 ounce bar was valued at $80,000. The refining period was 6 weeks. Therefore, all of these small operations could not afford the float. If they bought 100 ounces per week, then they would need $560,000 in working capital. That would not work for most of these small shops buying gold.
I made the market. The shops could ship whatever they bought that day and I would buy it at the daily price. I gathered all the gold sold by countless stores. The gold was shipped by armored cars to Englehard for refining (PhiBro or Philipps Brothers who eventually bought Saloman Brothers). I was doing tens of millions per week back then and refined a mountain of gold.
First, the NJ tax authorities walked in and declared me to be a merchant. I said gold was not taxable unless converted to a usable product. They said their “interpretation” was that the “use” was investment. I refused to pay and opted for a trial. Of course, you do not get a jury, just a judge who rules always for the government. I was not allowed to testify at my own trial for they said whatever the Senate had asked me to write, I may have misinterpreted their intention. Senator Foran was so angry that he demanded to testify at my trial. The government objected and he was allowed to testify ONLY as a private individual citizen. I moved to subpoena the full Senate. The judge denied me, and I lost.
Simultaneously, the Feds walked in and declared me to be a BANK. They then declared that I had to file forms to report when my clients bought or sold more than $10,000. Their interpretation was that gold was NEVER formally declared not to be money in 1971, so I was a BANK. They threatened me saying that the fine was $50,000 up to the full amount of every transaction I failed to report. They said they knew I perhaps did not “realize” I was a BANK and would forego the fines if I would allow them access to audit all my clients. I had no choice. They set up shop in my office. I walked by, noticing that they were pulling out names of those whose transaction were even $5,000, and I asked what was going on. The agent turned to me and said very aggressively, “You have a problem, keep your mouth shut!” The next day in rolled the vans and they took all my business records and began an audit over 3,000 of my clients for the next three years.
That is why I retired. I neither wanted to collect sales taxes on bullion nor be a BANK and report on my clients. Since I was the biggest, they were starting with me. People doing business outside of New Jersey would not have the sales tax problem and the IRS was interested in me because of my size. They would not do the same for small shops. So it was time to get out of the business. Clients wanted the research to continue, so that was spun-off as a new company in 1981.
Now comes Bitcoin. The Judiciary Committee of the United States Senate is currently working on Bill S.1241 that aims to criminalize deliberate concealment of property or the control of a financial account. The bill was submitted in June, and the law would change the definition of “financial account” and “financial institution,” and thus also cover digital currencies and digital exchanges. Who is pushing it? None other than California’s Senator Dianne Feinstein, who maintains that the bill is needed to update existing money laundering laws because of terrorists.
This means that the miners of Bitcoin will become a “bank,” as I was declared. The operators of the trading platform Coinbase were forced by court ruling to notify the IRS of the identity of over 14,000 investors who were trading $20,000 in Bitcoin. Users were affected if their trading volume had exceeded $20,000 at the beginning of 2013 by the end of 2015. So this is NOT a single transaction, but accumulative. The IRS will now “presume” tax evasion. This is what I warned would happen. Been there done that! They can shut down Bitcoin in the blink of an eye by simply defining anyone who is a miner to be a financial institution.
The bill will change the definition of “financial institution” in Section 53412 (a) of Title 31 , United States Code. The text will read:
“An exhibitor, a redeemer or a cashier of prepaid access devices, digital currency or a digital exchanger or a digital currency.”
The regulation will remove the anonymity of Bitcoin and other cryptocurrencies defeating this idea that there is an alternative-financial-universe separate from government.