Month: September 2024

MicroStrategy, a leading business intelligence and Bitcoin development company, has announced a proposed private offering of $700 million in convertible senior notes, due 2028. The offering will be made to institutional buyers under Rule 144A of the Securities Act. The company also plans to grant an option for purchasers to buy an additional $105 million of the notes.

JUST IN: MicroStrategy to raise $700 million “to acquire additional #bitcoin” and redeem Senior Secured Notes. pic.twitter.com/2VV9PMkEd6

— Bitcoin Magazine (@BitcoinMagazine) September 16, 2024

The notes will be senior, unsecured obligations of MicroStrategy, bearing interest semi-annually and maturing in September 2028. Holders of these notes may convert them into cash, shares of MicroStrategy’s class A common stock, or a combination of both, at the company’s discretion. Conversion terms will be determined at the time of pricing.

MicroStrategy intends to use the proceeds to redeem all $500 million of its existing 6.125% Senior Secured Notes due in 2028. The remaining proceeds will be allocated to acquiring additional Bitcoin.

“On September 16, 2024, MicroStrategy issued a redemption notice pursuant to which the Senior Secured Notes will be redeemed on September 26, 2024 (the “Redemption Date”) at a redemption price equal to 103.063% of the principal amount, plus accrued and unpaid interest, if any, to but excluding the Redemption Date (approximately $523.8 million in the aggregate), with the redemption of the Senior Secured Notes contingent on the closing and settlement of the sale of the notes,” MicroStrategy stated. “Upon redemption of the Senior Secured Notes, all collateral securing the Senior Secured Notes, including approximately 69,080 bitcoins, will be released.”

The offer is subject to market conditions, with no guarantee on the timing or terms of completion. The notes will not be available for public sale, maintaining private status under the Securities Act.

This article is featured in Bitcoin Magazine’s “The Privacy Issue”. Subscribe to receive your copy.

“Anarchy is order; government is civil war.” – Bellegarrigue

The advent of decentralized money gave rise to an intriguing cognitive bias among early adopters. Bitcoin’s success is convincing many that we can do away with trusted institutions altogether—that trust itself can be engineered away. This hubris is reflected in how we deploy our collective resources and capital.

In the absence of appropriate social structures, we have become risk averse and generally mistrusting of each other. As a result, Bitcoin commerce has become marginalized and many revolutionaries have retreated into techno-utopianism. This complacency has deprived many of the tools needed to navigate this digital economy. Between regulated platforms and half-baked scaling solutions, there is little room for alternatives.

The situation is bleak: the majority of Bitcoin’s commercial activity still revolves around fiat interfaces. Inertia has left users vulnerable to highly organized state actors. While our technical elite fantasizes about theoretical constructs, progress around practical solutions has stalled. Instead of stimulating market functions to replace current financial institutions, we have allowed them to further entrench their position, passively accepting their authority.

This pattern is all too familiar in revolutionary movements—once wealth has been seized or obtained, ideals often become lazy.

Fortunately, the convergence of two technologies—one old and one new—holds the potential to challenge the status quo. Chaumian ecash, decades in the making, and Nostr, a novel, decentralized, social network could provide the groundwork necessary for emergent behavior to trump central planning.

The Financial Anarchist seeks to harness this potential and challenge the incumbent system with decentralized alternatives. He embraces the risk entailed by this duty because he believes it is right and just. He believes we can embrace and wield trust rather than reject it outright

For the Financial Anarchist, decentralization is not an end in itself, but a means to empower individuals and cultivate genuine economic freedom.

A public forum

Like Bitcoin, Nostr does not attempt to prescribe what its users make of it; rather, it offers a set of rules for individuals to organize around and create a foundation for markets to emerge. Those rules are based on a fundamental set of principles: censorship resistance and decentralization.

It achieves this using distributed servers called relays. Relays host content published by users, and thanks to encryption, cannot discriminate based on the nature of the content. Each user event is signed by his cryptographic key and Nostr ensures it remains always available by distributing data across multiple relays. Of course, users are also encouraged to run their own relays. To interact with this network of servers, participants use a variety of software clients that can verify the authenticity of messages shared by others.

Those features and many more make Nostr a strong contender to become the identity layer for the online arena. Every individual is represented by a unique identifier tied to a public key. The motivation is to eliminate the concept of accounts usually associated with centralized platforms. The arrival of Nostr heralds a new era of market prosperity, enabling individuals to liberate themselves from the serfdom of the consumer internet. Identity is finally freed from its fiat chains.

Thanks to its versatility, the protocol lends itself to an ever-growing number of use cases. Chief among them is the creation of social networks for us to coordinate around local and global marketplaces. An interesting trend in this direction is the integration of Nostr with Bitcoin payment applications. Using the protocol to communicate between Bitcoin services, we can enable interoperability so that our social graphs can be ported to any supported application. Our network becomes an extension of our Nostr public key, allowing us to maintain our financial relationships across platforms.

The Financial Anarchist imagines Nostr as the foundation of a new Serene Republic, the ultimate theater for trade and industry in the digital world. It is here that we begin the process of individuation anew.

Reputation markets

Today’s reputation systems are entangled with fiat institutions, with public information about trade and commerce siloed into centralized databases. An open and distributed record of trust is a significant step towards a legal system more closely resembling natural laws. Based on cryptographic attestations of social connections, a functional Web-of-Trust can align users’ incentives and allow markets to thrive by significantly reducing the costs typically associated with enforcing fiat contracts and laws.

Though this may seem implausible, informal systems like Hawala already rely on trust and reputation to operate. Based on a global network of informal brokers, nearly half a trillion dollars move through these channels every year. Built on centuries of accumulated trust and relationships, Hawala examplifies the potential and resilience of self-regulating economies. (citation needed)

Nostr introduces a radical shift in our approach to reputation as it promises to replace centralized certificate authorities with local and distributed trust archives. Relational databases can now be unique to every individual, informed by their voluntary interactions with other market participants. Using simple discovery features, we can reduce information asymmetry and practically eliminate barriers to entry. Individuals new to Nostr only need a single trusted connection to reveal an entire social graph based on their peer’s connections. Imagine the “recommended” feature of the average digital platform but open and extended to every facet of the market based on your social network.

Nostr gives us the tools to survey the integrity of counterparties and accurately assess your position against them in the economy. It is now possible to establish trust structures outside the purview of traditional internet platforms.

Economist Hernando De Soto has attested to the quality of societal records as a defining characteristic of modern societies. Keeping accurate records of assets and transactions is crucial to economic prosperity. Nostr allows us to take an unprecedented leap forward in this regard. We can finally seize information and our data back from the fiat overlords.

The goal is not to eliminate institutions or middlemen but to democratize the provision of such services — preferring systems based on social accountability over centralized institutions and their monopoly on violence.

Electronic cash

While Bitcoin makes several tradeoffs to achieve global trust, the decentralization of finance should not be seen as an end in itself. Unfortunately, this misconception has gained popularity over the years, leading to inevitable conflicts of interest and moral hazards.

A compelling alternative is to recognize and embrace the inherently local nature of finance. Finance operates locally, while money functions globally. Attempting to decentralize finance as if it were money is an exercise in futility.

Chaumian ecash offers a different approach. For the uninitiated, ecash is a medium of payment made possible by the use of blinded servers. Using any form of collateral, the server can issue a corresponding number of tradeable notes. By design, Chaumian mints cannot identify individual payments, payers, or payees. Notes can be transmitted over any communication layer and do not rely on third parties for settlement. The Lightning network allows every Chaumian mint to settle with one another, allowing local finance to operate at a global scale.

Despite its remarkable features, ecash has often been dismissed by casual observers due to its custodial model. However, this perspective overlooks its true potential. By distributing risk across smaller, local instances, we can address the systemic issues typically associated with custodians. Payments are inherently social, making intermediated finance a natural fit for many transactions. The Financial Anarchist dreams of a future where every Bitcoin wallet has access to the modern equivalent of a neighborhood bank. By leveraging their Nostr social graph, users will be able to quickly identify trusted payment hubs within their network. In doing so, ecash protocols will redefine banking and payment services. We can reduce finance to its smallest common denominators, reversing decades of centralization caused by fiat cronyism.

Using Nostr as a coordination mechanism, we can empower communities to pool common resources and establish dedicated financial hubs. Individuals can interface with the Lightning network by sharing channels and liquidity, providing cost-effective payments for every participant. Any group of users can now collaborate to optimize their interactions with the Bitcoin network. As a result, the convenience and user experience associated with custodial wallets are no longer exclusive to large institutions.

Because of the protocol’s versatility, onboarding other users becomes trivial. Ecash notes can be issued for every payment request and used by the recipient to pay any Lightning invoice. Atomic payments allow it to piggyback off any wallet on the network without the application developer changing a single line of code. Users can accumulate notes from different issuers or swap them into their preferred mint. Alternatively, distinct notes can be used to fund a single multi-party payment, affording users incredible freedom and optionality. Members of certain communities may begin accepting a collection of different notes depending on their relative social proximity to the issuers. Mints could be distributed such that multiple operators could issue tokens, effectively distributing the risk of user exposure to a single operator.

This free flow of payment will snowball in different ways. First, a new class of dedicated users will emerge, advertising their services through various marketplaces. One area of particular interest is the provision of stable ecash notes. Thanks to its native programmability, it’s possible to issue dollar-denominated ecash backed by Bitcoin reserves. This could have significant implications for the Bitcoin economy. Using the asset as collateral presents many opportunities to extend its market demand beyond its current speculative use cases. This could result in a flywheel effect which provides the necessary liquidity for it to stabilize over time and become a more reliable medium of exchange. Until then, the unique properties of ecash make it a superior option for payment applications which could see it challenging the current treasury-backed stablecoin hegemony.

The operation of stablecoin mints also creates compelling incentives for liquidity providers. By issuing dollar-denominated notes, they can establish non-custodial long exposure to Bitcoin and take directional bets on the asset. The distributed and permissionless nature of ecash operations presents an interesting contrast to the centralization of current stablecoin issuers, offering market actors a way to hedge their risks against single points of failure.

The grassroots adoption of this technology will undoubtedly face challenges, akin to the early days of Bitcoin and Lightning. While hobbyists and amateurs play a crucial role in bootstrapping ecash, creating a robust and reliable financial system at scale will involve growing pains. Opportunists may exploit others’ trust, and the custodial aspect of mints makes them particularly susceptible to scams and fraud.

However, safeguards can be implemented to mitigate these risks. One idea being explored is programmatic redemption, which would require issuers to regularly prove their solvency. Users would periodically “rotate” the notes in their wallets, exchanging them for new ones. Some have referred to the idea as “scheduled bank runs”. The technical details could be abstracted away to ensure a seamless experience. Additionally, various “Proof-of-Liability” systems are being developed to mitigate the risks of fractional reserves.

As a general rule, it is wise to avoid holding more in ecash mints than one can afford to lose.

Conclusion

We have no elected government, nor are we likely to have one, so I address you with no greater authority than that with which liberty itself always speaks. I declare the global social space we are building to be naturally independent of the tyrannies you seek to impose on us. You have no moral right to rule us nor do you possess any methods of enforcement we have true reason to fear. – A Declaration of the Independence of Cyberspace

In an age where centralized authorities dictate the rules of financial engagement, the Financial Anarchist emerges with a radical proposition: to support an alternative system reliant on trust between individuals.

This is not a call for civil disobedience. It is also not an attempt to undermine the valiant work of developers focusing on trust-minimized technologies. It is the proclamation of the undeniable potential within our grasp as individuals to organize and use technology to elevate our communities.

The spirit of voluntary association at the heart of Bitcoin should drive us to focus our efforts on maximizing market optionality. Sadly, the paternalistic approach borne out of techno-utopianism has failed at this mission and left us stuck within the constraints of traditional financial institutions.

The Financial Anarchist envisions a world where Nostr and Chaumian ecash allow us to reclaim this sovereignty. By opening up the design space for experimentation and locally-driven initiatives, we are making a conscious effort to divorce from the centralized command structure we’ve inherited. The vision of autonomy and self-regulation alluded to by those tools reinforces the notion that individuals should be free to define their economic relationships on their own terms.

We must build new autonomous zones across cyberspace, away and out of reach from the “weary giants of flesh and steel” Perry Barlow warned us about. The current state of distrust in our ranks is not the natural order of things; it is the consequence of generations of imposed authority. It is no surprise that today nobody even trusts their neighbor. Should Bitcoin prevail, we expect this trend to reverse course and eventually foster levels of trust among individuals previously deemed unimaginable. Anything less would be a tragic outcome.

On the heels of tour stops in Arizona, Nevada and Detroit, the America Loves Crypto tour rolled into Wisconsin on Friday, September 13, where local Bitcoin and crypto voters in the state rallied in support of pro-crypto candidates for the upcoming US elections. At the Red Rock Saloon in Milwaukee, WI, more than 200 people — including founders, politicians and technology enthusiasts — congregated to ask the question: How can we support Bitcoin and crypto on Capitol Hill?

The battleground state was split nearly down the middle in the 2020 U.S. Presidential election, with Biden and Trump receiving 1,630,866 and 1,610,184 votes, respectively. With 840,000 Wisconsinites owning some form of cryptocurrency, the narrow 2020 electoral margin of just 20,000 votes could easily be disrupted by the undecided crypto vote in 2024.

The America Loves Crypto crowd was met with politicians from both sides of the aisle as well as Bitcoin and crypto industry representatives, followed by up-and-coming artist Jessie Murph, whose soulful blend of country and pop music resonated with a surprising number of fans.

The event’s speakers included Josh Schoemann, Washington County Executive (R); Peter Burgelis, City of Milwaukee Alderman (D); Kara Calvert, Coinbase Head of U.S. Policy; Dom Bei, founder of Proof of Workforce; Spencer Smith, Founder of AmpliPhi Digital; Tiara Nicole, Co-founder of Craft the Future; Ian McCullough, Stand With Crypto WI chapter president and Awen co-founder; and Maggie Schmidt, Awen co-founder.

Wisconsin State Pension’s Bitcoin Investment

In May of this year, the State of Wisconsin Investment Board (SWIB) invested $162 million dollars in Bitcoin ETFs, becoming the first U.S. state pension fund to invest in the asset class.

“The Wisconsin retirement system is a very healthy fund, and it’s funded at almost 100%. Very few pensions in the U.S. can boast that, and they are the 10th largest pension in the nation,” Dom Bei told Bitcoin Magazine.

“They have a good balance of being both conservative and innovative. It’s a huge deal because they are healthy and they are looked at nationwide as a leader in the space,” he added.

Bei is a firefighter for the city of Santa Monica, California and Founder of the Bitcoin 501(c)(4) non-profit Proof of Workforce Foundation who educates workers, unions, pensions and municipalities with education-based Bitcoin adoption. To Bei, the trend of pensions investing in Bitcoin will only continue to gain momentum.

“The $5 billion dollar Houston Firefighters Relief and Pension Fund was actually the first public pension fund to buy Bitcoin back in 2021,” Bei explained.

“The state of Michigan has also made a small $7 million allocation to Bitcoin ETFs. It will be fascinating to see the profile of the pensions that follow, whether they are underwater and mismanaged, or fully funded and operating from a place of strength,” he added.

For Bei, Bitcoin is not just a tool for risk managers and Wall Street-types seeking outperformance, but an opportunity to re-engineer the American city for the benefit of wage earners, not just those in power.

“It’s not just necessarily about municipalities holding bitcoin”, said Bei. “It’s really about activating the Bitcoin community, its innovation, and competing to bring in Bitcoin companies while increasing financial literacy for everyone.”

“If union members and workers learn the history of Bitcoin and why it was created, they are going to understand immediately where Bitcoin fits into the union story and the genesis of organized labor,” said Bei. “Bitcoin was created as a response to the financial system placing its failures on the backs of the wage earner.”

Bei’s non-profit has partnered with the City of Santa Monica to launch the Santa Monica Bitcoin Office, akin to the El Salvador Bitcoin Office, to launch a Peer to Pier Bitcoin Festival in October of this year during Los Angeles Tech Week.

When it comes to other investment allocators taking the plunge with Bitcoin and crypto, Spencer Smith, founder of marketing firm AmpliPhi Digital and Board Member of the Wisconsin Technology Council, sees Wisconsin’s allocation as an extremely important signal to the investment community.

“If I’m an investment manager reporting to a committee, you can point to the state of Wisconsin and say ‘Well, they did it, here’s how they did it, and why I propose that we [allocate to Bitcoin].’ said Smith. “Having that first-mover advantage is important for Wisconsin, [and] it really sets the stage for the rest of the states as well.”

Smith also noted that Bitcoin’s sideways price action, following the meteoric 2021 bull run, has led to more clear conversations amongst Wisconsin legislators as well.

“Now that the hype has died down, it gives us a lot more room to educate on a basis that’s more from an understanding [of] ‘How do we figure this out? Now that there’s ETFs, how do we deploy these? How do you explain compliance?’” he said.

Incentives first. Party second.

Wisconsin has seen a stark divide between its rural and urban voter populations, reflecting a larger national trend of partisan polarization with rural voters predominantly voting Republican and urban voters predominantly voting Democrat. Despite that backdrop, the Red Rock Saloon saw a unique blend of poly-partisanship on display, where Republicans, Democrats and even Independents saw value in courting the crypto voter.

Delivering remarks in the typically deep blue Milwaukee, Joe Schoemann (R), Executive of the rural Washington county, received loud cheers in response to his re-affirmation of crypto as a means of prosperity for the average American.

“I’ve been focused on giving the American Dream to the American citizen,” said Schoemann to the crowd. “Crypto represents that for all of us.”

It’s no secret that the Bitcoin and crypto industry has seen what many view as unwarranted, or at least unwelcome, attacks from the national regulatory apparatus in the last few years, and because of this, the industry is not backing down.

This attitude was echoed by Peter Burgelis (D), City of Milwaukee Alderman.

“I ran for office because the election didn’t go my way and I was pissed,” said Alderman to the crowd

“And when something doesn’t go your way, you can post something dumb on social media or you can put your boots on and run. And I ran and I won,” he added.

“Crypto is important and your vote matters. Get out and vote.”

U.S. Senate candidate Phil Anderson (I) reflected on the fact that Bitcoin and crypto appear to be one of the few issues that can transcend party lines.

“We don’t have representative government anymore,” Anderson told Bitcoin Magazine.

“Lobbyists write the bills and the two-party system makes the representatives vote a certain way. And that goes to what all of Congress will agree to: constantly spending on war, constantly spending without any responsibility and really abusing fiat money,” he added.

“It’s all tied together, and it’s important to support Bitcoin and blockchain as a way of making our government more transparent and more accountable.”

With his campaign slogan of #DisruptTheCorruption, Anderson sees Bitcoin and crypto as both a technological and electoral priority for representative democracy.

The next America Loves Crypto event is in Philadelphia, PA on September 16, followed by a 600-person event in Washington, D.C., culminating in a featured performance by The Chainsmokers to close out the tour.

Attendees may RSVP for the free events via the Stand With Crypto website.

South Asian country Bhutan, a Buddhist kingdom on the Himalayas’ eastern edge, has been revealed as a major Bitcoin holder, owning 13,011 BTC worth around $780.49 million, according to a report by Arkham Intelligence. The public data company identified Bhutan’s Bitcoin addresses, marking the first time this information has been publicly shared.

“Bhutan is the 4th largest government with Bitcoin holdings on our platform, with over $750M in BTC,” Arkham stated on X. “Unlike most governments, Bhutan’s BTC does not come from law enforcement asset seizures, but from Bitcoin mining operations, which have ramped up dramatically since early 2023.”

Arkham

Arkham

Bhutan’s Bitcoin mining activities are conducted by the Kingdom’s investment arm, Druk Holdings. According to Arkham, the country has constructed mining facilities at multiple sites, with the largest on the grounds of the defunct Education City project. Arkham further noted, “We were able to corroborate the timeline of on-chain mining activity with time-lapse satellite imagery of facility construction.”

In May of 2023, Bitdeer partnered with Druk Holding & Investments to develop the 100% carbon-free Bitcoin mining operation in Bhutan.

Earlier this year, a Bloomberg report revealed that Druk Holding & Investments and Bitdeer were expanding their mining capacity from 100 to 600 megawatts. Bhutan’s focus on eco-friendly mining is bolstered by its abundant hydropower resources, making it an ideal location for eco-friendly mining.

The debt based monetary system has become quite extreme. On one hand, the US crossed the $35 trillion national debt milestone, placing a $104k burden on every US citizen. On the other hand, the Congressional Budget Office (CBO) puts federal expenditures for 2024 at 24.2% of GDP.

This divergence between profligate spending and debt ballooning puts the economy on a narrow path. It is exceedingly unlikely that USG would opt to reduce spending, most of which goes to social programs, entitlements and the military. The latter alone is the key ingredient that backs USD as world currency.

Conversely, this entails another Fed balance sheet expansion, with three 0.25% rate cuts this year already priced in. In turn, non-currency assets like equities, gold and Bitcoin are poised for growth yet again. At the root of this dynamic is the question of information validity.

Just as the US Bureau of Labor Statistics is expected to revise down job figures by up to one million between April 2023 and March 2024, the information corruption is visible with central banking itself. If the Federal Reserve can increase M2 money supply by 27% in 2020-21, the money itself loses informational coherence.

It is this why investors then seek equities, gold and Bitcoin. These assets become vehicles of value because currency loses its ability to reliably relay value. The problem is, they are also taxed as a way to subdue the velocity of exiting the central banking system.

This is especially pertinent for Bitcoin, a unique asset that is both a store of value but could be made as a daily transaction driver. The question then poses itself, is a legalistic landscape viable in which low-value Bitcoin transactions are exempt from federal taxation?

Bitcoin’s Usage and Currency Substitution Suitability

To understand the regulatory path forward, we first need to understand how Bitcoin is typically used. After all, contrasting Bitcoin usage against fiat usage paints a clearer picture if Bitcoin can be used as a practical currency, or if it will be perceived as a threat to the current monetary system.

Notwithstanding layer 2 scaling solutions such as Lightning Network, the more BTC is used the greater is the load on the Bitcoin mainnet as miners process transaction blocks. In turn, greater network activity generates greater friction, manifesting as escalating fees for each BTC transaction.

In a developed country like Australia, cryptocurrency usage for payments has been typically minimal.

Image credit: Reserve Bank of Australia

This is predictable as people need strong incentives to move away from existing payment solutions, ones that are already instantaneous and convenient.

At best, BTC transactions mostly revolve around third-parties facilitating BTC transactions using fiat currency. Case in point, Bitcoin onramp platform Strike had to ditch Prime Trust custodian as it eventually filed for bankruptcy. However, Strike still uses banks such as Lead, Cross River Bank, and Customers Bank.

In other words, Bitcoin adoption is attached to online payment systems, through commercial banks which are tied to central banks. The latter have already made money de facto digital, except it is hosted on their ledgers.

Although these institutions can tamper with the money supply, they can do so to facilitate maximum liquidity needed for a debt-based monetary system in which fiat currency is effectively a debt-tracker.

In contrast, Bitcoin’s scarcity makes it less appealing for such use. Gold already showcased this when it was abandoned. Because gold’s supply was not flexible enough to support a growing (debt-based) economy, mainstream economists viewed the gold-backed currency as outdated.

Moreover, Bitcoin is ill-suited as a daily currency driver against feeless alternatives like Nano (XNO) that boast eco-friendly green hosting or potential CBDCs. Rather, Bitcoin’s strength relies on inviolable scarcity, one that serves as a global reserve settlement layer.

While both of these factors, network friction and flexible liquidity, are making Bitcoin less suitable as a proper medium of exchange, it also makes Bitcoin less threatening to the system. But does that mean that Bitcoin’s tax treatment should be tweaked?

The Impact of Current Tax Policies on Bitcoin Usage

On exchanges and platforms like aforementioned Strike, users can freely buy Bitcoin without worrying it will be a taxable event. It only becomes so when BTC is sold for profit. Then, it is subject to capital gains tax for trading.

That’s because the Internal Revenue Service (IRS) designates Bitcoin as property. If Bitcoin is held less than a year before it is sold, holders are subject to ordinary income tax rate ranging from 10% to 37%.

Holding Bitcoin over one year makes it subject to 0% – 20% tax rate, depending on the income level spread across three brackets – 0%, 15% and 20%. In turn, Bitcoin holders have to keep a track of when they bought BTC, at which price, and when they sold it, at which price. The profit difference is taxed as capital gains.

Likewise, swapping Bitcoin for another cryptocurrency is a taxable event, subject to capital gains tax. If BTC is received as payment/earnings, or from mining/staking/airdrops, it is then treated as wages income tax, falling into the 10% – 37% ordinary income tax range.

Alongside buying BTC, holding it or donating it to a registered non-profit, users can also transfer bitcoins from exchanges to wallets without constituting taxable events. Although BTC gifts can also pass as non-taxable upon reception, they would still be subject to the same tax regime later.

In the case of selling Bitcoin at a loss, holders could write it off, limited to $3,000 per year (carriable into next year if exceeded). At the moment, it is still possible to engage in Bitcoin tax-loss harvesting, in which holders can sell BTC at a loss to claim the tax break, and then buy it back.

Unfortunately, this leeway not enjoyed by shareholders could be terminated with the proposed Lummis-Gillibrand Responsible Financial Innovation Act, under Section 1091, “Loss from wash sales of specified assets”.

But even with that tax break still open, it is clear that Bitcoin’s unique nature is not reflected in IRS treatment. The tracking alone of every BTC transaction severely discourages daily use as the mere purchase of a pint of beer would require calculating initial BTC price to see whether it was at a loss or at a gain.

Likewise, merchants would have to hassle with the same tax regime because they technically received property, not money. Combined with the previously mentioned issues of friction and flexible liquidity, this puts an additional burden on mass Bitcoin adoption by incentivizing long-term holding.

Moreover, Bitcoin’s expansion into innovative financial products is impeded as well.

The Tax Burden on Bitcoin Derivatives

Although Bitcoin has become the least volatile cryptocurrency due to its large $1.2 trillion market cap, holders would still prefer to protect themselves against price fluctuations. Derivatives, such as options and futures, make this possible.

Additionally, Bitcoin’s price volatility creates opportunities for traders willing to bet if BTC price will go up (going long) or down (going short). This speculative market important for risk hedging and price discovery is also burdened by the current tax regime.

Once an options contract is exercised, or when it expires, it is subject to capital gains tax. Most traders will create trading alerts to signal the moment BTC price crosses a certain threshold. This helps traders to respond quickly as the loss or capital gain tax is calculated based on the difference between Bitcoin’s fair market value and the strike price. So, staying consistently updated on Bitcoin’s fair market value is a challenge.

Additional difficulty would be to calculate the fair market of another cryptocurrency if it was the vehicle for Bitcoin contract settlement.

But if the contract expires without buying BTC, the capital loss would be regarded as the paid premium for the contract. On the other end of the equation, sellers of Bitcoin options premiums would have to pay capital gains tax as well.

When it comes to futures contracts, 60% of gains/losses are taxed as long-term capital gains/losses, while 40% are taxed as short term capital gains/losses. This is irrespective of futures contract length.

While derivatives markets greatly enhance liquidity and trading volume, the current Bitcoin tax regime discourages broader participation.

The Virtual Currency Tax Fairness Act and Bitcoin

The year 2024 turned into a massive pileup of good news for Bitcoin, barely bothered by the German government’s BTC selloffs. The most recognizable cryptocurrency received an institutional blessing when the Securities and Commissions Exchange (SEC) approved 11 exchange-traded funds (ETFs), having climbed to $48.13 billion AuM as of August 20th.

Not only did Bitcoin ETFs exceed all expectations, but their success served as an endorsement ramp for two presidential candidates, Robert F. Kennedy Jr. and former President Donald Trump. Both endorsed the idea of a strategic Bitcoin reserve at the Nashville Bitcoin 2024 conference at the end of July.

Just at that time, senators Ted Budd (R-NC), Krysten Sinema (I-AZ), Cynthia Lummis ( R-WY) and Kirsten Gilibrand (D-NY) re-introduced bill S.4808, the Virtual Currency Tax Fairness Act.

As the bill’s title implies, cryptocurrencies would receive the same tax treatment that is currently reserved for foreign currencies.

Meaning, under the value of $200, cryptocurrency transactions would only be subject to regular sales tax. Although this is still behind El Salvador’s approach of having Bitcoin as legal tender, the bill would immediately lift the barrier for small item purchases in merchant locations.

Previously, one of the co-sponsors, Sen. Cynthia Lummis, noted she is “absolutely certain that Bitcoin will be among them…and perhaps dominant among them”, referring to a future world order based on a basket of global reserve currencies.

As of the latest campaign development, presidential candidate Kamala Harris is in favor of President Biden’s 44.6% capital gains tax, in addition to raising the corporate tax rate from 21% to 28%.

The Broader Implications for Bitcoin Adoption

Although to a lesser extent, recession is still on the table moving into 2025. If materialized, this will be another BTC price test, if its risk-off status will be light or heavy. But on the long-term horizon, the structure of mass democracy doesn’t allow for austerity.

And if austerity is not on the horizon, the ballooning of the Fed’s balance sheet is, inevitably eroding USD confidence. It is anyone’s guess if factions vying for power will allow Bitcoin to become a potential exit vehicle on that road.

Making BTC transactions under $200 subject to sales tax, instead of capital gains tax, would go a long way in further ingraining Bitcoin into the financial system. Considering that Blackrock’s IBIT has become the largest Bitcoin ETF, at $17.24B AuM, it is fair to say that Bitcoin’s “threat” perception has been muted, if not abandoned.

Conclusion

Currently priced at above $60k per BTC, it is becoming increasingly clear that only a tiny micro minority will ever own more than 1 BTC. Accordingly, such a small population pool is unlikely to shake the proverbial central banking boat.

What is more likely to form is a parallel, hybrid system in which Bitcoin is both a commodity and a premium currency that is tracked. This is evidenced by the fact that even senators not explicitly anti-crypto want expansive cryptocurrency surveillance.

And Bitcoin’s transparent ledger is ideally suited for it. This is a positive development as privacy-oriented cryptocurrencies like Monero (XMR) have already been ousted from the largest exchange onramps.

Without those headwinds when sailing on a fiat ocean, Bitcoin is free to foster greater financial inclusivity and innovation despite the onramp/offramp barriers, including taxing an appreciating asset. The Virtual Currency Tax Fairness Act is paving the road, but it is likely to receive more tweaks. Specifically, it is yet not clear how transactions amounting to $200 are aggregated. 

This is a guest post by Shane Neagle. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

In the wake of Mi Primer Bitcoin’s three-year anniversary, the El Salvador-based organization announced that it has promoted two of its staff members — Reyna Chicas and Quentin Ehrenmann — to leadership positions.

Chicas, a native Salvadoran who has been with the organization for approximately two years, has quickly ascended through its ranks from teacher to Lead Teacher to a member of the Board of Directors to now the Director of Education. She has shined since the beginning of her time with Mi Primer Bitcoin (MPB), when the organization sent her to Bitcoin Lake in Guatemala for six months to teach in the community. During this past year, she’s been a point person for Mi Primer Bitcoin for its communications with El Salvador’s Ministry of Education.

Reyna Chicas speaks at Adoption Bitcoin El Salvador in 2023. Photo credit: Frank Corva

“As a Salvadoran who began this journey as a teacher, I’ve experienced firsthand the power of education to inspire growth and change,” said Chicas in MPB’s announcement.

“With this new opportunity as Director of Education, my commitment is stronger than ever to help create more stories of empowerment with MPB, to be a good example for my people, both in my country and beyond, and to show that with passion, effort, and dedication, we can build a better future,” she added.

Ehrenmann has also been a rising star since joining MPB in 2023 and was recently promoted to General Manager of the organization. For his first project for MPB, he moved to an underdeveloped island off the eastern coast of El Salvador and kickstarted an education-focused circular economy. After that, he moved to the mountains of Berlin, El Salvador to educate within the community there. He was then promoted to Director of Operations, where he helped further MPB’s Node Network of Independent Educators, which now includes teachers in 27 countries.

“From working on a special project on an island off El Salvador to joining the leadership team and contributing to the execution of our mission, my journey at Mi Primer Bitcoin has been incredibly rewarding,” said Quentin in MPB’s announcement. “I look forward to helping bring independent Bitcoin education to the next 100,000 students.”

For more on Mi Primer Bitcoin, read our Founders profile on the organization’s founder, John Dennehy.

The closure of a Bitcoin mining facility in the Norwegian town of Hadsel has led to a 20% increase in electricity bills for residents. The mine was shut down after the municipality declined to renew its permit due to noise complaints.

Kryptovault operated the mining facility for 20% of local power company Noranett’s revenue. With the loss of its largest customer, Noranett is raising prices for households to compensate.

Locals had complained for years about noise from the mine’s cooling fans. However, due to the closure, residents are now faced with paying several hundred dollars more per year for electricity.

“When such a large individual customer switches off overnight, it has an impact,” said a Noranett manager. The company estimates bills could rise by up to $300 monthly.

While unhappy about the price hikes, Hadsel’s mayor said the municipality must deal with the consequences of losing a major power consumer under the regulations. He said the town will now seek new projects to utilize the excess energy capacity.

The situation highlights how Bitcoin mining can help reduce electricity costs by distributing grid expenses to a larger customer base. Bitcoin mine’s continued operation would have prevented the rate spike for citizens.

The incident has fueled debate in Norway about imposing restrictions on energy-intensive mining. This could force miners to relocate operations abroad and can further lead to an increase in prices for residents.