By Joe Jarvis
In 1791, brand new America was in debt.
Successfully revolting against Great Britain was expensive. To pay back the financiers of the revolution, Alexander Hamilton championed a tax on whiskey.
And maybe if there was enough left over the soldiers who fought would actually get paid, too…
The tax targeted western Pennsylvanians, a region known for its whiskey. It applied to both commercial and private operations. So any old Pennsylvanian distilling on their home hearth owed DC for every gallon of spirits they produced.
I hate taxes, but the least the government can do is to make it easy to get robbed.
But the US government insisted that residents pay the tax not in whiskey, but in coin.
For big commercial distilleries, this wasn’t an issue. Since they sold their whiskey anyway, they had the coin to pay the tax.
But for random Pennsylvanians who brewed whiskey as a way to preserve their grain, this was horribly oppressive. Not only would the government take a portion of their livelihood, but they would force the people to somehow come up with money to pay the tax.
But whiskey was the money for these people. They never planned to sell it. And they couldn’t compete against the big distilleries, which because of scale, had cheaper per gallon costs.
So individuals had to sell some of their whiskey for a loss in order to come up with the coin to pay the tax.
If the government had accepted the actual whiskey as payment for the tax, the injustice wouldn’t have been so intense.
And over two centuries later, the same situation is happening to Pennsylvania’s westerly neighbors.
Ohio will begin allowing businesses to pay state taxes using Bitcoin. Eventually, they will accept Bitcoin payments from individuals as well.
It is a policy started by the state treasurer, who did not seek legislative approval before enacting the policy.
And, actually, Ohio is never going to hold any Bitcoin. The payments will be processed through a company called BitPay, which accepts the Bitcoin and sends the dollar equivalent to the state.
So then why couldn’t people just cash out themselves and then pay the taxes?
Because then they would owe more taxes. And it is actually unclear if paying taxes to Ohio using Bitcoin would trigger a taxable event at the federal level.
It probably would… currently the IRS says any use of Bitcoin is like selling a security, and capital gains are owed on any increase in value since acquiring the token.
So if you bought Bitcoin at $1,000 and then bought a $10 meal with Bitcoin at $4,000, then you would owe capital gains on $7.50 of the purchase–the gain from the $2.50 that amount was originally worth when you bought it.
So here we have the same whiskey problem. You pay $1,000 in taxes to Ohio, and then owe the feds 15% of $750, the capital gain.
But say you only have Bitcoin, like the Pennsylvanians who only had whiskey. Now you need to convert more Bitcoin in order to pay the tax.
But if you simply sell $112.50 worth of Bitcoin to cover the tax, this triggers another taxable event. So you have to sell an extra $12.66 to pay the tax… except that will be taxed as well…
In order to cover the $112.50 you owe the federal government for paying your state tax bill in Bitcoin, plus cover all the taxes you owe on that transaction, you need to sell an additional $132.50 worth of Bitcoin.
There is plenty of fair criticism of Bitcoin. But cryptocurrencies and digital tokens cannot prove themselves effective currencies if they are treated as securities.
That said, Ohio’s acceptance of Bitcoin is still a step in the right direction. But it is an almost worthless innovation given the federal government’s dominance over state governments.
This is yet another reason states should seek more autonomy from Washington DC.
Then we would see experimentation with digital currencies.
Of course, all the experiments would not lead to positive results.
And that is why we need to try these policies on smaller scales so that the consequences do not reverberate to 320 million Americans.
Independent of the feds, would Ohio’s move encourage Bitcoin millionaires to move to the state? Would this benefit the economy?
Or would the state end up in the red if the currencies they collect become worthless?
Either way, Ohioans would feel the benefits and detriments of the decision made by the government which they ostensibly control.
At least DC bureaucrats and politicians from California, Florida, and Maine wouldn’t be dictating to Ohio.
And that is the first step to a freer society, bringing the government down to more and more local levels, to give the people more control.
You can read more from Joe Jarvis at The Daily Bell.