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Taxing Times: Crypto And A Redesigned Social Contract

It’s tax time again, and no doubt the American crypto community is wrestling with the complexities of filing their crypto earnings – or losses – with the IRS. On a more philosophical level, though, where do borderless virtual currencies fit within national tax regimes and the social contracts they help fund?

The Paradox of Taxing Crypto

For most people, taxation is the bluntest interface they have with their governments, and it is the essence of the social contract.

Our respective jurisdictions confer, for the benefit of our society, a series of rights and obligations upon citizens to maintain order and to establish norms by which that society conducts itself.

We all cede some degree of personal sovereignty to the society in which we live, and the social contract is enabled by our tax liabilities. Taxes fund the expenditures of a society best undertaken by that society collectively. It is far more efficient, for example, for a governing body to pave roads and create infrastructure than for individuals to carve out their own sections thereof. Taxes fund those efforts for the collective good.

In such an arrangement, however, taxes have – at least, for hundreds of years – pertained to the fiat currency issued by that relevant government and used by its citizens. How, then, do non-state issued cryptocurrencies fit into that paradigm?


The Libertarian Credentials of Cryptocurrency

Cryptocurrency has a strong libertarian pedigree and represents, for many, an evasion of state control over their money. The first bitcoin transaction, sent from the wallet controlled by Satoshi Nakamoto to Hal Finney, famously included a decrypted note:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.

Crypto enthusiasts have since referred to the message in bitcoin’s genesis block as the rationale for crypto’s semi-anarchic nature. Cryptocurrencies offer people the ability to make strictly peer-to-peer transactions, without a trusted intermediary, and certainly without the need for authorization of any governing body.

This has led to a revival of the “taxation is theft” ideology, espoused on a rather frequent basis by John McAfee (who is, ironically, running – again – for president).

People and Governments. Part 3. Freedom. — John McAfee (@officialmcafee) December 9, 2018

The Interplay Between Libertarianism, Crypto, And Tax

The ideas of both non-state issued currencies and taxation as theft are not new. Georgism, named after Henry George, was a late 19th century view that held that taxing work and productive investment was both immoral and even amounted to a form of theft (as well as being inefficient). Tax revenue, according to Georgists, should be derived solely from non-productive land.

Libertarianism is a collection of philosophical and political ideologies that espouse core principles of political freedom, personal autonomy, and voluntarism. Virtual currencies are an almost ideal digital manifestation of libertarian beliefs.

Cryptos, as private currencies, are similarly digital derivatives of non-state issued money, previously observed during the Free Banking Era in the US and in a number of other countries in the 18th and 19th centuries, during which time banks were free to issue their own currencies that were not subjected to central regulation.

Governments worldwide are grappling with the treatment of cryptocurrencies – blockchain technology’s first mass-use case – in much the same way as they did with the internet in the 1990s: haphazardly, awkwardly, and with a heavy dose of skepticism and hesitance.

The social contracts formed within the nation-state system do not lend themselves to seamless integration of borderlessness, a feature of crypto. Indeed, from DVD region codes to determining whether an internet publisher is responsible for the user-generated content it hosts, government agencies have pursued an ungainly approach to regulation of those things that lend themselves to extra-jurisdictional capacities.

Where a tax agency in one country treats crypto as property subject to capital gains tax and another country treats it as a currency (and some – paradoxically – treat it as both a gain and a property, according to whom you believe), the regulatory stances of governments toward crypto are as varied as they are incomplete.

The IRS treats a profitable trade from one cryptocurrency to another as a taxable event, while the SEC can do little more than ‘regulate through enforcement’ what is a security and what isn’t, without a great deal of clarity: and in this confusion, cryptocurrencies threaten the very nature of the social contracts citizens have formed with their governments.

To the extent cryptocurrencies undermine a regime’s grip on its citizens’ activities, they are surely certain to redefine the boundaries between the private and the public. Presumably, that will be in a positive way for those seeking more autonomy over their financial affairs.


The Benefits Of A Social Contract

In the rather grim view of Thomas Hobbes as expressed in the seminal Leviathan, the natural state of man is a violent and pessimistic one in which:

“… men live without other security, than what their own strength, and their own invention shall furnish them withall. In such condition, there is no place for Industry; because the fruit thereof is uncertain; and consequently no Culture of the Earth; no Navigation, nor use of the commodities that may be imported by Sea; no commodious Building; no Instruments of moving, and removing such things as require much force; no Knowledge of the face of the Earth; no account of Time; no Arts; no Letters; no Society; and which is worst of all, continuall feare, and danger of violent death; And the life of man, solitary, poore, nasty, brutish, and short.”Thomas Hobbes

His solution to humankind’s natural inclination toward violence as a means of survival was the formation of a society, led by a government. If crypto is to undercut that social contract of which Hobbes spoke, could it lead to the environment of which he warned? Or could his pessimism be misplaced?


Can Crypto Help Forge A New Kind Of Social Contract?

Satoshi Nakamoto himself pointed out that bitcoin would be appealing to libertarians:

“It’s very attractive to the libertarian viewpoint if we can explain it properly.”Satoshi Nakamoto

Cryptocurrencies may abrogate a government’s ability to uphold a society’s social contract, and in many respects that liberty is positive. Without the threat of government interference, one of cryptocurrency’s most promising qualities – the ability to redefine and democratize financial norms – might be realized.

Could it be that crypto leads us down a path toward a healthier social contract? One without the need for the strong arm of the law or of any government? After all, crypto’s reliance on trustless transactions confers more power to notions of consensus than the coercive forces of the state.

If democracy is truly the product of the consensus of the majority, then surely borderless currencies are better equipped than any nation-state or governing body to deliver that?

Borderless and decentralized cryptocurrencies promise an entirely redefined social contract, one based on rational people acting in their own self-interest, but all bound by the rules of consensus.

The natural agitation between a state’s need to exercise control, and its citizens’ yearning for freedom, may find itself smoothed over by the ability of virtual assets to span borders, cultures, and norms – ushering in a trans-national social contract that no longer relies on coercion to remain glued together.

By the way, you have until about 5pm to get that tax return postmarked. Good luck.

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