Stability and Taxes: Could Bitcoin Be a Replacement for Gold?

Given that the design of bitcoin’s peer-to-peer system was partly inspired by gold, it’s not a surprise that many bitcoin enthusiasts are also fans of the precious metal.

Both gold and bitcoin are scarce commodities used as stores of value by those who might be distrustful of fiat currencies.

The bitcoin community has long been interested in courting gold users – Ripple, for example, recently introduced gold trading to its platform. Even so, gold enthusiasts have not always been bitcoin champions. Some even go so far as to vocally oppose bitcoin as an investment vehicle.

Schiff’s stance

One notable gold enthusiast and bitcoin skeptic is Peter Schiff, whose precious metals company Euro Pacific Precious Metals accepts bitcoin payments for gold. Schiff has continued to speak out about what he feels is the lack of long-term potential for bitcoin.

He told CoinDesk in May:

“I still don’t feel that any of these digital currencies are likely to survive long term.”

Schiff isn’t alone in his belief, and he doesn’t think his anti-bitcoin stance hurts his company’s chances finding customers in the market for converting BTC into gold market.

Euro Pacific’s main selling point, according to Schiff, is that bitcoin investors can unload some of the digital currency for gold in case of a precipitous price drop.

The radio host added:

“What if it goes down to $100 or lower? Maybe it will. People can take some risk off the table by buying some gold or silver.”

It remains to be seen whether Schiff will be right or wrong in the end. That’s why it is important to compare bitcoin and gold in terms of price stability and taxation in an attempt to showcase how bitcoin could surpass gold as a popular investment.

Stability issues

It’s important to establish why bitcoin users believe the digital currency could take the place of gold in the global market.

One of the main reasons is because some see bitcoin as an investment without the common pain points associated with gold. In addition, significant investment capital pouring into the bitcoin market could make it more valuable than gold.

The high-water mark for those who share this value belief took place on 29th November, when the price of bitcoin on then-operational Mt Gox exchange reached a high of $1,242, trading two cents above gold’s $1,241.98 at the time.

Gold and BTC prices were at similar levels at the end of 2013. Source: George Leong

That price similarity was short lived, however. Soon after the start of 2014, bitcoin’s price fell due to uncertainty in the Chinese market  – along with the collapse of Mt Gox.

Despite a brief correlation in price, high volatility is the reason some still think that most gold bugs don’t believe in bitcoin as an investment.

Bitcoin prices this year. Source: CoinDesk

Gold prices fluctuate too, but not as much as bitcoin has this year. BTC has seen an over 62% drop in 2014 after hitting a high of $951.39 in early January down to $360.84 in April.

Gold prices this year. Data from Quandl.

Despite fears of instability, Timothy Coles, a gold investor who is selling his Canadian gold mine that generates $1m annually for BTC, told CoinDesk he thinks the decentralized currency is less susceptible to the whims of banking forces.

Coles said:

“People that have gold really have no control over the direction that [it] goes.”

Gold, bitcoin and taxes

Convincing gold enthusiasts that bitcoin could prevail long term requires rethinking of long-held beliefs. Many investors in scarce metals, for example, believe no matter what may happen in terms of the economic realities, the scarcity of gold will continue to hold its value.

Michael Deblis, a tax attorney who specializes in gold investments, noted that investors to turn to gold given its history of security. He said:

“Many taxpayers store gold in private accounts offshore in many different countries. There is proliferation [of that] in recent years because of uncertain global economy.”

Bitcoin also has an advantage in that its US tax status is currently more favorable than holding gold in offshore accounts.

In 2013, the Financial Crimes Enforcement Network (FinCEN) established a new form that taxpayers with financial accounts outside of the US must submit to the IRS. It’s called a report of Foreign Bank and Financial Accounts, or FBAR – with rules that require reporting gold holdings.

This, along with the Foreign Account Tax Compliance Act, or FACTA, overseas reporting requirements are one likely influencer for foreign-residing Americans to increasingly give up passports – and US citizenship. 

Source: Bloomberg

This makes bitcoin advantageous, at least for the time being. Deblis said a recent conference call held by the IRS confirmed there were no reporting requirements for bitcoin on 2013’s FBAR.

However, the agency is reexamining virtual currencies, meaning there could be some changes to that in the future.

In the end

Anyone who has been watching the bitcoin markets since the demise of Mt. Gox has probably seen more stability than perhaps ever before.

Yet relatively shallow bitcoin order books on various exchanges could still pose a problem if large buyers or sellers want to make waves in the market.

Many large bitcoin investors, however, use more institutional-grade vehicles for the bitcoin, including companies like Vaurum and SecondMarket. There are also new tools coming out to help hedge against volatility – Coinapault’s Locks is an example of this – and there will likely be more complex instruments available to investors in the future.

The tax issue for bitcoin is still evolving. The IRS has ruled it property for now, which has been applauded by investors and other experts in digital payments. The ruling as it stands can be interpreted as bitcoin being digital gold, and gold analog bitcoin.

Based on tax attorney Deblis’ understanding, it’s still an iterative process for the IRS. But he believes that the IRS property designation for BTC should stand. He added:

“I think a very compelling argument can be made that [bitcoin] is so distinct from any type of a typical banking situation that it is property and should not be treated analogous to money that is deposited in financial institutions.”

Gold bars image via Shutterstock