I thought the whole rationale for taxing capital gains in the first place was that we want to discourage inefficiently frequent trading.
If you buy that rationale, then the last thing you want to do is tax unrealized gains. If you don’t buy that rationale, then why tax any gains?
Unless, of course, you’re more into thuggery than rationales….
I’ve blogged about this before, but probably less clearly than I should have. A “Why aren’t you blogging?” email from Bob Murphy inspired me to try to boil this down to a few paragraphs:
Let’s imagine a future where cryptocurrency (or more specifically Bitcoin) is widely accepted, and we have infrastructure in place that makes it very easy to exchange Bitcoin for other assets.
I’ve seen many people — both journalists and economists — suggest that in that future, Bitcoin will be quite valuable. (That is, one Bitcoin will be worth a great many dollars, or a great many Teslas.)
But it seems to me that the opposite is more likely to be true. Here’s why:
1) Both today and in that hypothetical future, if I want to send a million dollars to a guy in, say, London, and have him know with certainty, within an hour, that the transaction is irreversible, then I am definitely going to use Bitcoin.
2) Today, if I think I *might* want to send that million dollars to London sometime this week, I am going to hold a million dollars worth of Bitcoin for a while, just in case. That’s precisely because acquiring a million dollars worth of Bitcoin at the last minute is kind of complicated and I don’t want to deal with it.
3) But in that hypothetical future, I will keep my million dollars in an interest-bearing asset, and then, using that marvelous future financial infrastructure, trade the interest bearing asset for Bitcoins about ten seconds before I want to send them to London.
This means that as Bitcoins become easier to use, the demand to hold them should go down, not up, and the value of the Bitcoins themselves should go down, not up, accordingly.
Am I missing something?
