US Government Embraces Bitcoin in Hearing on Virtual Currency

Daniel_Stuckey writes "Congress held its first-ever hearing on virtual currencies this afternoon, and it may have been the best PR boost bitcoin's had yet. The tone at the hearing held before the Senate Homeland Security and Government Affairs Committee was overwhelmingly positive as the panel weighed the risks of the technology that grew out of the criminal underbelly of the web, with the potential economic value of the now-booming futurist money. The prevailing sentiment over the two-hour deep dive into the pros and cons of the digital coins boils down to this: We need to uphold America's position as center of technical innovation by welcoming the new currency—but that that can't be done without government safeguards and regulations." SonicSpike wrote in with a link to another report in Bloomberg. The Federal Reserve has no plans to regulate Bitcoin (lacking regulatory authority), but the SEC chair wrote "Regardless of whether an underlying virtual currency is itself a security, interests issued by entities owning virtual currencies or providing returns based on assets such as virtual currencies likely would be securities and therefore subject to our regulation."

Comments

Translation

[Anonymous Coward]

...but that that can't be done without government safeguards and regulations

What they really mean: Congress is very excited at having found something new to tax.

Re:Translation

[Anonymous Coward]

Bitcoins have always fallen under the current tax laws. There haven't been any new tax laws designed for e-currency like BTC.

Re:Translation

[mysidia]

Bitcoins have always fallen under the current tax laws. There haven't been any new tax laws designed for e-currency like BTC.

They are subject to government regulation when used as a medium of trade.

However; at other times, there is a great deal of uncertainty -- for instance, the IRS has yet to issue any guidance, as to : whether bitcoins are classified as non-tangible personal property under the tax code, or as a foreign currency/ cash-equivalent/financial instrument.

The difference could be very important to miners and people holding bitcoins as well: if the former, then mining bitcoins may be a non-taxable event, and tax liability might not be incurred, until bitcoins are exchanged, and a capital gain is realized.

On the other hand --- if classified as a currency/cash-equivalent/financial instrument, there could be immediate taxes due whenever bitcoins are mined, and also: for tax purposes, requiring anyone holding them, to mark their bitcoins to market at the end of every year, and report the gain or loss based on the change of fair market value of their bitcoins in USD.

When is the government actually right? Ever?

[roman_mir]

Think about it, governments are basically contrarian indicators to any truth or knowledge or insight. That's all I wanted to say about this: BTC can be 1,000,000 USD per coin tomorrow or it could be 10 cents. Nobody knows, there is no intrinsic value whatsoever, more currencies of this type are created all the time, that's how you have inflation in BTC (never mind that every single BTC is actually a stack of 10,000,000 coins in its own right, all of which have exactly the same intrinsic value as the 1BTC, which is to say 0).

BTC may as well be 1,000,000,000 dollars in 2 months, who knows, but without a mechanism to SHORT this coin (except by not owning it), what I mean is without a mechanism to borrow coins to sell them, there is no downward pressure at all, while so many people are enticed into this particular pyramid, feeling like they are missing out on something. The early holders of BTC may all be millionaires right now if they sell. They have everything to gain from higher prices, they won't sell and if you want to buy, you have to pay more and more.

What happens when large holders want to sell without any prior shorting in the market?

Re:When is the government actually right? Ever?

[Copid]

What prevents you from simply borrowing them and selling them? That seems like an operation that should be completely doable with any good that is traded as freely as bitcoin.

Re:When is the government actually right? Ever?

[triclipse]

Like many people, you fail see that Bitcoin does have an intrinsic value: it is a useful medium of exchange. There is a predictable inflationary curve, it is impossible to counterfeit, and there is a low transaction cost.

It's usefulness as a medium of exchange is the same as it being useful for another purpose (such as copper's use as a conductor).

Re:When is the government actually right? Ever?

[cykros]

The exchanges I know of thus far provide no shorts yet, but Kraken has the code laid for it (they're brand new and are waiting for volume to increase before they add that along with some other advanced trade options). And yes, this would add market stability, which is part of the reason they're adding it.

Unfortunately, they're only available in a few states as of yet. The regulations in the US that apply to them unfortunately are on a state by state basis, and have significantly slowed the rollout of the exchange (unlike some of the prior exchanges that's gone up, they're A) operating in the US and B) being now scrutinized enough to really need to be fully compliant).

Re:When is the government actually right? Ever?

[Solandri]

Like many people, you fail see that Bitcoin does have an intrinsic value: it is a useful medium of exchange. There is a predictable inflationary curve,

There is a predictable deflationary curve if you want to think of it as a currency - it is consistently going up in value. That makes it a terrible medium of exchange, because it encourages people to shove it under the mattress and wait for its value to go up instead of using it to get real productive work done. A good medium of exchange encourages you to go out and do something useful with it, thus encouraging more economic activity, and increasing the productivity of the people using it. As long as bitcoins' value is going up, it is a speculative investment, not a medium of exchange.

The trick to getting a currency to work, and the reason pretty much every developed country has switched to a fiat currency, is to keep the currency's value relatively steady despite the growth of your country's economy. If your currency's value goes up over the long term, it encourages hoarding and discourages productive economic activity. With a fiat currency it is easy to maintain this balance - print more money as your economy grows. With a currency based on a fixed resource (whether it be gold or bitcoins), this only happens if by sheer luck the rate of mining new gold/bitcoins matches the rate the economy is growing. If the mining rate does not keep up with economic growth, you get deflation and people will try to hoard the currency as a method of getting rich, instead of spending it or investing it to do actual productive work.

Re:When is the government actually right? Ever?

[triclipse]

There is a predictable deflationary curve if you want to think of it as a currency - it is consistently going up in value.

You conflate two different concepts. There is no doubt that the number of Bitcoins is increasing on a predictable curve - by definition that is an "inflation" of the currency. Do not confuse that with a rise in the purchasing power of the currency and the consequent drop in the price of goods and services as priced in BTC.

But you are right that it is also deflationary, just not in the way in which you think. It is my understanding that Bitcoins can be irretrievably lost. Eventually, after all the Bitcoins have been mined, the number of Bitcoins in existence will start to fall (in other words, the currency will deflate, however slightly).

If your currency's value goes up over the long term, it encourages hoarding and discourages productive economic activity.

It's hard to believe that people actually think this way, but a century of central banking propaganda has had its intended effect.

Though certainly true that rapid fluctuations in a currency's value make it inconvenient as a medium of exchange (the problem with BTC right now), a rise in the value of a currency rewards savers and increases the pool of savings available for investment in productive economic activity at lower interest rates. An endlessly inflated fiat currency has the opposite effect: it encourages malinvestment in unproductive economic activity (also known as "bubbles" - e.g., internet stocks and real estate), punishing savers and rewarding debtors. Though interest rates can be kept artificially low for a time, eventually either interest rates must rise or the value of the currency must fall (or even both).

Re:When is the government actually right? Ever?

[buck-yar]

Or campbx.com...

Re:When is the government actually right? Ever?

[ibwolf]

You are forgetting another deflationary pressure on bitcoin; increased adoption. As more people want to use bitcoins the demand for them goes up. Demand goes up, so does the price of bitcoins and thus the commodities prices expressed in bitcoins go down. Deflation.

Given how little bitcoins are actually used today this is a very significant hurdle to more widespread use.

Two things glossed over in the summary

[Derec01]

From watching a bit of the C-SPAN coverage, I found it interesting to note that several of the witnesses from law enforcement effectively stated that:

1.) Current regulations had not hampered their ability to pursue criminals
2.) They saw more danger from centralized currency systems based in fringe countries than from "decentralized currencies such as Bitcoin"

Re:Oh look!

[Anonymous Coward]

The fact that you think Bitcoin is a Ponzi scheme shows just how little you know about the currency.

That explains the spike

[gman003]

So that's why BTC jumped up to $900 today, after opening around $500. I bet some speculators made a ton of cash that way.

Re:That explains the spike

[Seumas]

Despite the flood of the Bitcoin Defense Force, I still purport that Bitcoin is what it clearly was from day one, back when the presentation on what it is and how to use it on their website made it look like one of those scummy scams that you had over a decade ago. You know, the "we pay you to run calculations on your PC!". Run their application on your PC 24x7 and they'll (maybe) pay you a few pennies a month. They were absurd and that Bitcoin chose to present itself in such a similar way as to give off "wait, is this some goofy scam?" way from day one was very telling.

Anyway, I have one point and one question to pose:

Question: If the government regulates, controls, monitors, tracks, and taxes bitcoin, what is the benefit of bitcoin, anymore?

Comment: For the price of Bitcoin to really mean anything, you have to be able to exchange it for local currency that you can use to actually buy things with (you know, unless you want to use your one bitcoin to buy $600 worth of shampoo from the online version of a shitty dollar-store or pay your webhost online). To do that, you have to sell them. Now, take a look at the spread on Bitcoin. Seriously, look how wide that spread is. Makes it pretty clear what the game is, doesn't it?

Further, governments have been pushing for the eradication of hard currency for quite awhile. They may just see Bitcoin as something they can usurp to push for the whole "cashless society" bullshit.

Re:That explains the spike

[VortexCortex]

Question: If the government regulates, controls, monitors, tracks, and taxes bitcoin, what is the benefit of bitcoin, anymore?

Answer: 'Controls' is the operative word there. Right now they control the dollar -- Well, actually a non-federal owned Federal Reserve does. Would you rather be paid in IOUS redeemable at the company store, or have a real currency? The dollar is the IOU, they can print as much as they want. The same isn't true of bitcoin. The other benefit is decentralized digital transacitons without the high price-fixed cost of wire transfers. True cash exists. However, I can't throw it half way around the planet, nor can I send cash by mail.

Comment: For the price of Bitcoin to really mean anything, you have to be able to exchange it for local currency

Ignorance: Blissfully believing that the price of stock or the dollar really mean anything; It's the exchange rate for GOODS AND SERVICES you fool. These can be transacted with bitcoin or dollars. Except with bitcoin I can exchange them for stuff not in the company store.

Re:That explains the spike

[jd]

Have to say you make excellent points. It's why I avoided even looking at bitcoin for the longest time. (Early on, the value was less than the cost of the electricity and as the computations were only going to get harder, the likelihood of benefits was nil. It didn't help that something for nothing often ends badly for the people who think they're paying nothing.)

Really, for a good virtual currency, you need it pre-generated and beyond the ability of computers in the next 30-40 years to potentially break. 150-200 years would be ideal. That isn't bitcoin. Don't get me wrong, bitcoin looks less vulnerable to counterfeiting than regular currencies, but I remain unconvinced that it will prove strong over the lifetime of currencies. When currency lifetimes are measured in centuries, knowing something was strong last week isn't really good enough.

(I can't say the US decision thrills me, knowing that the same people applauding bitcoin have interfered with crypto development.)

What we have right now is hyperinflation due to rampant speculation. A few will get rich quick, a lot will get poor even quicker when the bubble bursts. We've seen, what, 800%, 900% inflation this year? Competing with Zimbabwe? This isn't remotely sustainable, especially as everyone and their pet dog can run a bitcoin miner and cash out via one of the ATMs or an exchange service.

We've also now seen cases of virtual bank robberies, with owners of online wallet services cutting and running. Yes, that happens with physical banks too, but all that tells me is that a lot of old problems remain, a lot of new problems are added, and still no sign of actual benefits.

I want a virtual currency that works. Mondo experimented with electronic cash in the late 80s, early 90s, where you had smart cards you could actually use in real stores to make payments without going via any bank. It was an interesting system, it used a real currency rather than a virtual one but that's immaterial as it could have used anything. The fact is, they had a working system for utilizing electronic money without involving central systems. It should be very easy to do better today and have more places adopt it.

Combine that with a currency that isn't scattered at random on some mathematical version of a sidewalk (pavement in the UK), and you'll have something that really does impress for all the right reasons.

Re:That explains the spike

[jd]

First, not really. Bitcoin is only usable because those IOUs exist. (Well, they're not really IOUs, since the sum value of hard currency will always equal the sum value of what they're pegged against. A floating currency is pegged against the nation. Print all the hard currency you like, the value per unit will drop until equilibrium is reached. They are shares, just like any other, and are priced by the market just like any other.)

Because the sum of the hard currency ALWAYS equals the sum of the goods and services available, a virtual currency for goods and services cannot have value if the hard currency has no value, since they value precisely the same thing.

Can bitcoin actually buy goods and services, though? One pizza place is a start, but not a very exciting one. Mondo started with the entire town of Swansea and still didn't get enough momentum going. The only way to currently use bitcoins for anything* is to convert them at places like MtGox for hard currency.

*Anything not pizza. Or drugs. I suppose I should include that, since there are bound to be people wanting to recreate the Excel flight simulator effect.

Re: That explains the spike

[Anonymous Coward]

The British pound. Around 400 years so far.

Re:That explains the spike

[triclipse]

Print all the hard currency you like, the value per unit will drop until equilibrium is reached.

.

I don't know what you mean by a "hard currency" but government issued currency anywhere in the world is pegged against anything except, in some circumstances, other government issued currencies.

No equilibrium is ever reached by endless "printing" (I know what you mean) of a currency - eventually the currency collapses through hyperinflationary price increases.

Re: That explains the spike

[triclipse]

Just calling it the same name does not mean it is the same currency.

The British Pound has taken many forms over those 400 years. Initally pegged to gold, then to silver, then floating freely, then pegged to gold again, then floating freely to finance WWI, then pegged to the US dollar under Bretton Woods (which in turn was pegged to gold internationally) and now it floats freely again like any other fiat currency.

Re:Oh look!

[aaronb1138]

A few really simple reasons the government would be in favor of Bitcoin:
1) Gain control early.
2) Every transaction leaves a trace. The idea that Bitcoin is anonymous is a bit of bullshit. Yes, right now the exchanges keep one hand from knowing the other. This is easily changed.
3) In aggregate, it's impossible to trace for a non-government entity. This means slush fund spending woohoo time.
4) Politicians have figured out that the extreme anti-social end of the internet from which Bitcoin has gained its popularity are a bunch of socially inept jack offs. They know these people have poor impulse control and too much intellect, but are easily swayed by marginal amounts of lip service.

Huh

[umdesch4]

I guess I missed the happy, joyous part then. I watched the first hour and 20-some-odd minutes of this hearing, and if I had taken a drink every time they said "child pornography", I would be in the hospital now.

Kiss of death.

[Anonymous Coward]

Ha. Now the libertarians are going to abandon it wholesale.
No fun when the big bad gubmint likes your freedomcoins.

Re:Kiss of death.

[Jane Q. Public]

"Ha. Now the libertarians are going to abandon it wholesale.
No fun when the big bad gubmint likes your freedomcoins."

Nonsense. It has nothing to do with what the government likes. It has everything to do with whether, and how, government "regulates" it.

Just watch. Somebody in government will attempt to regulate it in a way that is fundamentally at odds with the mathematics of how Bitcoin works. It's almost inevitable.

Like, just for example: trying to legislate a fixed exchange rate for dollars. (Just an example. I doubt they'd be stupid enough to do that exact thing. But you never know.)

Re:Kiss of death.

[ThatsMyNick]

Ha. Now the libertarians are going to abandon it wholesale.
No fun when the big bad gubmint likes your freedomcoins.

Nah, unless the government can start printing bitcoins, libertarians who liked bitcoins (I dont know if they did), will continue to like it. It is still, in your words freedomcoins.

Great.

[scottbomb]

Because everything else our glorious government tries to control turns to gold.

Re:Oh look!

[firex726]

Downside though is the extreme volatility of them.

No one is going to convert their millions in a slush fund into bitcoins if it'll mean that the value will spike and dip on daily basis. Financial security means confidence in a currencies value.

Now for some legit exchanges

[Animats]

The problem with Bitcoin now is that it's being used mostly for speculation, not for trade. You can't price anything in Bitcoins when the price changes 30% in one day. If you accept Bitcoins for anything that doesn't have a huge markup, you can get clobbered by the price fluctuation before you get the payment converted.

Worse, the "exchanges" are very, very flaky. Over half of the Bitcoin exchanges have gone bust. Mt. Gox hasn't paid out US dollars since August, large euro payments seem to be randomly delayed, and some days customers can't get Bitcoins out. Coinbase, which is a dealer, not an exchange (you're buying and selling to and from them) will sometimes drop out of the market because they can't buy or sell Bitcoins (and actually get the funds delivered) on some other exchange. Not one Bitcoin exchange is publicly audited or insured, yet they hold customer funds.

Tradehill was going to be the "legitimate Bitcoin exchange". They went bust. Another exchange in China just disappeared last week, with the customer money. A solid exchange, registered as a broker/dealer in some reasonably legit country, would be a big step forward.

Re:Now for some legit exchanges

[Anonymous Coward]

Which is where paypal comes in if they are smart. If Paypal manages the red tape to become the defacto bitcoin broker, then they will have cemented their position as internet payment central. If they neglect to fill this role: they will fade in to obsolescence. Dethroned by a superior technology.

Anyone in politics should absoutely love this!

[Kaz Kylheku]

Bribes, prostitutes, extravagance ... all require anonymous, untraceable forms of money.

If politicians didn't require it, governments would have banned cash long ago.

Re:Anyone in politics should absoutely love this!

[_merlin]

Bitcoin is far more traceable than cash - each coin keeps its entire transaction history. Silk Road tried to do something about that with the way it would slice up all the payments and randomly assign them, so the net result was correct but it was unlikely (much of) your bitcoin went to the actual vendor you bought from. You're unlikely to have this kind of protection at a point of sale, so you're far more anonymous paying that hooker with banknotes.

Re:Anyone in politics should absoutely love this!

[cykros]

A transaction history isn't as useful as it necessarily sounds. I use a $20 to buy scratch tickets at a convenience store, someone else cashes in their tickets, ends up with my $20, and then subsequently uses it to buy crack in a sting operation, and they see that I was formerly in possession of that $20. So? At most, the concern here is that it may get you some unwanted attention, but it's hardly solid evidence if you have the thought to just move it between a wallets on tor exit nodes. Not to mention that "Satoshi Square Meetups" happen in a variety of cities around the world, where people meet in person to relatively anonymously buy and sell bitcoin without going through an exchange at all.

So yes, bitcoin is quite traceable. That doesn't necessarily mean it can't be used as a method of exchange with fairly solid privacy when that is one's planned for goal.

Re:Anyone in politics should absoutely love this!

[_merlin]

But if you're worried about your wife finding out you're frequenting the hookers, the only thing she needs to find is the wallet the 'coin was in immediately before it ended up in the hooker's/brothel's wallet. She just needs to see a (you,hooker) sequence. It doesn't matter where the 'coin goes after that, and the hookers could easily be keeping all the information on which wallets they were paid from before they transfer the 'coins onwards. I'll keep paying for hookers with cash, thank you very much.

Re:Anyone in politics should absoutely love this!

[James McGuigan]

This could be solved by a "paypal" like anonymous bitcoin transfer/laundering service.

You make your payment to the transfer service, and they make payment to the hooker using a random selection of coins from their collective "pool". There could be a few obfuscating transfers in the middle of the process, and possibly an apparently "respectable name" as the payment beneficiary. The transfer service would charge a commission of course.

All the wife/government would be able to trace is that payment was made to a known anonymous bitcoin transfer service... which still leaves the question of what are you hiding?

Of course you could always create a special one time throwaway bitcoin wallet for suspicious purchases. Do It Yourself Virtualized Pimping.

Re:Anyone in politics should absoutely love this!

[BitZtream]

When they see the very next transaction after you was by Silk Road ... its pretty obvious what happened. Plenty enough to take law enforcement to the next level and get a warrant.

Its already been demonstrated to be useful for building profiles of people. Collect enough hashes and transactions and you can start attaching hashes to actual names and faces. All easy to do, especially for the government.

Re:Oh look!

[triclipse]

... or what a Ponzi scheme is.

Re:Oh look!

[Anonymous Coward]

embrace extend extinguish

Re:What's the point of Bitcoin if this happens?

[Anonymous Coward]

Nice strawman you got there.
Find anyone with a clue about how bitcoin works (no, that does not include tech "journalists") claiming it's anonymous.
Oh, everyone says it's a pseudonymous public ledger? Who would've thunk...

Re:eco-generation

[N3x)(]

Not everybody who uses bitcoin mines bitcoin. To be a profitable miner nowadays you need several thousands worth of hardware. Just holding bitcoin doesn't consume any electricity, in fact you can hold bitcoin without a computer. The bitcoin ecology has shifted from an everybody who participates helps secure the network to more of a server-client relationship. As long as there are several independent mining coalitions bitcoin as system is still secure.

Decentralized exchanges will replace centralized

[elucido]

And that will eventually replace everything else.

It's hardly used for trade at all

[Sycraft-fu]

Not only is it mostly speculation, but even the times when people claim it is being used for trade, like the Silk Road, it really isn't, it is being used to launder money. It wasn't actually being used because it is an amazing currency, but rather because people believed it was a way to anonymously buy illicit goods, ie launder money to pay for them.

They only legit trade uses I've seen quoted have been totally worthless: Sites that will exchange bitcoins for gift cards at places like Amazon, with a 10% or more markup (when those same sites sell gift cards with a 0% markup using standard currency).

As you say, the speculation has to go from the market if it is ever to be considered a currency. While currencies do fluctuate, they don't move as much in a year as bitcoin does in a day.

Re:Criminal Underbelly of the Web?

[jcr]

Technically, the current "US dollar" came out of the criminal underbelly of Wall Street.

-jcr

Re:Oh look!

[data2]

It really depends on the amount of invested (or converted) money. The ups and downs are a symptom of the poor market depth of bitcoin. My real problem with it is that I don't see the market depth becoming deeper any time soon with the deflationary properties of bitcoin.

Re:What's the point of Bitcoin if this happens?

[Anonymous Coward]

What is left if these are no longer credible advantages?

A new coin will be born?

Ash nazg durbatulûk

Embracing Bitcoin, are they?

[InsightfulPlusTwo]

From the summary: US Government Embraces Bitcoin in Hearing on Virtual Currency

So glad that they are embracing Bitcoin. However, that reminds me of a quotation. From Wikipedia:

In a famous exchange with John Montagu, 4th Earl of Sandwich, ... the latter exclaimed, "Sir, I do not know whether you will die on the gallows or of the pox," Wilkes is reported to have replied, "That depends, my lord, on whether I embrace your lordship's principles or your mistress."

Re:bit bubble?

[vikingpower]

currencies don't and can't exist in a vacuum outside the framework of rule of law with zero transparency and accountability

Oh yes they can. Was the case for centuries and centuries during the Roman Republic. Any coin would be traded on the basis of the instantaneous value of its gold, silver or copper part. If you wished to pay in, say, Greek statera or Seleucid Antiochian gold coins, the city-state in Greece or the Seleucid empire had no say in and no overview over the transaction. It was a private deal between a private person ( you ) and some private merchant. Only the Roman emperors began to draw control over currency towards them, e.g. Diocletian managed to force a ( then much-needed ) devaluation of the Roman sestertius, something that would have been impossible under the Republic.

Re:It's been compromised.

[jd]

The NSA designed almost all existant crypto to be breakable by them, and from the looks of what The Guardian has been reporting, that includes SSL/TLS. The reports also make plain that they can waltz into any Windows or Mac without effort.

That means all online (or remotely accessible) wallets, online mining pools, bitcoin exchanges and bitcoin-accepting vendors are vulnerable, possibly already compromised. All bitcoin transactions via the Freedom Servers, regardless of destination, were certainly recorded and all bitcoins involved are potentially hijackable at any time.

Because the NSA weakened all crypto standards (ps: Do NOT use SHA 3 in the weaker forms, I am extremely suspicious of remarks made on the official SHA 3 mailing list regarding strength, though the stronger forms are probably ok), it is entirely within the realms of possibility that the NSA already has a complete list of all possible bitcoins. The currency depends on the maths being hard, but if it isn't, then you've nothing. They may also be capable of injecting false transactions - never trust enthusiastic supporters in US security agencies, they aren't in the business for your health.

Re:Most Obvious Conspiracy Ever.

[lxs]

Oh yes! This is a huge conspiracy based on top secret information found in the press.
Don't you know that "the Illuminati" refers to that elite cabal of people who possess a secret technique called "the Reading of the Newspapers"?

Re:Oh look!

[BitZtream]

WHY would you bother with bit coin if you're going to store it in USD. What would be the point, other than being trendy?

Not ambiguous at all

[sirwired]

This isn't a work of art or something... it's designed, from the ground up, to be a currency. Trying to argue to the IRS that a mined BitCoin isn't a cash-equivalent is not going to end well.

Re:Not ambiguous at all

[JesseMcDonald]

So far two people have responded saying that Bitcoin clearly falls under a particular section of tax law. However, you've argued—reasonably in both cases—for different sections, commodities and cash-equivalents. I think this illustrates the GP's point quite well.

Personally, I think you're both wrong. If you look into what Bitcoin really is, it's really closer to reputation than a commodity. What you really have, when all is said and done, is the agreement of other Bitcoin users that the person in possession of a particular private key controls a particular number of bitcoins. There are no actual bitcoins (not even as data), it's just a unit of account, like points in a game. Now, these "points" happen to be worth something, but only so long as everyone else plays along.

From a tax point of view, just as it would be unreasonable to tax someone on the value of their reputation, it would be unreasonable to tax them on the present value of their bitcoins. It makes much more sense to ignore bitcoins per se and treat their sale or exchange for other goods or services as regular income, with deductions for bitcoin-related expenses.