Legal Tender laws

I’m trying to understand what it means for states to pass a law making gold and silver coins legal tender, as is allowed by the Constitution. Most of the articles I have found on this make no sense. It seems to me that the way it ought to work is that merchants may voluntarily offer goods and services priced in ounces of gold or silver, and people may pay for such goods and services with approved gold and silver coins (such as those coins minted by the U.S. government which have both defined weights of gold or silver and face values denominated in dollars), WITHOUT any requirement to figure out how many “dollars” were involved in the transaction for tax purposes. No one would be forced to use gold or silver because no one would be forced to do business with such a merchant, but the state government would need to accept gold or silver as payment of sales taxes on such transactions, or of state income taxes from the person who received the coins but never converted them to dollars. Furthermore, a fluctuating exchange rate between the bullion and the dollar could not be used to require payment of capital gains taxes.

If a state wants to do this for transactions between people in the state, and is willing to accept taxes in bullion for transactions or income denominated in gold or silver ounces, but anyone who wants to do everything in dollars can still do so, this appears to be permitted by the constitution, because otherwise I cannot imagine what could be meant by the constitutional implication that states may “make … gold and silver Coin a Tender in Payment of Debts”. (The Constitution actually states this negatively, that “No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts;” but the clear implication is that gold and silver Coin are OK as long as the state didn’t coin the Money itself but used Federally issued or approved coinage.)

But what I don’t understand is how this works for Federal income tax. The Federal government can’t do a sales tax, but the 16th Amendment says “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” and that is not limited to dollar-denominated income.

Before we went off the gold standard this was a non-issue because your receipts in gold and silver coins were always exchangeable into dollars at a fixed rate; afterwards, it was a non-issue because although states could have made gold and silver coins legal tender, they didn’t until Utah passed such a law in 2011.

Now, however, there is a problem because your federal tax rate is progressive, and this nonlinearity means that you can’t simply be taxed at a given rate for both your gold and silver income and your dollar income. There would need to be a formula that figured out the rate based on how much gold, how much silver, and how many dollars you earned, and then told you how many dollars you owed Uncle Sam, or how many Silver Eagles you owed, or whatever.

How the heck is this supposed to work? If I move to Utah and provide a service for someone in return for 20 one-ounce U.S. Silver Eagle bullion coins, which are denominated at one dollar each, and may be used as legal tender anywhere for a dollar (if I was insane enough to pay a tax bill of $1000 with 1000 of those coins I could), and I report that I earned 20 of those coins, does the IRS get to pick whatever exchange rate it wants to for me to convert my income to taxable dollars?

I predict that the U.S. Government will sue the state of Utah and say that the 16th amendment implicitly repealed the gold and silver tender provision of the Constitution, and that people must convert all transactions to dollars for tax purposes in the same way they are already supposed to do for “barter” transactions, using some defensible exchange rate (more easily defensible for gold and silver, which trade publicly, than for true barter).

Any legal experts out there who can clarify this?


About Polymath

Discoverable with effort
This entry was posted in Uncategorized. Bookmark the permalink.

One Response to Legal Tender laws

  1. Polymath says:

    The IRS might kill Bitcoin by requiring that all transactions be reported and converted to dollars, because barter can’t be used to avoid taxes. But they can’t do that to gold because legal tender exchange is not barter.

    Even if my state doesn’t pass a law making gold and silver legal tender, maybe I could sell my services offering a 96% rebate for silver coin in the same way that some merchants offer rebates for cash over credit — instead of giving me $1000, someone could give me $40 face value of silver eagles. (Just kidding, Mr. IRS-agent-reading-this….)

    If any readers use two currencies in their own countries, for example Euros and Romanian Lei, how are income taxes handled when someone has income in both currencies?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s