What if everything you knew about money was turned on its head? What if the U.S. dollars you carry in your wallet weren’t actually the currency of choice in your community?

That’s what a Philadelphia nonprofit aims to find out. Resources for Human Development, or RHD, has introduced a different kind of currency. It’s called Equal Dollars.

Equal Dollars Community Currency comes in 1, 5, 10 & 20 denominations. Maggie Kuhn is on the $1 bill: she is most famous as the founder of the Gray Panthers. The same face graces the remaining denominations: Alain LeRoy Locke, a Philadelphia native, best known as the father of the Harlem Renaissance and the first black Rhodes Scholar.

The idea is simple: Equal Dollars are a local currency that can be earned and traded within the community. In Philadelphia, Equal Dollars are generally earned by volunteering to support the existing nonprofit: volunteers receive 25 Equal Dollars for between one and four hours of work. The money can be used to make purchases at local businesses of items like food, clothing, and even batting cages. So far, approximately 300 individuals and 150 businesses use Equal Dollars in the Philadelphia area.

Philadelphia isn’t the only community experimenting with this idea. Other areas, like the Berkshire area of Massachusetts, have a similar currency (theirs is called BerkShares, not to be confused with Buffett’s Berkshire).

So what’s the big draw? One reason to embrace local currency, according to John Poling, co-founder of Cascadia Hour Exchange in Portland, Ore., is worry over an uncertain economic future. He said about the concept that “[t]he economy is in trouble and people don’t trust the Federal Reserve and they don’t trust the government, so this is somewhere they can turn, and somewhere they can still do business if the banks close.”

Local currency also reportedly circulates faster and helps promote the “buy local” trend. RHD claims that it also “empowers and enriches communities by giving value to unused assets that are undervalued or no longer have value in the national US Dollar economy.”

And no, it’s not illegal. There’s nothing in the U.S. Constitution that bans private institutions or individuals from issuing paper money: the only real prohibitions are those on coins and those on currencies issued by the individual states. There are some restrictions, of course, such as that alternative currency can’t look like federal money (hence the appearance of Kuhn and Locke on the Equal Dollars).

But what about how it fits inside our existing economy? It doesn’t matter whether you’re paid in euros, rupees, Bitcoin, or Equal Dollars, compensation for services equals income. And income is taxable. That means that the exchange of local currency – including Equal Dollars – for “volunteering” or working produces taxable income (it also includes barter). Bob Fishman, the CEO of RHD, should know more than most: he is paid partially in equal dollars. He says, about the arrangement, “We have pegged it to the U.S. dollar at 80 cents on the dollar. So I pay taxes on the equivalent of 80 cents on the dollar value.”

But is he an outlier? The exchange of Equal Dollars is a $2.5 million operation, according to RHD. BerkShares claims that it circulated over one million BerkShares circulated in the first nine months of operation and over 2.7 million to date (roughly pegged at $.95 U.S. per BerkShare). Ithaca HOURS, touted as the oldest local currency in the country, currently has over $100,000 in circulation.

This means that potentially millions of dollars in local and community currencies are trading inside the U.S. And while almost all of the local and community currency web sites (and I read a lot of them) include some instruction on claiming their use for income tax purposes, how much is actually being reported for income tax purposes?

If I had to guess, I’d say a fraction. Not because I think that those who use it are deliberately avoiding income tax but because the system, meant to be more simple than using federal currency, necessarily detaches itself from a “regular” currency. Taxpayers think of it differently and think that alternative rules apply (such as the erroneous notion that bartering isn’t a taxable transaction). In many cases, there are no tax forms being issued, no receipts handed out, and no “paychecks” being cut. Like the barter economy, the informal nature of these currencies can make keeping track of exchanges and valuation difficult and otherwise confusing for taxpayers.

We’ve seen the same kinds of initial challenges with respect to Linden Dollars (from Second Life) and Bitcoin (digital currency). While these types of currencies have markedly different implementations, they raise similar questions about how the IRS may treat alternative currencies as a whole.

We know that alternative currencies are definitely on the IRS’ radar following the government shutdown of Liberty Reserve in May 2013. Liberty Reserve, an offshore alternative currency exchange – which handled more than six billion dollars during its brief run – was able to exploit the key advantage of using its own currency (anonymity) to an economic underground. No identifying data, no forms W-2 or other tax documents made it easy to launder money and evade taxes, a fact that didn’t go unnoticed.

This isn’t to say that Equal Dollars currency is the same as Liberty Reserve. I understand that the two couldn’t be more different when it comes to audience, community, and goals. But the notion of alternative currencies is the same. And when it comes to IRS, the tax implications are likewise, the same. As public interest in these kinds of alternative currencies – whether for community growth or international businesses – appears to grow, expect the IRS to have increased interest, too.

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Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

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