Sure. But the government can still insist that all transactions paid in BitCoin are subject to a sales tax, which is payable only in legal tender (not BitCoin).

Money is whatever the market participants agree on, and laws are whatever the government agrees on.

It requires cheap trackability to tax.

Of course, BitCoins are easily trackable, thus doomed. It was possible, though, to design them without this property, ensuring that costs of tracking offset the potential tax gains.

EDIT: It would be fun to consider the arbitrage opportunities rendered possible by such sales tax.

My understanding is that it's easy to track the transfer of bitcoins to accounts, but very difficult (impossible) to figure out who is behind an account unless they choose to reveal their identity. Since accounts can be generated on a whim, and with no identification, the upshot is that taxation would be unenforceable.

They do not think so[1]. It is easier to fail than with the old-fashioned money, given that all the transactions are publicly logged.

http://www.bitcoin.org/wiki/doku.php?id=anonymity