> Letter 6174– this is a soft notice informing the taxpayer that there is a likelihood that they did not report their virtual currency transactions. The notice asks them to check their return and, if necessary, file an amended return to correct the misreporting. The taxpayer is not required to respond to the notice and the IRS intends not to follow up on these notices. In short, this is information only to the taxpayer and education on how they comply.
> Letter 6174-A– this is a “not so soft notice” from the IRS. As in Letter 6174, this letter tells the taxpayer that there is potential misreporting of virtual currency transactions. However, this notices states that the IRS may follow-up with future enforcement action. Again, no response is required if the taxpayer believes that they are in compliance. Taxpayers who receive this notice should be aware that they have been put on “notice” that they have been identified as a noncompliant taxpayer for potential future enforcement.
> The last notice requires a response – Letter 6173. This notice requests a response from the taxpayer about the alleged noncompliance. The letter provides instructions on responding to the IRS. The IRS intends to follow up on these responses to determine if the taxpayer is in compliance.
The phrasing "requires a response" on Letter 6173 is a bit slippery. To be absolutely clear, if your lawyer thinks you shouldn't send a response, you don't have to. And if it's not already blindingly obvious, literally nobody should even dream of sending in a signed affidavit affirming "under penalty of perjury that they are in compliance with tax laws" without first consulting legal counsel - HN pooh-poohing about the IRS just trying to get its money notwithstanding.
> a signed affidavit affirming "under penalty of perjury that they are in compliance with tax laws"
Can you be forced to sign anything like this? I would never sign such a document out of my free will (what's the upside?). Tax law is so complicated that I wouldn't be surprised if nearly everyone is not super 100% in compliance. I mean completely independently of this particular Bitcoin issue.
Do you know that Letter 6173 makes such a request? I would guess that it's more likely it requires you to either simply acknowledge receiving the letter or to agree to something like the statement that you already had to sign to when submitting your taxes:
> Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year.
Though of course you are right that anyone should consult a professional in such a case.
Basically, these all say the same thing and aren't _that_ scary aside from the fact they are from the IRS: Amend your prior returns if you owe money. I am curious if they expect the same if you lost money.
IANAL, I'm not a tax expert, but I believe you can deduct losses when converting to/from fiat currency (US dollars). Which is where taxation would take effect.
If you invested $10k in crypto mining equipment, you can deduct that investment (over 5 years or something similar), you then successfully mine 5 coins. These coins are/were worth whatever exchange rate you could get. Until you use/exchange them, you aren't taxed. If you buy something, you need to declare the value of what you bought and pay income taxes against it. If you exchange it for currency, you need to pay taxes on that currency.
If you bought $25k worth of BTC, and it fell from $25k to $6k, then you turn it back into USD, you can take a deduction on the losses too. This is how most interactions with futures/stocks works. However the tax rates, triggers and rules are more tightly regulated than straight/regular income. If you're operating under a corporation or llc, again the rules may be different still.
Having a tax lawyer and accountant is probaly prudent if you're talking about 5+ figure transactions over a given tax year.
edit: --- based on responses below, I'm probably wrong about mined coins, and you probably have to pay taxes on the value when mined. Again, I'm not a lawyer/accountant, so if you're in a position where you're talking about a significant amount of money, get professional advice.
The IRS treats BTC as commodities like stocks, not as foreign currencies.
If you mine any coins, that is income you have to pay taxes on. Just like when my RSU stocks vest, I pay (regular income) taxes on the vested amount. It's treated as if my company gave me the money to buy these stocks I now have. Later when I sell them, I'll pay capital gains tax on the gain/loss.
Now if I buy coins, then I will only be taxed on them when I sell them.
This is also not correct. Crypto-tokens that are not securities are considered property. As such, they are not subject to wash-sale rules, while stocks are. (Not legal advice.)
Before anyone gets excited, despite being considered property, crypto-tokens are explicitly not eligible for 1031 like-kind exchanges after the latest tax bill (although it's debatable that they were allowed prior.)
As far as I know, you can still take a loss, then re-purchase at FMV, and claim the loss, even though you end up with the same assets in your portfolio.
If you trade an asset, any costs you have in the transactions are deduced (real estate agents fees deducted from house selling price, fees/commissions when buying selling stock etc) and you are only taxed for the net. I wonder if taxes from mining coins are for net gains? That is, can you deduce the electricity cost?
> IANAL, I'm not a tax expert, but I believe you can deduct losses when converting to/from fiat currency (US dollars). Which is where taxation would take effect.
You are flat out wrong. You are taxed on any income or transaction, no matter the currency used.
That's when you buy it. I'm not an accountant, but AFAIK if someone gave you stock for performing a service you would pay taxes on it at that point in time. Then if you sold it you would pay taxes on the difference in value.
I think the key might be that the IRS is viewing bitcoin as a payment for the service of mining.
As you're not a tax expert and neither am I, take my objection to this with a grain of salt, I think this is wrong though. When you have income from mining, that's income that should be reported at the market value of the coins at the time that they were income (when you received them.) AIUI they are taxed as income, and you should pay taxes for that income based on your regular (marginal) income tax rate. Once you've paid that income tax, you've established what's called a cost basis for capital gains. (This is also what you have when you have bought a coin rather than mining it. This is considered a "taxable event," even if the money you received in the exchange is never withdrawn from the exchange.)
If you buy something using your crypto asset as payment, or if you exchange them for currency, then you might also owe capital gains tax based on the difference between the cost basis, and the price/value you received for your sale. (If the price went down after your cost basis, then instead you have a loss, and so you don't owe capital gains.)
If you bought something, and the price went up between when you mined and when you made the purchase, then in addition to the income tax, and the capital gains, you will _also_ owe sales tax on the purchase, unless the seller collected the sales tax. (Although unless you are running a scheme to systematically undermine sales tax, and they have you with assets which can't be explained any other way I am not sure how they can ever prove that you owe that sales tax.)
When you are paying capital gains, the usual capital gains rules apply. If you have held the asset for longer than a year, you pay the long-term capital gains tax rate which is lower. The rules are (and this is the point where I'm talking way above my pay grade, but I think I've done my homework) first-in first-out, no like-for-like exchanges, which means if you sell some BTC and receive some ETH as payment, those are two taxable events. (The BTC sale is taxed at the capital gains rate for the USD value of BTC, and the ETH asset establishes a new cost basis at the USD price for ETH.)
If you have held the asset for less than a year before it is sold, then you pay the short-term capital gains rate. If you are not paying capital gains, and your aggregate transaction volume for the year on any given (compliant) exchange is above 10 or 20 thousand dollars, then you are very likely to be on their radar.
If you have losses over the whole year, and no corresponding gains to cancel them out fully, then you can take the excess loss against your income for a deduction in income taxes (subtract the taxable value lost from your income).
Please don't take my word for it though, I have someone that does my taxes for $200 or $300 and I use http://bitcoin.tax to extract the data from the exchange and provide them with the data in a form that they won't balk at. But you can take this as some free tax advice from someone who filed and paid their crypto taxes last year (and obv. also took the loss this year!)
>One version of the letter recently uploaded to the IRS website asks recipients who believe they have followed the law to sign a statement...
Just a word of advice to anyone who may be receiving letters like this in the future. Do not, under any circumstances, sign a statement that you have followed the law without consulting with qualified counsel first. You should know that every time you sign off on something to the federal government, if it turns out not to be true, they got you on a count of Lying to the Federal Government. (Yes, each signature is a separate count. At least that's the way our lawyers explained it to us when advising us on FDA approval for our product.) So you can easily rack up years behind bars in this situation right? There's the original forms in you return. How many times did you sign papers there? Then there's this statement that they want you to sign. That's another potential count.
What's worse, you may have made an honest mistake, and you really do believe that you are in compliance. So you go ahead and sign such a statement. Only you weren't in compliance. Now what? I hate to say this, but just don't. Don't sign it. Get everything looked over by the experts first. Maybe they can even negotiate with the IRS on your behalf if you have made a mistake.
But you don't want to be in the position of having signed something like that with honest mistakes potentially out there in your documentation.
Another word of advice: The standards of the FDA and the IRS are very different, and the FDA is used to corporations acting maliciously while limiting liability for those involved.
The IRS on the other hand with these kinds of notices is not out to get you, and I don't believe I've ever heard of someone being charged with perjury for signing an IRS document that wasn't true (and they genuinely thought it was true), especially from the perspective of a small time residential investor who is making an effort to be compliant with tax law.
I think a more sane proposition is this, if you only have a few thousand USD in crypto, you probably don't need to hire a tax lawyer or tax accountant (or both) to review your documents and compliance.
But if you're at 5 figures or above (10k USD+) then spending hundreds of dollars, up to a thousand or more, just to retain a lawyer and/or accountant could be a smart move for you to ensure that everything has been handled appropriately.
And it's not "hire a lawyer to review this one document", it's hire a lawyer and/or accountant to review your compliance with all tax laws and investment laws federal and local, and it's something you should do regardless of receiving a letter like this. If you have a lot of money in crypto and have never spoken with a lawyer or accountant about it, you should probably consider doing that sooner rather than later.
Even if you do "lie" to the IRS, and they think you have, they aren't going to have you charged for lying and put you in jail, they're just going audit you or determine you owe them money without you admitting it, then send you a bill and enforce that bill over time through wage garnishment, account levy, tax lien, etc. They would much rather tell you that you have debt and garnish your wages than lock you up.
Generally they save the courts for extremely egregious and offensive cases of intentional tax evasion (like people who use the 861 argument)
> The IRS on the other hand with these kinds of notices is not out to get you.
Citation needed. The IRS can be among the most vicious of any federal agency. Having dealt with FATCA situations with overseas Americans, Treasury is, in my experience, nobody’s friend.
The IRS is in the business of getting money for the federal government. People in federal prison don't have much in the way of income, nor do they pay much in the way of taxes. They're a net drain on the federal budget.
The IRS will generally take the most effective tack it can in getting the money it is owed. For honest mistakes, that usually means sending you a formal notice that it believes you are out of compliance and requesting that you pay them. If you pay them, all is forgiven. If you can show to their satisfaction, with supporting documentation, that you don't actually owe the money, all is forgiven. (I once got a notice that I owed $11K because of some stock sales I'd forgotten to report and education credits they didn't believe I was entitled to; after producing documentation on the cost basis of these sales, a course transcript from the educational institution, and an amended tax return, the total was reduced to $50, I enclosed a check for that, and I got a notice back that the matter was closed.) If you try to pull any funny business or argue with them and your arguments are not backed up in fact, they will viciously hound you until you pay the money that you owe.
Yeah, I've been through a similar experience, didn't file RSU income correctly one year, they thought I owed $7k or something. I could have just paid it, but the amount was large enough and the issue simple enough to be worth arguing over. Wrote back with the correct adjusted cost basis to show I already paid the taxes when I sold them (I had done this correctly in other tax returns..) and ended up getting a check from the IRS for around $100 since there were some other minor ±couple dollar irregularities in a liquidated portfolio I inherited that were in my 'favor' with a capital loss. (Odd since I used that company's online tool, so the numbers should have been identical, but who knows.)
If you pay them, they go away. Or sometimes they pay you and go away. (My first IRS letter was after my first semester of college, which was a bit disturbing since my whole income that previous year was ~$1k, but opening it revealed that I had neglected some sort of new education credit and they were giving me a small check to account for it.) My only remaining "fear" of the IRS is the scary Audit, because I know my record keeping is terrible and I don't want the anxiety of calling places and hunting down receipts or getting sworn letters from people that such-and-such checks were used for rent sharing not income/paying for services, and so I only hope that any audit could just be resolved by paying a lump sum even if with a bunch of effort that could get reduced...
True, but I think the rest of the comment does a good job of clarifying what he means... they're not (typically) out to get you for the purpose of putting the average person in jail; however, they are out to get money from you if you owe them.
Exactly. It falls in line with similar to "don't talk to the police". Just keep quiet. This applies to everything when dealing with any government agency. The government is not your friend.
People say stuff to police that's later used against them in court all the time, so I agree keeping quiet is generally good advice. You should still use your common sense though.
I have a friend who took this advice way too literally when we were 18.
I was in the car when he got pulled over for speeding once, and he refused to say a single word to the officer. He handed over his license, registration and proof of insurance, but wouldn't answer any questions.
The cop asked how him how fast he thought he was going, and my friend didn't even tell the cop that he wouldn't answer his questions. It was just the straight silent treatment. The cop was clearly getting agitated. I was begging my friend just to answer the questions, even if just say he didn't remember or something, but he refused.
Fortunately, his grandma is in the backseat and really saved the day by apologizing for her idiot grandson. My friend wound up only getting a warning thanks to his grandma, but no doubt we would have gotten a big ticket at the minimum if he kept the silent treatment up.
Another time, we both got busted for launching bottle rockets in a public park a couple weeks after the 4th of July. There were several witnesses including the people that called the cops, but once again my friend did the exact same silent treatment to the cops. I sang like a bird about my own actions while being careful not to say that my friend had also launched rockets.
Fortunately the questions were directed at both of us, and we weren't asked specifically who all was involved before my friend felt guilty that I was taking all the blame and started talking to the cops himself.
Good thing because in Ohio launching bottle rockets is an M-1 misdemeanor carrying up to a six month prison sentence. The cops could have been jerks, but instead they recommended that the prosecutor drop charges after we did some community service. Had my friend stuck with the silent treatment, I fully believe we would have been punished more severely.
Again I urge common sense. Every situation is different. Had it been someone else or somewhere else or a slightly different situation, being quiet could have been the right decision. This could be an example of white privilege, but so far in my life, I've never regretted just being honest with the cops.
You fully believe [..] and you urge common sensen.
You fully believe, but you don't know for sure what would've happened in your alternative reality. We miss a lot of details as well. For example, are you POC? What about your friend? White privilege is still real in 2019 (and I say that as someone who's whiter than white). I fully believe I got away with things in my youth someone who's POC would not have gone away with. Not just cops specific, but also community specific, neighbor specific, etc.
The point being, what might be common sense to you or me might not be common sense to any random person.
Here's a famous video [1] of a lawyer and former cop who suggest you never talk to the police. ACLU also has videos online with examples of how you may incriminate yourself even whilst you're fully innocent.
> in Ohio launching bottle rockets is an M-1 misdemeanor carrying up to a six month prison sentence
I wonder if we're thinking of the same kind of bottle rocket... like a plastic soda bottle propelled into the air by water and/or compressed air? Why is the penalty so severe?
I'm guessing you're American. It saddens me that so many of you over there seem to have this view of your own government and institutions.
Anecdote time. Having been stopped by police in the States four times (that I can recall offhand) over the years -- with a legitimate justification in each case -- my experience has been that courtesy and cooperation have served me well. On a couple of occasions when I could quite reasonably have been ticketed and fined, I have instead been sent on my way with a friendly warning to be more careful. I strongly suspect taking a strict "don't talk to the police" line would have cost me quite a bit more stress, time, and money.
As a general rule, if your sole interaction with the police is traffic enforcement (and it helps if you are white), then being courteous and honest is generally the most successful strategy. Anecdotally, aside from a few newsworthy examples, almost every traffic situation that escalates into a significant confrontation got that way because of unnecessary belligerence.
When "never talk to police" comes into play is when they are doing a criminal investigation. And even then, when to pull out the fifth amendment card depends on individual circumstances. It can definitely escalate an otherwise innocuous situation if you overuse it.
Also, try to remember that what makes the news is newsworthy for a reason.
The wording is a bit slippery. I believe that one could get into big trouble for truly not knowing they were not in compliance, but the fact that is says "who believe," to me, means, "as far as I am aware, this is true." There are a lot of undeclared assumptions in that statement, and all of those are at the cost of the person signing that statement.
Alternatively, we see politicians walking back false statements or changing stance daily because the thing they said previously was what they believed based on the facts present at the time -- and they are never held to account.
Former investment banker and President of the New York Fed, Timothy Geithner in his confirmation testimony to become Secretary of the Treasury [credibly, I would say] maintained that he had misunderstood the code and mistakenly underpaid his taxes by $34,000. If he can't understand the tax code, how can we.
At the end of the day, the IRS just wants their money.
On the other hand, IANAL, but a tax lawyer once said to me the only thing you go to jail for is hiding money. You can claim weird deductions, invent new depreciation schemes, misapply rules and all the IRS will do is say "No" and stick you with a bill. But if you're hiding income, it really upsets them.
This is why "lying to investigators" is such a bs charge.
It's incredibly easy to do what you think is the right thing but still "lie" because you didn't know/understand all the facts, implications, and details.
Always, always, always, get qualified legal/accounting counsel involved.
No, your uncle the family law attorney is not qualified.
Lies have to be knowing and wilful [1]. It shouldn't be easy to knowingly and wilfully lie about something when you don't understand all the facts, implications and details. Did you have a example in mind of someone who had been wrongfully convicted of this offence due to an innocent mistake?
Many, many situations of "lying to investigators" has been claimed to be an innocent mistake. No telling how many really were as it's 100% a judgement call of the investigators.
Until you've sat across from a pair of investigators, it's hard to guess how you'll respond to relatively simple questions.
I've run mock interview sessions for these and it's incredibly easy to trip someone up once you get them angry or get them agree to something you've purposely misstated.
It's not a judgment call of the investigators, it's a crime that you can plead not guilty to. I think the burden is on you to provide an example of someone who was actually convicted of this crime despite not having "knowingly and wilfully" lied.
Investigators - at least with the FBI, where I am familiar - don't record and are often discouraged from recording interviews. They take notes in the moment or summarize based on their memory some time after. Therefore what you said and how you meant it have gone through at least one interpretation before it makes it into any official record. And the interviewer is often not going to be the lead investigator on the case, adding another interpretation.
And that's assuming everyone is doing their best to give a complete and accurate statement+summary minimizing their own biases.
When it comes down to "knowingly and willfully" it is often a judgement call.
This is well-established legal understanding. Please read up on 302s:
This is a situation where the probability that you unintentionally violate a serious law is high, the probably of that law actually being enforced against you is low, but the consequences if it is are extremely bad.
From an expected value perspective the result has a negative sign but a small magnitude, so you avoid it whenever you can but not if doing so comes at a significant cost. But low probability events with large negative consequences are the category of thing that worries people a lot; other instances in this category are things like plane crashes, child abductions, forcible rape and terrorism. It's not strictly rational to be as afraid of them as many people are.
However, in this case there's also the consideration that the probability of the law being selectively enforced against you has a lot to do with whether the government doesn't like you, so if you're the sort of person the government (or some plausible future government) might try to stick something to, then the "low probability of enforcement" side of the equation changes and you're in entirely different territory.
And we also generally, as a pro-social activity in solidarity with those populations, might want to err on the side of encouraging everyone to behave in a way similar to what those vulnerable populations would have to, to normalize it and make that sort of selective prosecution more difficult. At least as long as we continue to have these disproportionate penalties for what are in practice honest mistakes and everyday behavior.
I interpreted it as HAVE to report, given the context of police asking you for information rather than the other way around, which seemed like a very fascist requirement.
This advice is good, but never addresses the issues of:
- cost
- impact to work
- fear of retaliation (Oh, that's illegal? Show me how that will be dealt with in ways that don't negatively impact my job/family/bank account)
This is no different from any other profit or gain. The Government isn't specifically targeting these people; it just wants them to make sure they realize it's like any other investment.
I hate that people treat currencies as an "investment". In my mind, crypto concurrency is the perfect value-store (like gold used to be), not an appreciating asset. Yet because people treat it like stocks, it behaves like stocks.
Probably, yes. But everyone else is still subject to this law. For example the UK pound may or may not go down in value in case of hard brexit, if a brit had some euros stashed and the pound crashed, they would have to pay capital gains when exchanging their euros back into pounds.
Isn't the idea of gold as a good store of value that it's price doesn't change rapidly over time, allowing you to ride out downturns by converting your money into something that can't be dragged down as quickly as other forms of investment.
Cryptocurrencies seem to offer the exact opposite experience. Wild swings in value that are extremely difficult to predict and may or may not follow other markets.
The idea, your mileage may vary, is that gold's value in, say, hamburgers may fluctuate less than fiat currency. In the strongest gold-bug case, one might argue that a loss of trust in the dollar could make an ounce of gold worth more hamburgers than it could be traded for today.
If preserving value, priced in dollars, is your only goal, holding dollars is guaranteed lossless (modulo tiny costs).
I’m not sure there can ever be a perfect value store. Because such a store is a future promise to “look after you”, but the world is so damn unpredictable! Food prices could soar, land prices too, etc. How does the perfect value store keep up or know what will happen?
The impression I get is you need to invest in things that are short term risky and long term safeish like stocks to even attempt to store value. If you look at how pensions are usually reallocated from stocks to cash as you near retirement this is a clue.
But even then who is to say the ratio of Vangard to 1 months rent or 1000 calories of nutritious food will be the same in 20 years time?
Gold hasn’t performed too well over the last few years by the way.
A die-hard indexer would suggest that, if you could, you would want to own uniform (cap-weighted) amounts of every type of asset to ensure getting exactly average performance.
It's always fun to try to convince people there is no such thing in nature as a perfect store of value.
Houses decay, land can erode or land uses can shift destroying the social value.
If your friend asks you to help him move, next week he'll return the favor, but try going back after not talking to him for thirty years and cashing that favor it.
Crypto like bitcoin is necessarily an appreciating asset because it is deflationary by its very nature. Over a long enough time period, if BTC were in fact behaving like a currency (that is, as a medium for the exchange of value, rather than a store of value) the value of BTC as expressed in exchangable goods must rise, unless the global production of goods contracts, and there is no reason to expect that to happen.
Just like any other good, there is a fluid rate of demand for money. If the supply of money is unable to increase with the demand for money, the relative value of the money increases.
This is exactly why USD is a poor store of value (it reliably depreciates by 1-3% annually) and a good currency (well-managed supply vs demand results in long-term predictability about the value of 1 USD, making it reliable to transact in).
>Crypto like bitcoin is necessarily an appreciating asset because it is deflationary by its very nature.
That assumes that the demand for cryptocurrencies remains constant. If the demand for cryptocurrencies drops faster than the deflation of the currency, then the value goes down.
Absolutely! My point is that it's ill-suited to be a currency because we know now that stable currencies need to be able to match supply to demand. Because of crypto's fixed supply, it behaves more like an asset (though it certainly need not be an appreciating asset).
Overall, I believe that a successful crypto will behave more like an asset than a currency. The failing ones are just dust.
Say I get paid 100 BTC for doing a job worth $100/BTC at the time or $10000. Now, say BTC drops to $1/BTC. I owe income tax on the $10000. Let's say I owe $2000 (20%) in taxes. However, I only have $100 now. My effective tax rate is 2000%.
This does allow for a small deduction of capital gains each year. However you can only deduct $3000 a year in capital gains. In a larger scenario, this would take decades to fully receive your total deduction.
> Here's one situation where it is very different.
Good god, no it is not different.
When the internet bubble collapsed in 2000, it literally bankrupted some people who had been compensated with stock options because of taxes. Exercising the options not only had resulted in greater income, but it caused AMT to kick in.
Moreover, some of the exercised options yielded stock that was still in lock-up due to IPO agreements. (People were anxious to start the long-term capital gains clock.) Shares plummeted even before they could be sold to pay off the taxes due.
The moral of the story is: Make sure to set aside money (liquid, USD) for taxes if you get hit with a sudden windfall. (edit addition, JumpCrisscross comment below has it right.)
> When the internet bubble collapsed in 2000, it literally bankrupted people who had been compensated with stock options
Best practice is to sell stock sufficient to pay for taxes when exercising options. (Same for workers subject to U.S. taxation being paid in a foreign currency.)
Alternatively, you can sell a covered collar that protects your downside enough to know that you'll have the cash on hand come tax time. This limits your upside somewhat, but usually less than selling the stock outright. Mark Cuban famously used this strategy to protect his Broadcast.com payout under lock-out.
(Check the details of your contracts with an attorney and financial advisor; I've heard that some lock-outs now explicitly forbid trading in derivatives of the stock to prevent doing what Cuban did. With financial engineering being as advanced as it is, though, it's always possible to create a "synthetic" derivative that is nearly guaranteed to have the same value as a particular options strategy without mentioning the particular asset involved.)
Trading options against employer's stock may be forbidden by insider trading policy. It was in my previous job (along with shorting, and only trading during trading windows). Can't say I disagree with such policies.
Other than that yeah, get a collar or just straight up buy some puts. Or like others recommended - sell some % instantly and put in high grade bonds, or a savings account. Forgetting taxes is a big mistake.
> Isn't the whole point of the story that they weren't allowed to sell when they exercised their options?
The story most applicable to cryptocurrencies is the one where the stock was publicly traded [1]. Those exercisers chose not to sell.
(With respect to ISOs for private stock, yes, it's different. Best practice is not to exercise until you have a plan for paying taxes. This could be lining up a loan or a secondary sale, or only exercising what you can pay for.)
I chose NOT to exercise options and let them simply expire because they will illiquid and I didn't expect the company to every be worth anything. (It turns out that was wrong!)
This is why I was annoyed when Congress bailed out these dot-com specu-vesters. They knew the risks, or should have. I chose not to exercise because of the tax consequences. They were no secret. Anyone buying stock options should know what they are and how they're taxed.
Coincidentally, I was the engineer at Zenpayroll (now Gusto) who was working on enabling employees to be paid in crypto back in 2013/2014. We never got to the implementation phase because of precisely this scenario. Bitcoin is so volatile that it's a very scary way to be paid. The downside risk (you can't pay rent because bitcoin did something weird that week) is really really bad for users and most people don't understand those or the tax implications. So we scrapped the feature.[0]
A parallel would be stock options issued by companies. Let's say you get 100 stock options with a strike price of $1/per share. You wait a year to exercise and by that point the common stock is valued at $2.50 per share. If you exercise, you still pay $100 for the 100 shares but you owe taxes on the $150 gain, even though you might think that your compensation was always $100.
If you acquire an asset at one price and sell it at another, you owe taxes on the difference. If you acquire an asset for less than it's worth, you owe taxes on that.
[0]: this is one reason why I will never understand people defending btc as "a store of value". That's a terrible store of value!
What about setting up partial compensation on a sliding scale? If my rent+bills+other fixed expenses is X% of my income, I could just take as much as cash as will pay for that and take out the rest of the 1-X% in crypto
That said, unless there are tax implications of paying/getting paid in BTC that cause you to e.g. not realize gains, it's really no different than just paying the employee in all cash and letting them purchase as much crypto as they want with it.
There were other issues as well that contributed to the decision, namely:
- Legality: there are specific regulations around how employees can be paid. These stem, historically, from companies paying employees in coupons only redeemable at other company stores (think: railroad workers paid in coupons for the general store owned by the railroad.
- Reversibility: What happens if the payroll needs to be reversed? With bitcoin you can't. This is important for cases of fraud (e.g. stolen credentials), user error (e.g. mistyping hours worked), or bugs on our end.
- Anti-money laundering: We needed to be reasonably sure you weren't laundering money. In case you were, having a bank account makes tracing the money much easier. Coin tumblers and the like make obfuscation and cleaning dirty money trivial.
- User adoption and education: How many people really want this feature versus others in the pipeline? If we ship it, what load does this put on our support team to handle calls about bitcoin? About losing their private key?
These are a subset. There are many concerns. I hear you about employees taking that money and buying it anyway, but we did have additional concerns to think about. We weren't against crypto, but it wasn't a good fit for our platform, userbase, size, priorities, etc.
What if you get paid in meat, $100k worth of meat, but then you spoil all of them so they're now worth $0. It's not government's problem if your currency is volatile. You can find a job that doesn't pay you in BTC.
The problem there is that meat doesn't come in dollars; it comes in kilograms.
If you are paid in meat, you get something like 100 kg of pre-formed frozen ground beef patties. That doesn't have a dollar value unless you can find a buyer for it. Which is pretty easy to do if it's a commodity.
So let's try a more broken example. You get paid in sandstone triangular prisms machined to be 31 mm on the two longer sides, 19 mm on the short side, and 9mm in height. These then have a square(-ish) hole drilled in them, slightly off center, and then the sides are grooved, and the faces engraved. These triangles are called fubaar.
Fubaar have no fixed exchange rate with the dollar. For a job, you are paid 1000 fubaar. The value of a fubaar is very stable. One has been able to purchase the traditional formal attire of Barbazia for exactly 5 fubaar, for over 800 years. But you can't buy much with them on the international market except quuxfruit--which bruises easily, and smells like durian crossed with feet after four days.
At the end of the year, I could report that I earned 1000 fubaar since last year, and mail about 250 of them to the treasury. It's not my problem if the government can't convert them to dollars. They can go buy quuxfruit with it. But the treasury won't take anything but dollars. My only recourse is to say the fubaar represent $0 in income, because they really are essentially worth $0, having no inherent value.
The problem is that the gov't is levying taxes in dollars on income that is not dollars, and exporting the inconvenience of conversion to those least able to get a good conversion rate. Congress has the enumerated power to regulate the value of foreign coin. Why not use it? The Treasury also has the ability to accept foreign coin. For a good length of US history, much commerce was conducted in Spanish silver dollars, not US-minted coin. Those were acceptable for payment of taxes.
I think I follow what you're saying, you think the IRS should accept BTC as the tax payment, so it is at least always correlated to the asset you earned/lost.
While I agree, it's kind of backwards to ask for this now, after the IRS is finally making their moves/intentions clear. I know a majority of the crypto crowd was quietly hoping the IRS wouldn't keep track of the absurd money people were making, so this just feels like a reckoning.
That's just it. They require you to say how much it was worth when you got it.
But they really have no way to know whether you are lying. As a result, people lie about the value of traded goods, or art, or land properties, or unlisted financial instruments, to reduce the amount of income tax they purportedly owe. This is a major tax-evasion (not avoiding) and/or money-laundering loophole employed by the rich, especially when employing art and real estate, which may be justifiably non-comparable to similar goods due to uniqueness.
A law-obeying person would liquidate enough of the subjective-value goods to pay income tax at the maximum withholding rate at the time of receipt, and send that amount to the IRS at the end of the quarter, then claiming a refund from that amount with their return at the end of the year.
A practical, law-breaking person would just keep their mouth shut about it, and allow the IRS to claim it was income that had value, and only pay taxes on it (or dispute the amount demanded) if the IRS actually demanded an amount.
The enforcement on Bitcoin-holders is not to raise revenue in any meaningful sense. It is to discourage use of cryptocurrencies as a means of tax evasion--probably because middle-class people could make use of it. With respect to the means employed by the rich to evade and avoid taxes, an equivalent effort would likely return 1000 times greater rewards.
I agree with you, but "My effective tax rate is 2000%" is a huge stretch. No, you got taxed 20% when you generated the income. Just because the place-you-keep-your-money blew up doesn't increase your "effective" tax rate or any other. It's a you problem if your mattress-full-of-cash burns down, or your bank goes out of business, or whatever -- you were taxed at the time you generated the income, and if you didn't set the money aside at the time, that's not the government's problem. You can't really say they're increasing your tax rate.
And easily mitigated by converting the amount you owe in tax at the time your are paid. I don't see how this would be different than getting paid in any other currency.
The problem in your scenario is not really to do with tax, it's that one has effectively expended $10,000 worth of effort for $100.
If someone was worried about this, they shouldn't be accepting BTC as payment, or they should convert it to fiat currency immediately upon receipt.
This situation is treated the same as the following:
Say I get paid $10,000 for doing a job, and buy bitcoin at $100/BTC. Now, say BTC drops to $1/BTC. I owe income tax on the $10000. Let's say I owe $2000 (20%) in taxes. However, I only have $100 now.
The smart way to handle that would be to deduct approximate income taxes "immediately" and convert to USD. This scenario is part of why income taxes are deducted per-paycheck instead of just once at the end of the year.
This is why you shouldn't accept payment in any currency other than the one you pay your taxes with. It's effectively investing 100% of your income in a single asset.
But you could also say that you shouldn't accept payment as the entity that will pay taxes. That's what Apple, for example, does for non-US revenue. And what Mirimir does, in a small way.
It's not different at all. Copying from my other comment:
When my RSU stocks vest, I pay (regular income) taxes on the vested amount. It's treated as if my company gave me the money to buy these stocks I now have. Later when I sell them, I'll pay capital gains tax on the gain/loss.
What you describe is exactly this, with stocks instead of BTC. If my employer gives me any stocks, I have to pay income tax on the value of the stock calculated on the day I received it.
Now I know stocks are volatile. If I decide not to sell them immediately (at essentially 0% capital gains tax), I am deciding to take the risk in price fluctuations.
BTW, if your BTC drops to $100 value in under a year, simply sell them and claim the loss. It will typically be taxed at the same rate as your income, and you'll effectively only pay income tax on $100.
How is this different from any other sort of security that drops in value? You make a conscious decision to hold a volatile security. You could have just as well sold it and put it into An index fund.
I travel to India every year, and I always carry with me a few hundred USD worth of rupees (the local currency).
It would be insane for me to try and track the value of the rupees (in USD) for every time I bought something, and calculate the deltas between that and what I originally gave to the money changer. It is completely impractical to do that, and while I'm not an accountant, I have an intuition that for any reasonable amount of money that any traveller would be carrying with them, the fluctuations are irrelevant.
And yet this is what people using cryptocurrencies are expected to do.
Obviously if there is a large capital loss or gain, then this should be reported on your taxes, and I suspect the same is true for foreign currency exchange.
I guess to ask a question: are individuals expected to track the fluctuations in USD value of their cash while travelling? If so: is there a threshold? Why is crypto different (other than some belief that it might be more convenient).
I spend a lot more yen than you do rupees, have USD denominated reporting and payment obligations, and have asked my professional representatives about this. I was told a variant of "De minimis non curat lex." ("The law does not concern itself with trifles.")
This is similar to income-shaped small transfers of money within families; there would be Congressional hearings if the IRS found a deficiency in mandatory withholding taxes on babysitting money, which is unambiguously earned income of a statutory employee.
>And yet this is what people using cryptocurrencies are expected to do.
Maybe because the IRS declared years ago that cryptocurrencies will be treated similar to other commodities?
And while I don't know the tax code, I suspect if you convert your USD into rupees, and those rupees suddenly increased value tenfold, and you started buying Mercedes with them, the IRS likely will come after you there as well :-)
The ICO market crashed and trading volume on crypto exchanges keeps dipping lower and lower and lower. Its main use-case has shifted back to currency after a failed bid as a security.
Can you refer me to the source of "crypto exchanges [volume] keeps dipping", please? I'm looking at BTC volume and it's not dipping at all. There was a sharp drop in Jan '17 when Chinese exchanges were forced to close. Other than that volume correlates to the price.
This is a relatively new change though, as in the last year/couple of months. So I wouldn't expect the IRS to have shifted it's treatment. Especially in the context of 2018 taxes.
Strongly disagree. In terms of both actual usage and the rhetoric I most commonly see on crypto fora (“digital gold!”, “store of value!”), commodity, not currency, is the correct categorization.
Just because some people are loudly shouting it's only a "store of value" (i.e. they only speculate with it), doesn't mean others aren't using it as money. Furthermore that's only the Bitcoin maximalists and it doesn't apply to all other cryptocurrencies (since Bitcoin is only really useful for speculation).
> It would be insane for me to try and track the value of the rupees (in USD) for every time I bought something, and calculate the deltas between that and what I originally gave to the money changer. It is completely impractical to do that,
It is much more impractical to track the value of fluctuating (maybe x1000 more fluctuations than the USD?) cryptocurrencies though.
My experiences with the IRS have been nothing but positive over the years. They were always polite and clear in their positioning. They either made corrections in my favor or sought more information to identify what if any additional taxes I owed due to a mistake in my filing.
What I suspect is happening here is that the IRS is figuring out how to prioritize it's investigations. Sign or don't, it only determines when you are investigated. Once they've identified a holder of bitcoin it's likely that an investigation will be forthcoming.
So long as this is the case how can it possibly make sense to use bitcoin to actually transact e.g. fulfill the vision of bitcoin as "digital money" if every time you buy a cup of coffee with bitcoin the expectation is that you'd have to calculate capital gains and report every year?
This applies to any forex. If you're in the US, but you buy a coffee using CAD somewhere near the border, you have to keep track of that transaction and report it as a cap gain (or loss if you want).
Things get weird when you use a strange currency for any transaction.
Surely this is not true? It doesn't seem consistent with the IRS's guidance [1], anyway. You would simply value the expense in USD at the time of the transaction. There is no capital gain or loss.
Any time you "realize" a currency or commodity (that is, sell it or trade it for something else) you need to pay tax on the capital gain, if there is one. At some point, you purchased those CAD. If the value of CAD is higher when you use it to pay for your coffee, there was a capital gain, and you just realized it.
Say you purchased X amount of CAD a few years back for $0.70 USD. It doesn't matter how much you purchased.
Now some time goes by, and the current market rate for CAD is $1.00 USD. You go ahead and purchase your $5 CAD coffee. By doing that, you've realized $5 CAD of your investment, which is currently worth $5 USD, but when you bought it it was only worth $3.50 USD. So you made a capital gain of $1.50, and you have to report and pay tax on that.
Whether you purchased a coffee or converted to USD doesn't matter -- the important part is that you made a gain on the CAD over time, then used it for something.
I did not realise you were assuming that the taxpayer already held the CAD for some period of time before the coffee purchase. So US tax law provides no exception for trivial capital gains on personal use assets? Clearly it makes sense to bring forex gains and losses to account when dealing with large transactions and investments expected to produce a return (eg. cryptocurrency). But in my country, a small balance in a foreign bank account held for the purpose of personal expenditure while in that country would not be regarded as a capital asset where every transaction is taxable.
This is true for any foreign currency, and it's exactly why a country tends to converge on exactly one currency, even when it's illegal. Dealing with multiple currencies on a daily basis is a giant pain in the ass.
Europe is an instructive example here. Most of a continent was sick enough of the hassle that they eliminated 19 currencies in favor of the Euro [1]
Another good example is Ecuador. In the 1980s, both currencies were in use, with dollars being used by wealthier people for larger transactions, including savings. That was due to financial instability that got worse; eventually Ecuador just gave up and adopted the dollar. [2]
So to answer your question, it probably doesn't make sense, which is why approximately nobody uses Bitcoin as digital money. In contrast, look at the digital money scheme M-Pesa, which started around the same time. It has many millions of users and has seen widespread adoption. [3]
No, this is not the case. For foreign currency there is a low-value transaction exemption. If you go on vacation in Italy you don’t have to report forex income/loss for every meal. But if you came back with an Italian sports car, you would.
Not so with bitcoin, which the IRS taxes every transaction, no matter how small.
I think the reasonable justification for the low-value exemption for foreign currencies is that it's a) a common consumer use case, and b) hard to account for. Neither applies to Bitcoin. Not only is Bitcoin a failure for typical consumer use [1], but its digital-from-the-start nature means that the accounting burden is much lower.
If somebody has designed a digital system to throw away data instead of recording it, that doesn't excuse them from recording it when needed for tax reasons.
And I understand that in cryptocurrency land there's always a future thing that people will use. Wake me when that happens, as 10 years in I've stopped holding my breath. Especially since, as I said upthread, other technologies in the same period have found widespread adoption.
It's not buying a cup of coffee that's the issue. The issue is in converting between currencies, which is no different than investing in foreign currencies. If you exchange USD for EUR, wait a while, then exchange back to USD and you've made a profit, it's taxable.
Every taxable event is something you have to keep track of.
And spending appreciated crypto, even on coffee, or anything else, is a taxable event.
So the point stands that using crypto as "spending money" vs purposefully saving it as store of value is going to be a real pain, for all of the technical reasons but also the tax complexity.
To see why this is the case, imagine someone saved BTC as store of value, then years later exchanged it for a house.
They didn't sell if for $. But they used its appreciated value to buy something. There is a capital gain involved, and so taxes as well.
It is, though. Transacting with bitcoin is a taxable event just like converting between bitcoin and fiat. It's no different from the IRS's perspective.
* H&R Block and Intuit have good lobbyists who prevent it from happening.
* Republicans want to make filing taxes difficult so that people won't like taxes. In particular Grover Norquist has managed to get essentially all federal level Republican politicians to sign a pledge not to raise taxes, and Norquist considers making filing simpler to be effectively raising taxes.
I'm sure those aren't the only reasons. Quite a lot of people get away with tax fraud. If the IRS really knew everything and filing taxes was just a pointless exercise, why is fraud so prevalent?
Speaking from a European country, employers are reporting salaries to the revenue service. The banks are reporting capitial gains from taxable accounts.
So basically the only reasons for filing taxes are for exotic revenues (for example crypto !) or to ask for exemptions. Free lancers still have report their revenue themselves but I would say that for a very very vast majority of people, they already have all the information needed.
Actually we receive our forms with some fields (salary for example) pre filled, you only have to check if this is correct.
The tax form is just some kind of confirmation, most of the time.
Believe it or not, those really are the main reasons why taxes still suck in the U.S.
There's a recent Planet Money podcast on it. The regulatory lock in for tax filing is ridiculously profitable, and companies like Intuit certainly rent-seek to solidify their revenue stream.
Massive social engineering mean the IRS would need every financial and legal transaction you've ever participated in. Which they clearly do not.
For example, we don't have a simple tax system based on a percentage of salary. The amount they want as a tax depends on your marital status, how many kids, how much your spouse earns, and if you itemize deductions it gets even worse WRT every medical provider's bill you've ever paid and weird details of interest payments on mortgage loans.
Honestly the error rate of trying to gather all that big brother data is almost certain to be higher than the fraud rate of people in general.
Also people push agendas, so if you want to spread the idea that fraud is rampant, if I get free coffee at church and starbucks has proven 52 coffees per year is about five hundred bucks, not declaring that coffee as income is fraud; with paper money and barter the IRS can't get all "weird" about little details, but with digital currency if you buy a donut, there will be a reckoning simply because its possible.
It's not just a matter of the paperwork being too burdensome; free coffees at church are simply not income. Neither is $20 in a birthday card from your grandma. Of course, there are grey areas where it's much harder to draw the line, but it's wrong to suggest that the IRS would tax every transaction if it could.
It doesn't necessarily tax everything but the IRS does seek God-level knowledge/insight into every transaction - and then it just exempts certain things based on size or other factors. If you are deducting charitable contributions to the church they actually do expect you to subtract out the value of coffee, meals, etc. Donate $100 to some non-profit that sends you a t-shirt as a thank-you? Your deduction is $87, not $100, because the t-shirt has to be valued at $13 or something similar that they consider reasonable. Somewhere they actually have federal employees tasked with determining this year's acceptable minimum value for a t-shirt.
The $20 gift from grandma is exempt, but not because they don't demand insight into intra-family transfers.. it's only non-taxable because of its size. If you have a rich grandma and she gives you $20k, that needs to be reported.. even if no tax is ultimately due, it probably reduces the future value of her estate tax exemption. Dying is a very complex taxable event!
If you want to follow the thousands of pages of rules to the letter - sufficient to sign a letter declaring under penalty of purjury, etc - the tracking and compliance burden on many US taxpayers is enormous, even with assistance from the commercial closed-source SW packages that you are more or less forced into buying each year because they won't let you e-file with them directly over HTTPS+JSON or whatever.
Sure, taxes couldn't be fully automated, but those are the reasons the IRS won't just send you a pre-filled form with the information they have, and instead makes the taxpayer duplicate that information.
Even if the IRS had perfect info about all your income and investments, there are decisions you can make which effectively make taxes non-deterministic. Suppose on two different dates, you bought shares of a company. Then on a later date, you sold one share. You get to choose which purchase date to count the sale as being against. This is important because you pay on the profit made based on that assumption. It also effects whether you pay short-term or long-term capital gains taxes for the sale.
Say for example you bought 1 share for $100 two years ago, and another share for $500 one month ago. One week ago, you sold one share for $1000. If you count it as selling the $100 share, then you must pay taxes on $900 in profit, BUT you enjoy the lower long-term capital gain tax rate. If you count it as selling the $500 share, you must pay taxes on only $500 in profits, BUT you suffer the short-term capital gain tax rate. Which of the two should you do (if you're a hypothetical perfectly rational actor who always makes absolutely optimal decisions)? Depends on what you plan to do with the other share, what you think is going to happen to the stock price, and so many other factors you could write a 10,000-page book about them...
Lot identification actually isn't a tax-time decision; it's a transaction-time decision. If you don't identify the specific lot you're selling (or more specifically if your broker isn't given or doesn't follow instructions which lot to sell), then in general sales are treated as FIFO, which might not be surprising because that characterization leads to maximum gain in a rising market. See Internal Revenue Service Publication 550 for more. This means that the tax treatment of a stock sale is in fact fixed at the time of transaction; moreover, it's entirely automatable by standing instructions to the brokerage, which most brokerages routinely offer as a feature ("tax optimizer" or "tax-lot optimizer" or similar language).
(This of course is all US tax code, not applicable to US states or other countries.)
Not a tax lawyer, but reporting of lot identification is a tax-time decision, at least for the things being discussed in this thread.
If it's transaction-time then that's totally unenforceable since this discussion applies to things as diverse as trading physical goods for other physical goods in an ad hoc unrecorded environment. It would make no sense for it to automatically be FIFO anyway, for example a person with amnesia might temporarily forget their ownership of longer-term holdings.
And for just one example where FIFO would be suboptimal despite a rising market, merely suppose that you know you're about to die and your children are about to inherit everything with a higher cost basis, but you need a bit of cash right now. (I highly doubt tax optimizer software has achieved the strong AI that would be necessary to know if you're about to die.)
You've clearly never bought and sold stock in two different lots in the US before. Brokerages report cost-basis to the IRS, this basis will be calculated based on your selection when you initiate the trade.
You can't start talking about other capital gains in the same sentence as regulated securities as the reporting requirements are going to be different.
Interesting. I thought your original comment was explaining why the IRS doesn't have all the information it needs to determine tax due by itself, and your example was stock trading. In that case not only is there a documentary requirement at time of transaction, but there's a catch-all rule for cases where you turn out not to have such documentation. Amnesia or "ad hoc unrecorded environments" absolutely aren't exceptions to any of those rules.
Perhaps you're trying to make a different point now, or I misunderstood your original one.
> Why cant the IRS just tell us every year if we owe or not and how much?
You can already contest how much the IRS claims you owe. Why would this hypothetical be any different?
Yes, it's probably impossible for the IRS to perfectly account for every American-person's income. They already make mistakes and it's not terribly difficult to show them how they got it wrong. Whether they are incentivized to adjust to your lower claimed liability is another question... but that's why we have independent courts.
Simplify the question: why can’t the vast majority who don’t trade in any instruments at all have pre-filled tax forms they can sign online, like in many other countries?
That stocks and some types of deduction means it needs amending to be “optimal” is pretty clear.
No matter what the IRS does, "tell us every year if we owe or not and how much" can only apply for standard sources of income (e.g. salaries) which get fully reported to IRS by someone else - even in countries where "tell us every year if we owe or not and how much" is the main system, if you'd get some nonstandard income (like getting paid for some goods in bitcoin) you have a duty to file that.
Historically, it was not possible for the IRS to figure it out without an investigation that costs more than most people pay in taxes. Computers exist now, but changing the status quo would be politically challenging, and may still involve a net cost to the budget because the government would be performing a service that was previously the responsibility of taxpayers. However, the experience of other countries suggests that partial automation is well worth the investment, even though full automation is impossible, so the other commenters griping about lobbyists are correct too.
For what it's worth, Gemini doesn't report everything to the IRS. This is the response I got from them when I asked last year:
"Gemini is required to report gross proceeds paid to US customers from bitcoin or ether sales on the Gemini exchange on IRS Forms 1099-K when applicable reporting thresholds are met. Typically, Form 1099-K reporting will be required by Gemini where the number of bitcoin or ether sales transactions on the exchange exceeds 200 transactions per year AND the total sales proceeds from all sales transactions exceeds $20,000 per year."
I'm sure there's a lot to know about this topic, but it's odd to me that they'd treat a "currency" as an appreciating asset. If I'm given a dollar (or peso) as change, and if between the time I receive the dollar and the time I spend it the currency purchasing power increases, I do not pay taxes on that gain. I can just buy more stuff with that dollar (including other currencies). In this instance, where it's increasingly true that bitcoin can be used as currency to purchase goods and services, it's odd to me that those are realizing events that require you calculate gain. I get it that shares of stock work that way, but I can't buy a hamburger with shares of stock.
Come on; if you do Forex trading, you will pay taxes on your gains.
If you earn a dollar for your labor, and then hold on to it while its purchasing power increases before making a purchase, that increase is not taxable of course. It's not even quantifiable. Purchasing power can increase faster relative to a specific commodity that gets cheaper faster than other goods.
If you buy a currency and sell it later at a profit, that is taxable.
What is taxable, in a nutshell, is the result of any non-exempt activity that causes you to hold an increased numeric amount of your native currency. Increased purchasing power isn't taxed because it doesn't entail any numeric increase in the money.
At one time (maybe still), purchasing power for computer components went up much faster than inflation. If your goal was to buy a faster processor, then waiting effectively generated a rate of return based on falling prices.
That’s not relevant to the point you’re responding to - the point is, if the purchasing power of your dollars went up (and assuming it’s your native currency), you don’t get taxed on it because the number of dollars you hold did not change as a result. If you are holding a different currency, it’s value goes up, and you convert it back to spend, you made capital gains and it will be taxed even though that foreign currency is not an “investment” instrument.
1 USD always equals 1 USD and you pay taxes on gains relative to the USD as a US person.
It's not possible for your USD to be an appreciating asset relative to the USD and that's how capital gains are defined. However, if you go to a store in America (and hypothetically) they give you change in Euros, then you take that to another store, and redeem the Euros there, you do in fact owe taxes on the increase in value of the Euro relative to the US dollar over that time period spanning those two transactions.
At one point in time and at one location. At different places in the US, 1 USD can purchase more or less. So on the internet, the purchasing power of the dollar is fairly nebulous. So, I agree, but with more nitpickiness.
Yeah, capital gains are not adjusted for purchasing power parity within a country otherwise it'd be difficult to do business in both high and low PPP regions like SF vs the midwest.
So that's why we can't ever have some deflation here in the modern US, it would reduce tax revenue! I always wondered about that. In this light it makes perfect sense.
> that's why we can't ever have some deflation here in the modern US, it would reduce tax revenue
Deflation also increases the buying power of that tax revenue.
We avoid deflation because it incentivises hoarding currency over productive activity. We also know how to stop inflation--raise rates. We don't have reliable tools for fighting deflation (see: Japan).
(Also, it's not true that we've never seen deflation. Around the financial crisis, we saw negative CPI.)
>> We avoid deflation because it incentivises hoarding currency over productive activity.
No, it incentivises reasonable spending on things you need and saving the rest over mindlessly throwing money on useless crap because your money lose value every day.
> over mindlessly throwing money on useless crap because your money lose value every day
Your have more choices than spending and hoarding. Buying Treasuries, for instance, yield around inflation. (TIPs if you're more worried.) To say nothing of the entire universe of investable assets, from commercial paper to venture capital.
I’m not aware of any evidence that that’s actually the motivation behind preventing deflation. Just about every economist will tell you that deflation is undesirable because it incentives hoarding accumulated currency rather than investing it in productive capital because of the decreasing value of production relative to currency.
Fair enough, but if I convert a bunch of dollars to pesos and then the value of a peso increases and it allows me to buy a nicer car (in pesos) than I could have when I received the peso, is that taxable? If it is, is the dollar the only exception to this rule? Because I know for a fact nobody pays taxes (or carries forward losses) on the increased purchasing power of their cash held in dollars.
Yes, because you as a US person track your gains/losses relative to the USD so if you buy Pesos and the value of the Peso changes relative to the US Dollar over the time period you held them that is in fact a capital gain and reportable to the IRS for tax purposes. Every country that taxes capital gains operates the same way to the best of my knowledge.
> Because I know for a fact nobody pays taxes (or carries forward losses) on the increased purchasing power of their cash held in dollars.
Increased purchasing power of the cash relative to their home currency is what's taxable, and reportable at disposition.
This is helpful. Thank you. The whole thing is a little odd to me. I'm used to thinking about paying taxes on marginal increase in value, and I had never considered that to be defined exclusively in dollars. I suppose it is. If I buy for $10 and sell for $20, I pay taxes on $10 even if the value of the dollar dropped by half in the intervening period.
Basically inflation is taxed. However, few people report trinkets. Inflation in a certain sector (whether due to speculative bubbles or not) is taxable.
The real question is — what if there is huge volatility and it goes down after it went up? Surely you don’t pay taxes on just the hands you win in a casino without deducting the losses first? But when does a casino session end with markets?
another BIG question I have is, do you really now have to pay for EVERY TRADE of one cryptocurrency to another? What if you have a capital loss and gain etc.?
If you have a capital gain on one transaction and a loss on other, in general the net gain is taxed, and usually losses in one tax period can be used to offset gains in other periods - there are all kinds of accounting rules on how to properly document the transactions and these gains. In general, everything you worry about in this post isn't new, it's been argued and resolved decades ago, you "just" have to follow all the regulations. Or, alternatively, chartered accountants make a living by following the details of these regulations so that their clients don't have to.
Wait, the gain relative to USD is only reportable when you sell the pesos (to convert them back to USD, or to CHF or BTC or whatever). Is using a currency to purchase a good a "sale"? Would you incur capital gains tax on the USD-converted value of the car you had bought using the pesos?
Yes, I believe that's what they're saying. Calculating the gain when buying a car may be doable (dollar value relative to what the pesos cost originally). The part about all this that doesn't really work is if you convert to BTC and buy pizzas and beers throughout the year, it's not really possible to keep track of the gain relative to each of those transactions. I fear that this will break things.
Your point is moot, buying and selling Bitcoin is not like buying and selling currency. The IRS classifies it like buying and selling gold, which you pay taxes on when you make a profit.
If you do, how do you figure out if the investment appreciated or depreciated?
I mean, if I use BTC as a currency to buy things, I don't understand how I would evaluate every purchase at the end of the year to figure out whether I owe capital gains.
It's certainly possible - one way would be to do like some people who do some casual stock trading where you record all the transactions in an excel sheet with the amounts and dates, and then submit the appropriate reporting to IRS. Similar measures apply if you do significant amounts of barter; e.g. if you as a farmer trade a truckload of produce for an old vehicle without any cash involved, then you may have (all kinds of legal caveats apply) to appraise the transaction at some dollar value and justify that appraisal. For bitcoin it's a bit simpler than barter since just taking daily reference prices from a major exchange is an objectively reasonable method of pricing.
It's not that hard, but takes some work and skill - it may be prudent to hire a certified accountant to do that for you properly.
In any case, the fact that in some circumstances the reporting is labor-intensive, or expensive, or unclear isn't a valid excuse to not do it. You can ask IRS or a CPA for assistance, and if you do your best then even if IRS eventually disagrees with something, then it's going to just be a correction (which may go in both directions).
You can imagine you are converting BTC to dollars right before purchase. If you had 1 BTC worth $1000 at the beginning of the year and then 6 months later (when it was worth $1500) bought something with it - you earned $500 in capital gains. (Not saying this is the current law, but that method seems to make sense)
If someone tells you to walk 1,000 miles to get somewhere you need to be, would you really respond with anything except "I can't"? It's an acceptable shortening of "well that's a really long way, and it's really hot, and it would take a long time, and I don't have that kind of time, and I'm not in very good shape, and my knees are bad"
How practical is bitcoin as a currency for day to day use. I thought the transaction time was 10 to 30 minutes. I get frustrated at the checkout counter when my credit card takes longer than 10 seconds.
10 to 30 minutes seems a lot closer to how long it takes for a stock sale to go through on E-Trade so I can see why the IRS would classify it more like a stock than currency.
Ignoring the periods in the past with very high transaction fees and network congestion, for the most part it's been as practical as a card and often faster since I can just use my phone to scan a QR code and click a verify button. We can also ignore the lightning network in the calculation of practicality. Normally if I send you a payment you'll see the notification of a pending transaction with the amount on your side pretty much immediately. There is a risk that I could after walking off with the goods create a new transaction with a higher fee (especially if the replace-by-fee flag was part of the original send, and one might want to be more cautious if that was the case) to send them to myself instead, though even if I try it's not guaranteed to succeed. If you wait around for on average ten minutes (could in actuality be a few seconds, could be more than ten minutes) for the transaction to get one confirmation in a block you can be a lot more certain no shenanigans will occur. Most merchants will use a third party system that will take on this risk for you. I don't know if third party systems like Stripe do the same for credit cards, but credit cards have the same risk profile. (I can call up my card company and claim a fraudulent charge after getting the goods. They'll then in turn not honor the charge. It takes something like 180 days before a CC charge becomes much harder for the payer to dispute, vs. bitcoin's 10 minutes for very hard and 60 minutes for basically impossible. Seems like an ok tradeoff to me.)
"I can call up my card company and claim a fraudulent charge after getting the goods... It takes something like 180 days before a CC charge becomes much harder for the payer to dispute, vs. bitcoin's 10 minutes for very hard and 60 minutes for basically impossible."
Yes, because obviously what we need is less power to the consumer.
So what if it takes you 60 minutes to get home just to test the product you just bought? Or that you can't dispute frauds that target seniors (i.e. grandma), because she won't tell you what she bought within 60 minutes but only the next time you call her?
The digital nature + relative untracability + no chargebacks makes Bitcoin scammer heaven.
I don't mind less power in exchange for not having to give up so much of my information to merchants. As someone who's sold things before I also like that bitcoin presents a tradeoff on prevalence of buyer fraud vs. seller fraud, and that if I want more power as a consumer I can opt-in to various escrow or risk-absorbing systems rather than rely on buyer-side-bias in charge disputes as a poor man's escrow. It's not optimal to use the base network for every time of transaction, sure, but that's not true of any payment system.
I don't understand your grandma rhetoric. Not that scammers aren't already in heaven (especially targeting seniors) but I guess I'd be interested if you have any peer reviewed papers studying the means scammers use and how much cryptocurrency is part of the modern scammer's toolkit. (My understand was that wire transfers through western digital were the most common means of extracting payment.)
* There's no need for a tradeoff. We could just have a method of payment that gives less of your information to merchants.
* You can't 'opt-in' to 'various escrow or risk-absorbing systems'. That's because these services simply do not exist at this moment at Bitcoin-land. They may well never exist or be supported by merchants. You're comparing a non-existing theoretical model against real-world working stuff.
* Unfortunately, elder fraud is too rife where I live. The scammers call the elderly person, convince him/her to buy various utterly useless stuff like a rock to scare away tigers. This is almost never done in person, but by phone, and they use credit card details. At least there, there's some hope of chargebacks and a record of the transaction. Removing even those limited restraints... that's not what we need.
A bit late, but for your first point, what methods do you propose? The existing ones aren't good enough, with every merchant wanting to know as much as they can about you. In person of course cash works fine, and long ago I've mailed money orders, but neither is feasible for online. I'm glad PayPal exists and use it for some things, but of course PayPal knows all about me (I've even used their credit system before) and downstream merchants get bits of that + whatever else they require besides the money and a shipping address. (Like a phone number, though few ever try to verify them it's not an unreasonable step to try and cut down on buyer fraud. Seriously buyer fraud is huge, lots of dishonest people will buy something on ebay or wherever and then claim it never showed up, or the wrong item was received, or it was damaged, or.. all possibly perfectly normal issues that exist to help combat seller fraud, but the current tradeoff for disputes is so heavily stacked in favor of the buyer with the current systems that many times the seller can do nothing about a lying buyer except try not to deal with them again and/or require more information from the next person.)
Ultimately it boils down to, without comment on the desirability of making it possible to purchase illegal goods, can your proposals match the low amount of information darknet markets require along with the low amount of friction in making a payment? (A shipping address for physical items is the maximal information needed by any party in that whole system.)
For your second point, you can opt-in. Basic escrow has existed since the beginning with m-of-n signature transactions, various wallets have UIs for it. I'll just leave this here: https://en.bitcoin.it/wiki/Multisignature For "risk-absorbing systems" for merchants, those too have been around. BitPay is probably still the most popular, and it's several years old now. https://bitpay.com/ If you as a merchant use them, you can if you want not even bother dealing with BTC and its inherent risks at all but still accept it as a payment method.
For your third point I agree (elder)¹ fraud is a problem, and that if the scammers extract payment with a CC there's at least a chance of getting some money back... but that's not the only way they extract payment. Even if you made CCs magical anti-fraud devices, there would still be unacceptably high amounts of fraud targeting these types of people, because fraud is a complex problem and the institutions most capable of addressing it systematically would rather live with its predictable costs. As such I don't think adding BTC to the mix would harm things (or help things as a BTC fanatic might try and argue) by a noticeable amount in this area.
Admittedly I'm not too confident on this when applied to fraud more broadly; specifically I'm thinking of the new ransomware threat model people have had to contend with in the last few years. Overwhelmingly those attacks (not just against elders, but industrial infrastructure and so forth!) extract payment with cryptocurrencies, though sometimes they accept gift cards etc. Restricted to the elderly, more traditional computer related schemes like "coerce a phone call to a number for 'technical support' and get victim to grant remote access to their computer, 'discover' malware, have victim pay for 'fixing' it via CC/gift card/bank wire..." are still probably going to be the most common. And of course as I wrote above, by having a payment mechanism that shifts the tradeoff in fraud disputes back to the seller, we might see an increase in seller fraud, but how will that compare to the decrease in buyer fraud?
¹A not so elder relative got tricked out of $120 not too long ago, which for him is a significant chunk of change. Fraud is a multi-spectrum problem and in many respects only seems to be getting worse over time.
Well, there aren't many sellers which try to directly sue their allegedly cheating customers. It's almost never worth it. Platforms might be able to make that work, but they don't do that either. IMHO, the desire for buyer info is not motivated by trying to hedge against customer fraud but on trying to monetize everything - selling data, advertising to existing customers since they're more likely to buy v2 of what they bought, etc.
Giving less of my info to sellers is therefore less a technological characteristic of a payment system, and more a choice by the system's creators. There's no technological hurdle to even having a credit card which gives a bit less info. Theoretically, the credit company only needs to see my expense, current available funds and some transaction/merchant identifier, not exactly what I spend it on or even who I am.
I'm hoping some of the new NFC-based payment systems will make privacy a differentiator. They'll need something if they want to get into the market with such established players. We'll see what Apple comes along with. I've been slagging them quite a bit, but they do try to make privacy a selling point. Perhaps here too?
As for the second issue, I am sure that a form of chargeback could be implemented on top of crypto. Your first link just shows one way to do it - but doesn't link to any implementations of this. The second link explicitly mentions 'no chargebacks', so again, it's theoretical in the sense of not existing.
The hurdle here is again not technological, but the apparently inability of the crypto community to think that people might want this behaviour. Sometimes even sellers. Where I live, allowing return of unused goods before a certain period of time has passed is mandated by law. Payment methods which does not have chargeback may actually complicate seller's business in this case, since than they have to be even more careful against internal fraud and pay an extra fee for the return as if it were a new transfer (if not in cash).
Thirdly, fraud and ransomware are getting worse and worse. I'm sure eventually there'll a crackdown. I just can't predict how, where and when. But crypto would be a very convenient target politically; this doesn't yet require targeting any large stakeholder.
Alas, the one thing the crypto community is right about, is that many economists are just waiting to be able to implement negative interest rates - but I doubt crypto would be able to change anything there.
>for the most part it's been as practical as a card and often faster
Have you ever used a card? If you think that opening your phone, scanning a QR and then hitting "verify" is faster than a tap or swipe of your credit card, I'm not sure what to tell you. Best case scenario, they're about the same.
>I can call up my card company and claim a fraudulent charge after getting the goods
And they'll investigate and determine you committed fraud, and you'll be fined or go to prison. What's the equivalent with Bitcoin?
I of course use a card frequently, though have yet to have the "pleasure" of dealing with a tap-to-pay card. I don't really want to. I'd say average case (not best case) is they're about the same, but yes, getting out my phone and unlocking it, opening the bitcoin app, scanning the QR code and hitting confirm, then putting my phone away, is indeed often faster than getting out my wallet, picking out my card from the other crap in there, inserting it into the chip reader (or swiping it), and hitting confirm (after maybe having to enter a pin or zip code or tell it "this is a credit card" or dismiss a "do you want to donate to grocery store's cause-of-the-month?" dialog) and then sometimes having to sign a printout or a touch screen, then putting my card back into the wallet and putting my wallet away. CCs are a usability nightmare that I'm amazed we put up with.
> And they'll investigate
Have you never reported fraudulent charges before? There's basically no investigation unless it was an ACH thing.
Using a tap-to-pay card would probably change your perspective. They were specifically designed to eliminate that usability nightmare. I find them easier to use than Apple Pay (because Touch ID only works about 90% of the time for me), and certainly easier than scanning a QR code (look at the queue of people struggling to enter any concert with electronic ticketing). The only downside is that you still have to carry a card.
> And they'll investigate and determine you committed fraud, and you'll be fined or go to prison.
Trust me, nothing happens to these people. From first-hand experience I know that the merchant eats the cost 99% of the time when it's a card-not-present transaction.
When you pay with a credit card the merchant only gets a payment notification, the money is transferred much later. You'll get a notification in seconds with Bitcoin as well.
Of course I have to mention that Bitcoin has unreliable and sometimes very high fees. This is a problem with Bitcoin specifically not with cryptocurrencies in general.
As a practical example I bought computer parts recently and I paid with Bitcoin Cash. When I was prompted to pay I scanned a QR code with my phone and I was done. It was even smoother than having to input my credit card numbers into the site. Of course the experience is the same if you pay in person, which I did at a restaurant when I visited Japan. Extremely easy.
> How practical is bitcoin as a currency for day to day use. I thought the transaction time was 10 to 30 minutes. I get frustrated at the checkout counter when my credit card takes longer than 10 seconds.
It is, but there are additional technologies being built on top of it that get transaction times down to < 1 second (lightning network). It's definitely still rough around the edges, but it's at the point where it's usable for day to day use.
It's completely useless basically, unless you are paying online for something. For day-to-day purchases, it seems most people are just buying gift cards with their BTC. That seems to get the job done very effectively.
Also keep in mind, there are other cryptos that exist where the transaction fee is basically free and the transaction confirms in under 2 seconds. Nano is one that comes to mind.
Bitcoin is definitely falling into the "e-gold" category if you ask me.
> How practical is bitcoin as a currency for day to day use. I thought the transaction time was 10 to 30 minutes. I get frustrated at the checkout counter when my credit card takes longer than 10 seconds.
Its not very practical but this is mostly related to the merchant software and not the underlying technology any longer.
A) Merchants do not have to wait for a transaction to "go through", just like many credit card accepting merchants don't actually connect to the network when they swipe your card. They broadcast the transaction to the payment processor later. The same is possible with bitcoin, resulting in instant transactions for the user experience. It is an option with compromises, just like accepting credit cards is an option with compromises.
B) Consumers can broadcast the transaction to the merchant at the point of sale, but merchants do not have to wait for it to be added to the blockchain. This also results in near instantaneous transactions. It is an option, with compromises, just like accepting credit cards is an option with compromises.
C) Consumers can transmit a signed transaction to the merchant, without needing internet connectivity (nfc, qr codes, sound, bluetooth can work). Merchants can be the internet connected ones and check a balance. This would also be an instanteous user experience.
D) Consumers can transmit unsigned transactions to the merchant without needing internet connectivity, this is the same as C) but also allows for paper notes like national currency with denominations, without exposing the private key of the consumer's treasury.
> 10 to 30 minutes seems a lot closer to how long it takes for a stock sale to go through on E-Trade so I can see why the IRS would classify it more like a stock than currency.
weird analogy. stock sales take 3 business days to go through, and the proceeds take another 3 business days to be spendable in a different checking account at a different institution. the securities regulator is trying to get stock sales to get down to 2 and 1 business day.
brokers like e-trade hide most of this behind the scenes, and you can certainly "sell a stock" in a few seconds on etrade. So not sure why it takes you 10-30 minutes?
From a legal standpoint, it's muddled. The CFTC claims jurisdiction over Bitcoin and Ethereum as commodities. The IRS claims that cryptocurrency is "property" and doesn't elaborate further, except to say that it falls under existing capital gains rules. The SEC claims that most other tokens are securities and fall under its jurisdiction, but does not claim jurisdiction over Bitcoin and Ethereum because the CFTC has already claimed it, but also claims that Ethereum "was a security" but is no longer, and sets out a process for adjudicating similar claims that other cryptocurrencies might've been securities when launched but are not anymore. The SEC's jurisdiction is being challenged in court by Kik, claiming that its Kin token is a utility token and should be considered a product feature, exempt from regulation at all. Bipartisan H.R. 2144 (the "Token Taxonomy Act") [1] is currently making its way through Congress and explicitly exempts cryptocurrencies from securities regulation and crypto/crypto transactions from taxation.
Pretty much the only thing that all branches of government agree on is that cryptocurrencies are not currency. It's hard to see how they could declare otherwise, given that the U.S. Constitution grants the government the sole power to coin money, but there's a growing international economy that exists outside the nation-state framework and disagrees.
From a tax perspective it isn’t muddy though, the IRS opinion is the only one you need to understand. It may change over time, but that doesn’t affect your tax liability today.
> given that the U.S. Constitution grants the government the sole power to coin money
Not true. It grants Congress the power to coin money (Article I §8 ¶5), and prohibits the states from doing the same (§10 ¶1), but it says nothing about private citizens. Coins can legally exist which were not created by Congress or by any state. Arcade tokens would be one obvious example.
In any case "to coin money" refers specifically to making coins, as in physically stamping them out of metal. Whether or not they're treated as "currency" in a legal sense, cryptocurrencies are obviously not physical coins so rules about coining money do not apply.
From a tax perspective, the special treatment applied to foreign currencies is a result of specific treaty obligations. It only applies to small amounts of income—under $200 IIRC—and is meant to avoid the need to report small fluctuations in value when you hold foreign currencies temporarily for travel. In other respects the rules are the same as for cryptocurrencies, or really any other kind of property apart from USD. It's not surprising that the currency rules are not applied to something like Bitcoin which we have no treaties about and whose use is not strongly correlated with travel outside the country.
If you exchange your money for a foreign currency, and that foreign currency appreciates in value vs the US Dollar such that you realize a profit, that’s absolutely taxable profit.
This is the IRS's way of saying that it isn't a currency. It's the government's way of saying that only the US government makes valid currency in the US, and everything else is an investment.
They even treat foreign currency that way now. If you buy a bunch of Euros and then convert back to dollars later, you're supposed to pay tax on the gain.
So how does BitCoin Cash distribution get handled in USA?
Is it like a dividend? A stock split? A spin-off?
What about all of these airdropped tokens? Are they dividends, with tax payable even if you didn’t “collect” them in some way? Or splits?
Can you deduct the Day1 value of the new token from the capital gain on the first token? Or do you assume the cost of the new token was $0 and any sale is a total capital gain?
I'm not sure the burden is on the individual unless they recognize receipt of the cryptocurrency. If someone mails you $100 and you discard it I don't think you owe taxes on it. Same for air drops and forks like Bitcoin gold.
Forks are a unique economic situation. I think a slightly more accurate metaphor is if someone printed money and mailed it to you.
A cost basis of 0 on a sale is the most "fair" way to account for forks/drops/etc. imo. Otherwise there's too much burden on the individual to keep track of all the many forks that occur.
Companies pay stock dividends, in themselves or in a subsidiary they're spinning out to shareholders, all the time. Using a reasonable materiality threshold (which would allow for ignoring novelty forks) this isn't a challenging accounting problem.
Yeah the IRS has a lot of explaining to do before people can be expected to pay accurate taxes on cryptocurrency. I've been handling forks/airdrops as ordinary income at the time of the airdrop, at least for the ones I know about and can collect. That's the most conservative way to do it, and I suspect that the IRS will require it even though it's a stupid way to tax airdrops.
The right tax treatment would be the same as stock splits but unfortunately when I looked at the rules for stock splits they were narrowly written to apply only to stock.
My understanding is they're still investment property. So probably more like a stock split. IOW, there wasn't a sale and a re-buy. You had 1000 shares of bitcoin and now you have 2000 shares, some of which are in bitcoin-A and some of with are in bitcoin-B.
As to the cost you would probably assume the Day-1 value after the split for the new coins. The price of the split of the old coins should have been reflected in the price.
Ah, the other word I was looking for was “spin-off”, but usually paperwork needs to be filed with the government for it to be considered a tax-free distribution, instead of a dividend.
Like HP becoming 2 separate companies.
With coins, there’s no central issuing authority filing this kind of paperwork, so I always wondered if these spinoffs were taxable distributions.
Not a tax professional, and you should get professional advice if you're in this situation; but the way I handled it was by treating it as regular income (since the IRS defines "gross income" as "all income from whatever source derived"). So pay regular income tax on it, using the initial trading price to determine how much. Thenceforth it's a regular capital asset with a cost basis of whatever you used as the initial price.
Essentially, it's like you found X dollars and used all of it to purchase the newly forked coin. You have to pay income tax on the found money.
You could be conservative and be either paying the right amount or overpaying.
Or you could be aggressive, and be either paying the right amount or underpaying.
Nobody seems to know what the right way to treat these common situations, but the IRS wants you to figure it out and they’ll decide if you were right or wrong.
I did like the story’s example of buying a pregnant cow though.
There are a bunch of websites that will help compile your crypto trades into the forms you need for your taxes. This year I used cointracker.io and it worked pretty good for me. It created a file that was easily imported into TurboTax. Also if you lost money on crypto you can claim some of that as a deduction.
As far as I understand it, IRS wants cryptocurrency traders to report USD profit on every trade. This gets extremely ugly if you are trading one cryptocurrency for another, as these trades are unclear as to whether they are an entry or an exit.
Now, I simply recommend that everyone only trades USD-to-crypto and back, never crypto-to-crypto if you want to comply with tax law - it gets very complicated fast.
> This gets extremely ugly if you are trading one cryptocurrency for another, as these trades are unclear as to whether they are an entry or an exit.
Trading one crytocurrency for another is a taxable event. Just like how trading one real currency for another is a taxable event. It's not unclear and trading platforms provide tax tools that solves this problem
Also with the crypto->crypto trades there are many exchanges that don't track anything. There are some that are completely decentralized and work based on using smart contracts. Who knows how the IRS is going to tackle that issue. It is very small segment of the overall market though.
Having talked to many people I do believe there is low tax compliance, but having read how the IRS rationalized the Coinbase subpoena to the judge I realize they have no idea to tell if they have compliance or not.
They merely did a search string for 2015 for "bitcoin" in tax filings and found 800 people filed that way. So I checked my 2015 tax filings and saw I had manually entered "LTC" for closing a litecoin trade to US dollars. Hm okay, so one of the most compliant US citizens isn't counted as one of the 800 people, got it.
So then Coinbase's compliance with the subpoena now has them automatically sending Schedule D information to the IRS and to users based on a net value of any holdings in their account. But Coinbase doesn't know what any of the holdings or transactions represent, just like your bank doesn't know what your deposits and transfers represent. A third party is now assuming that its users are on the hook for capital gains, causing a filed accounting discrepancy for everyone.
"Coinbase doesn't know what any of the holdings or transactions represent"
I had a KYC interview with Coinbase wondering where my coins came from. (I mined them in the 2009 to 2010 era when they were worthless, mined before the famous 10000 bitcoin pizza delivery, LOL). So they have a statement from me, which is probably now on file with the IRS.
Now here's a puzzler... I got my 6174-A and so I verified my coinbase register and old tax form reported cap gains from sales match to the penny. Which they do. So now what do I do, just sweat I guess.
As always - get a professional to look into your situation. Hopefully you've made enough profit to pay the few hundred $ and forget about it. And if you made it big time - congrats man!
The IRS enforcement division is a disproportionately large but small part of what the IRS does.
The other parts basically extend privileges to you. like when you do 475 elections, or 83(b) elections, or 501(c)3 elections etc etc. Basically all the cool stuff that makes you not have to pay taxes and only comes up if you run for office.
The enforcement division can be overzealous and ruin their own cases just from always thinking they have a smoking gun. If you reported and paid them you'll be fine.
Chuck Rettig, the new IRS commissioner comes from a tax litigation background. He's got a lot of experience and is preparing for one of the next big tax battles which is how to bring crypto under compliance with the current tax regime.
I still think they lack the technical knowledge to understand crypto and as a result, you'll start to see an increase in information being requested.
In any case, I willing to bet that you'll have a couple of court cases that will really bring crypto into compliance in a way that makes sense for 80% of the people.
> I still think they lack the technical knowledge to understand crypto and as a result, you'll start to see an increase in information being requested.
On the contrary, I think that the IRS knows cryptocurrency very well. The reason why the IRS requests information is that they want to prove to a court that they went out of their way to give taxpayers the benefit of the doubt. They want to be able to tell a judge "we gave this person ample opportunity to explain the situation and correct any misunderstandings before taking enforcement action". The IRS will go through the motions of requesting information even if—especially if—they know full well that fraud has occurred, just to strengthen their case.
> The Coinbase customers whose information was turned over bought, sold, sent or received digital currency worth $20,000 or more between 2013 and 2015.
I believe they valued at time-of-transaction. e.g. if you had no other transactions except for a $100 buy in 2013 that you immediately withdrew to personal cold storage, and then that appreciated to $20k+ today, you shouldn't have been included, assuming they supplied only the minimum amount of info legally required.
I got a notice that registered mail failed to deliver from the IRS. Since I have no other dealings/reason for them to send me mail, I'm assuming I'm one of the ones. Will find out Monday.
And for the record, all my bitcoin dealings have been this year (late starter) so I have nothing to worry about with unclaimed income. (Thank you flying spaghetti monster)
I’m not an accountant, but based on what I know about stocks you would get taxed on you financial gains (if any) based on the market value of the bitcoin at the time you trade it for the car.
It is the same as using anything other than USD to trade for something. Wether that is Stocks, Euros, GBP, goats, if you bought it at one price and traded it for something else based on a different price, you owe taxes for your capital gains from holding that asset.
So under the current laws does a person only pay taxes when converting to and from fiat to crypto, or does it apply to crypto transactions of any kind?
You report the value of the gain at time of taxable event. Trading crypto for other crypto, or fiat, or buying real goods with it.... are taxable events. The capital gain is the appreciation in value at time of transacting.
When you convert BTC to anything and there is a gain, denominated in the currency you pay taxes in, so buying something for BTC, trading to other cryptos, trading for USD, trading for Euros, etc.
I believe this is where a lot of the confusion comes from. If you use Coinbase to directly trade crypto (e.g. BTC for ETH) this is a taxable event on your BTC even though you never touch fiat in the process.
And that's quite logical if you think about it. How else can you explain the amount of your gains/losses when trading crypto for crypto and then back to fiat again.
Only against the advice of most accountants. Exchanges between different grades of the same precious metal aren't considered like kind transactions, so it seems pretty unlikely this "trick" would work for crypto.
Applies to crypto transactions of any kind. This is a major impediment to use of crypto for its intended purpose, and there are bills currently proposed in Congress to reverse this.
Its intended purpose is debatable. Certainly this is an impediment to using it as a currency, or day to day spending money vs long term store of value, like gold, which also requires paying capital gains taxes.
The law on stocks is that if you'd barter one stock for another, then that's a taxable event and you'd have to declare capital gains on the stock you traded away - which is the same for a BTC->ETH trade.
Crypto currencies have properties of a lot of different types of assets. The crypto tax scenario should reflect that it is different than any existing single class of asset and should be treated as uniquely as it is.
The bitcoin / crptyo currency... ethos? (not sure what word to use there) seems to continuously collide into the reality of living in a society.
That doesn't make them incompatible, but it does perhaps provide some lessons for everyone on why financial systems are the way they are as it is, and how you can't just jump on a technology and escape.
At the very least it has all been an interesting thing to learn from.
At the very worst it is a blight on the environment.
27kWh of energy burned per transaction, with a maximum scaling limit on the order of 5 or 6 transactions per second. If everybody in the world used Bitcoin, then you'd be entitled to your one transaction every few decades.
If cryptocurrencies saw serious use, Bitcoin would self-limit at a sustainable level and new currencies would be invented to deal with those issues. The biggest problem with cryptocurrencies is that US dollars are actually pretty good.
>The bitcoin / crptyo currency... ethos? (not sure what word to use there) seems to contentiously collide into the reality of living in a society.
That technolibertarianism is rampant throughout the tech industry and not just in the crypto space. Ignoring laws is viewed as being perfectly fine as long as you label it "disruption". I don't see much difference in peole running unlicensed hotels out of their condo with the help of Airbnb compared with a crypto trader dodging taxes.
Well technically it does. Just not if you buy from coinbase where they need a lot of your personal information plus you'll be most likely buying with a debit/credit card.
If you pay someone for cryptocurrency in cash and they send to a wallet you have set up by yourself there is not really any way to prove that it's yours.
Also, the fact that Coinbase is in the US legal jurisdiction gives its clients confidence they would be made whole if anything untoward were to happen.
If the untoward event is solely in USD, perhaps, but not if it's in crypto. Exit scams, hacks, rogue employees, etc, could still hit a US exchanges' crypto holdings and the government probably cannot or will not compell a roll back, supply expansion, etc, on a major blockchain.
If anything is actually protecting clients against crypto theft, it's the exchange's privately-purchased insurance rather than the government. Although I wouldn't rely on that for much either as insurers are rarely eager to pay out.
The 'wealthy' and corporations have the finances to pay for accountants and attorneys to set these things up. Most of them are taking advantage of what is legally already there, but no where near common knowledge. Wading through tax code is a struggle at best.
It depends where you do your transactions. If you do it on CoinBase, yes, you are going to be tracked. There are many other options though where you don't have to provide ID.
From my experience, it's not really a matter of getting tracked. It's a matter of whether you can explain your income conclusively, which isn't easy if you don't report all transactions.
Right now it's pretty hard to live on cryptocurrency alone. Which means at some point you will need dollars (or Euros or whatever), and that transaction is almost always traceable to a person.
I don't know a lot of people who only have cryptocurrency income. Most people have a regular job, but then decide to put a % of their savings into crypto. You can use your job income to pay for transactions. If there are any cryptocurrency income, it's then up to you how to manage that. Put that into traditional finance (then declare it), hold (not selling, so there are no capital gains, so no tax), or use crypto to buy products that are outside traditional finance
This is true with cash too. You can take part of your income into cash and make anonymous transactions with cash, and maybe even profit from them in an untraceable way.
But you better hope it is truly untraceable, and that no one else involved in that transaction makes it traceable, otherwise the IRS will come for you.
Same with crypto, except it is a lot easier for someone else to make you traceable since all the transactions can be traced to their origin on the blockchain. If someone you transacted with files US taxes, it's not that hard for the IRS to trace that back and ask who the BTC came from. It would only take one person turning on you for you to get caught.
I'm not a lawyer or accountant but I'm fairly sure if someone pays you in cryptocurrency (or beer or gift cards or frozen shrimp or anything else) you owe taxes on the dollar value of that cryptocurrency in the year that you earn it, and of course if no withholding was taken out of it by the one who paid you you also probably owe quarterly estimated taxes.
I can't tell if you're acknowledging this, or if I am mistaken about this but I don't think you can legally avoid income taxes by being paid in kind. My understanding is if you're a US citizen you have to pay Uncle Sam on everything you earn not just every dollar. Otherwise we'd all just take our paychecks in krugerands.
I did not state that it was not tax fraud. I was just replying to the person above who states that the government will find you whatever you do. There are multiple ways so the government is not aware of what you are doing in cryptocurrency.
> The math behind crypto doesn’t magically make you immune to government oversight.
Not legally, but the math always gives you a stronger presumption of innocence than you'd otherwise have.
The economics are the same as gold mining, where what gives gold value is the fact that the expected returns from mining it are always negative. With gold, the concept is basically just that different types of sand have different weights, so due to a quirk in physics if you shake up sand the the heavier types of grains go to the bottom of your bucket. The fact that you can't ever reverse entropy like this (predictably) profitably is what secures its value. Similarly, with crypto what secures its value is that electricity cost of mining always outweighs the expected value of the crypto mined.
Anyway because the expected returns are always negative, it's much harder than it would otherwise be to identify people who have actually beat the odds to make money. Maybe not with Bitcoin due to the design of the ledger, but certainly with other cryptocurrencies.
If you Google for people who have made the money money mining gold, there are literally zero results. Why? Because the expected negative value makes it exceedingly difficult for the IRS to convict folks who are cheating on their taxes.
Obviously no, the math doesn't prevent them from shooting your dog and carting you away to a jail cell but your assumptions about enforcement are naive.
The typical MO for tax evasion is to just not report your side gig (crypto or otherwise), hope you don't get caught and play dumb and pay up if you do get caught. This doesn't change whether it's crypto or doing under the table work which is the point I'm trying to make here. You either pay up front the right way or have a chance of not paying at all (tax evasion) but if you get caught doing that you pay slightly more for not paying up front. Anyone who is being charged with tax evasion is doing something very stupid.
It should be obvious but the people who've revived these letter should play dumb (if applicable) and pay up at this point since clearly the IRS knows that they owe more than they've paid.
It's hard to prove intent after you receive a letter from the IRS telling you to do something then you don't?
The nice thing about the IRS is that intent is pretty irrelevant. You make money, you don't pay taxes, your wages get garnished and your bank accounts seized for taxes, fees, penalties and interest. There's no messing around with the IRS, intent not required. If they can show intent you go to prison.
[edit] The difference with under the table work is that you get cash, then you spend the cash and not a record was made, then you've got the IRS forensic accountants on your ass if you do it too much. With crypto if you want to get your purchasing power back you pretty much have to go through a fiat gateway, every transaction there is logged, and likely reported.
I am not sure if you're obligated to pay US federal income tax or not (either non-US resident/citizen living in the USA or US's resident/citizen in expat).
If the IRS sends a formal letter to you, their intention is pretty clear that they found something wrong with your tax situation. I have had a couple of official letters from them for the last 4 - 5 years. Some of which I owed them money and I had to either pay (with penalty) or if allowed, file a amendment soon after. For others, they said I had errors in my filing and they gladly return a few dollars for me.
The first time I had to deal with them, I was surprised that the IRS is very professional, patient and courteous to me! I believe if they assume you're not trying to cheat taxes, they will help you to solve your case.
It make sense in cases where people get rich overnight (vested options, bitcoin gains or what nots) and they already spent a huge chunk of that income without setting aside for tax. If that is the case, they will soon realize they need a sizable portion of that overnight gain to pay tax soon.
Unless you're a crypomillionare with little other income (most of whom are probably smart enough not to risk it) the paying up part shouldn't be too hard.
I can't stress how common this is with cash only side gigs. People hope they don't get caught and if they get caught they play dumb and agree to pay X per month to settle the bill.
They need to show intent or get you to lie to them if they want to put you in prison (which they don't because they want your money instead).
Intent or playing dumb maybe only matters as a defense against tax evasion charges, but everyone is liable to pay taxes and associated penalties for late/non-payment, even on an under the table side gig.
It's not sustainable to tax regular Joe for each and every cryptocurrency transaction due to the nature of cryptocurrencies, especially in the US where people have to do all of their taxes on their own.
I believe Canada has something like 20% tax on the profits you get out of cryptocurrencies for the year, which I think is a much simpler system that makes much more sense.
The U.S. works the same way. You are taxed on the net short or long term capital gains not on every transaction. So if you made $1000 on one trade and lost $500 on another you would only be taxes on the net $500 profit.
That's actually not true right now. Every time you trade it's a taxable event. So if you went USD --> BTC --> ETH --> BTC --> USD you would need to show 4 transactions to the IRS.
The total tax burden will look a lot like (Final USD - Total USD) * (Short Term Cap Gains Rate) but you can't just report it that way.
In 2017 I mucked around with Crypto and accumulated about 50 transactions over ~5 currencies. Reporting was a monster pain in the ass.
Given the libertarian bent of some people who are most attracted to Cryptocurrencies I'm guessing many don't report anything to the IRS voluntarily.
Even regular capital gains are kind of a pain to report, especially when you've inherited the stocks from a deceased relative who kept no records about them.
You're taxed only on the gain from the transaction, but you have to report every transaction (at least in theory - I'd bet that drug dealers being paid in crypto aren't reporting them, but if you're going to break the law, you're breaking the law). The issue isn't the tax bill, it's the amount of work you have to do to track the dollar value of the cryptocurrencies involved (which may not even be well-defined, since many cryptos aren't available for U.S. dollars) when you make a transaction.
They are treating cryptocurrency as they do any other investment: you are taxed on each transaction for stock as well. If you were day trading you would have just as much pain come tax season.
That some people insist on trying to use crypto currencies as an expensive environmentally horrific currency is kind of irrelevant when the majority of users recognize that at best it’s a long term hodl investment
That isn't true... you aren't taxed on every transaction. You are taxed on your gains and losses... if you make $1000, it doesn't matter if you made 1 big trade or 100 small ones, you get taxed on the total (either long or short term capital gains)
Where things get bad is when you buy a coin, it goes up 10x, at the beginning of the next tax year you sell and buy some other coin, it goes down to where you bought the first coin, and now instead of being where you started, you owe 2-4x..
How is this any different than selling a house for $1 million, putting that $1 million into a different house, and then the value of that new house falls to $100k?
If you sell the second house for $100k, you're on the hook for the tax on the net capital gains.
This is the same thing that all currency traders need to deal with, and there are a ton of rules and regulations already in place with how to file taxes for it.
> I believe Canada has something like 20% tax on the profits you get out of cryptocurrencies for the year, which I think is a much simpler system that makes much more sense.
This is wrong. Canada is taxed very similarly to USA meaning if it's an investment it may be capital gains and if it's a business then it's income.
I'm always impressed by how people make up statements online without any kind of research that would take less than 30 seconds. No Canada has no special tax rate for cryptocurrency, what kind of non-sense is that.
In Canada, capital gains are taxed at 50% of ordinary income, unlike the US where short term capital gains are taxed as if they were 100% ordinary income.
We've underfunded the IRS, and investigating the rich is really hard, because the rich can pay for armies of tax lawyers. You can't go after them without substantial resources, and anti-government extremists have teamed up with pro-business extremists to throttle the IRS' enforcement capabilities.
There are two separate matters here. Defining the law and enforcing the law. Misreporting capital gains on crypto violates existing law and is illegal today. Tax evasion by legitimate means (401ks, IRAs, writing off losses) is perfectly legal, and if you or I have complaints, this should be taken up with policy makers and at voting booths.
A nitpick on your language: "tax evasion" specifically refers to _illegal_ actions (eg misreporting capital gains); "tax avoidance" is the term to describe _legal_ actions that reduce a tax burden.
The real question is what can you do to avoid litigation and possible criminal charges for tax evasion -- _any_ transaction needs to be reported to the IRS, and willful evasion will generally lead to criminal charges.
No, the real question is how much is it to set up a "trust" or some other bullshit entity in the US Virgin Islands and do all your trading that way - completely legal, completely tax-free, just like the 1%.
It's not legal for Americans to completely avoid taxes simply by operating in a jurisdiction with different tax laws. You still have to report your foreign income to the IRS, you still have to pay taxes to the IRS. If you try to take the extreme step of acquiring a citizenship elsewhere and then renouncing your US citizenship, you even have to pay taxes to do that. The notion that "tax shelter" countries are a way to get around personal tax obligations is simply wrong. There are tax benefits, and plenty of people try to hide money this way, but it's not some magical solution that legally removes your tax obligation.
> It's not legal for Americans to completely avoid taxes simply by operating in a jurisdiction with different tax laws.
This is not correct, and pretty much all of the US Elite, above a certain wealth level, have some offshore structure(s), because there actually are major, legal benefits - including ones that can zero out the US individual tax liability for that activity, at least in some years.
As a result it's only the legally- & financially- relatively unsophisticated middle classes, and perhaps the lower-upper-class, that has literally every single transaction subject to US taxation.
This will be a very unpopular opinion, but it is true: USA is much better than 200 years ago; if 200 years ago you were a slave, 100% of your output belonged to your master. Now your government owns only 40-50% of your output and you feel totally free.
The only bad thing is that almost 100% of the population is now a half-slave. You don't chose what to pay, how much and what for, you just have to pay up, or else. Yes, you get some services, whatever the governments wants to, same as slaves got shelter and food, as much as the master wanted to. I see some similarities, tell me they don't exist.
Slavery was not fully eliminated in the US; it was just fractionalized, and the terms - which groups are enslaved, which groups are entitled to their output, and how much of it, etc - were obviously heavily modified. For instance you are able to change employers now, but no matter which one you pick - even if it's your own firm - in most highly-valued fields 40-70%+ of your output will be taken by various layers of government - by force if necessary. Your children are subject to the same obligation so "fractionalized chattel slavery" is a decent first-order description.
It is true that acts of extreme violence are less common than they were in the 19th century South, but that alone does not make the system "not slavery" given that a threat of overwhelming force still underpins it.
But you can move stuff out of government reach. If you're wealthy enough to afford good counsel, you can do it ~legally. As Apple, for example, does. Or you can do it illegally. Just don't count on Switzerland or Panama anymore.
And even little people like me can manage it. Using anonymous personas and well-mixed Bitcoin (or whatever). You just can't bring it back to meatspace, without risking deanonymization.
This is just foolishness. Are some rich people still exploiting others and rigging the system? Sure. But chattel slavery was an extraordinary evil. It's at best vacuous to put it in the same moral bucket as a democracy where people vote to, say, make sure old people don't starve in the streets.
The "high taxation is not slavery, because you voted" argument lost all merit once net recipients of the welfare state became able to out-vote its net contributors - which has already happened in the US.
> make sure old people don't starve
If only that were what the extent of what social security actually does. But it's not properly asset tested. So broke millenials are paying a ton of payroll taxes, which are - after substantial adminsitrative overhead - transferred to their elders who almost always have significantly more assets than they do, and often don't even need a transfer at all, let alone as their only way of avoiding starvation.
One, your numbers for "already happened in the US" are at best erroneous. The question of who gets what from labor is complicated, but the one thing for sure is that there are no easy answers, because labor itself is deeply social.
USA was a democracy also before Abraham Lincoln. Voting to take 50% of regular Joe's income does not make it right, like voting to kill Joe or voting anything that affects Joe, no matter how nice is the "cause" used as an excuse.
I understand your own quirky morality, but when you live in a society with other people, you'll have to find common ground.
I'll note that "50% of regular Joe's income" has an enormous number of hidden assumptions, all of them similarly socially negotiated. So the theoretical purity of your position is mainly an illusion.
Does anyone have a link to the letters? It drives me mad that journalists refuse to link to primary sources.