Bitcoin may change things, possibly a lot, and maybe for the better, but you have to be realistic about how much change is actually feasible.

The current governments exercise a lot of power through the banking system because it's convenient. If Bitcoin (or some more private successor like Zcash) makes the whole finance sector "go dark", like "Tor for money", those governments will still be there doing their thing, just using slightly less convenient methods.

1. Gold and silver coins were created by governments. 2. Tor was created by the government.

When you convert USD to bitcoin, that USD doesn't disappear, it still exists in the private sector economy. Nor does bitcoin increase the money supply of USD. That supply is controlled by the government.

What happens when the IRS cannot tax the bitcoin transactions is that more USD remains in the private sector than normally would. This does not cause financial problems for the government (Since government makes USDs anyway).

More USD in the private sector means at worse rising prices, and at best an economic boost.

This is not a family law judge subpoenaing coinbase for records. I've actual been an expert witness on such a court case and where Coinbase complied and gave the transaction history, for the record.

This is not the FBI or some regulator's enforcement arm investigating money laundering and having a court order requesting details of specific accounts. I'm sure they comply there too.

Nor is the IRS requesting information on specific people they think failed to report their taxes. That too would be understandable.

This is a fishing expedition. The IRS is requesting coinbase to turn over all personal information of all accounts and the entire transaction histories, with no specific basis given.

This is the financial privacy equivalent of court-order wiretapping vs dragnet surveillance. It is entirely reasonable to be angry about this.

Case in point: I bought and sold bitcoin on Coinbase at that time, as part of my non-registered sole proprietorship consulting business--I was paid by my clients in bitcoin, and purchased some on behalf of my father. As per the advice received by my accountant at that time, prior to publication of any IRS rules regarding bitcoin, I merely reported aggregate values of my own sales, not individual trades, on my Schedule C business income part of my personal 1040. Even in light of later advice published by the IRS, it's not clear that this was the incorrect way to file since it business income is handled differently. So I paid my taxes, legitimately, but there's no mention of bitcoin, or the individual trades that were made to cash out that bitcoin on Coinbase.

But, it now seems that the IRS is going to get a data dump that has my name and a bunch of bitcoin trades from years ago, and have no way of knowing that I already paid taxes on them. And, bad on me, I'm not sure I have sufficient record to prove my story, or if I do it will take a lot of unpaid work to put together. So I'm either going to get hit with an excessively large tax bill, or deal with a lot of pain and suffering and personal cost fighting this in tax court, losing a ton of my time for having done nothing wrong.

Fuck that. That's why we have due process and don't allow law enforcement fishing expeditions. False positives have a cost.

My 1099s from several Schwab accounts are the basis for much of my tax return each year and I am quite grateful for the way Schwab abstracts so much complicated accounting into a single statement that both I and the IRS can trust without question.

Is there a BTC exchange that DOES provide 1099-type statements?

If I use my bank to transfer you money, the bank isn't responsible for filing a 1099 to report that income to you; I am. Using coinbase to transfer funds to you should be handled the same, and Coinbase is a wallet and merchant service as much as it is an exchange.

Now selling coins is always a taxable event. But when properly using an exchange, the coins should not be kept "on account." So ideally, every bitcoin sold was transferred into Coinbase/GDAX prior to the sale. How does Coinbase know the cost basis to report? It doesn't. Not unless that information is freely provided by the user, in which case it is fully unverifiable and the user would be free to put whatever the heck they want. Should Coinbase be required to file 100% self-reported tax information from its users without any way to verify the authenticity of that reported cost basis and time held?

Cypto-exchanges might be able to skirt those laws for now, because they're slightly different, new, and small, but if cryptocurrencies become mainstream the laws will be updated to include them.

In this way, it is the government who commits a crime, crusading into new territory and plundering those who object.

Why is this any different at all?

If you already paid taxes on them, you can demonstrate that pretty easily.

And since your bitcoin trades attached to your name can be linked to your tax returns I think they would absolutely know that you've already paid taxes on yours, and they will ask for your help in tracking down people for whom you did transactions so that they might connect their transactions to taxes that they have paid on them.

That said, you still did business in an unsanctioned proxy-currency. There's bound to be a cost to that.

Honestly, you should be upset with the broker (coinbase) for not providing you with suitable reporting documentation in the first place.

https://en.wikipedia.org/wiki/Currency_transaction_report

For those who think about anonymizing their bitcoin sources by running them trough mixer or using anonymous cryptocurrency, think it over twice and find out more about the cash seizure, detention and forfeiture laws.

Money laundering laws are not a joke. They use reverse burden of proof. Your money can be seized and you must explain its origin or you lose it.

Definitely something I'd like to see challenged in the court system.

I would say that, like many fields, the existing domain knowledge in the relevant professions (accounting, finance) is incredible. But CS and the sort of expertise common in the Bay Area does have a lot to contribute to the tools used in those professions. I'm a lawyer and a developer working at a large public account firm, and my experience has been that the profession has a lot of experience recognizing the myriad ways to identify, measure, and disguise value via financial transactions, but very little expertise in using computers to do so.

Yeah, you're not gonna fool us by withdrawing $100k from your account and hiding it under your mattress or in a crypto wallet. Everyone in the field knows to look at the economic substance of a transaction over its nominal form. But most of us can't figure out how to open a CSV file that's too big for Excel, so there's plenty of room to help us with managing lots of data and extracting useful information from it.

>Case 3: money laundering and other types of financial crimes. There are entire companies who build software to detect money laundering. It's a well-understood problem.

I would disagree with you here. Money laundering is an extremely challenging problem, not least of all because money launderers are extraordinarily inventive and constantly shifting tactics. It's a lot like infosec. No matter how advanced your defenses are, a ton of hackers are always looking for a way through and any sufficiently complex system is impossible to secure 100%.

First principal of TaxLaw: It is all income unless it isn't. It is always taxable unless you can find language in the code exempting it. I'd go a little further in saying that the taxable amount isn't "Y-X", ie the profit. The taxable amount is actually just Y, the sale price. Income is all money literally coming into you. You then need to find a deduction for X, the cost of purchasing the asset. Maybe you find one, or maybe you bought your bitcoins with cocaine and so owe on tax on the entire sale price. Or maybe you have already deducted that cost in a previous year and so cannot deduct it again now. Or maybe you traded your bitcoins for some other bitcoins last year, realized the gain then, and now have to start reviewing the like-kind exchange rules. (I'm in that 0,01% of people who actually enjoy tax law. It's actually very eloquent.)

https://www.gov.uk/government/publications/revenue-and-custo...

Of course when you get busted for drugs, it’s pretty likely that your tax records will be gone through.

I saw a documentary where sex workers had accountants and such and declared all their illegal income. It was pretty interesting. But prostitution isn’t as severely prosecuted as drugs.

That's right, because everybody knows _I'M_ the smartest person in the world!

Nobutseriously. I've never been able to articulate why I was skeptical about Bitcoin as a "currency" per se, but I think you've done it. The money problems Bitcoin claims to uniquely solve, it either doesn't really solve, or it's a solution you can easily get some other way, or it was a security-through-obscurity type of thing where agencies of oversight were ignoring it/ignorant of it -- which meant if it ever went mainstream they would catch up... and now they have. Sadly I don't think there's any escape from authoritah.

That's not to say the blockchain idea isn't useful... just not as money.

This is a very different security model than that provided by the underlining base layer of many cryto currencies.

If the Panama papers have taught us anything it's that there are better places to hide money and legally avoid paying taxes on it than bitcoin.

Taxes are good, but I think that the "centralized" solution for taxing, (having a separate process, that is all defined and enforced by government) is a terrible solution that has proven ineffective, unfair, and inaccurate. Public commons like taxes need to have an equivalent smart contract and once you have mass acceptance of these tokens, people will have no choice but to pay taxes with any and every transaction, and all of the pain the current centralized IRS feels crypto has, will be irrelevant.

This is easy when you buy Bitcoin, hodl and then sell but what if you convert it to altcoins, trade altcoins for altcoins and ultimately sell some altcoin for USD? How do you even keep track of your profits?

Its the same as if you were to pay for a new car with some Google shares and your old car, where there is no conversion to money- it's barter trade. The CRA (Canadian IRS) treats BitCoin transactions as barter trade- and you have to declare the trade in equivalent dollar values.

The happy path does not allow for easy avoidance of capital gains. I am not sure what happens if you were to purchase outside the country though- although I think the limiting factor here is the exchange you're converting on. Connecting with banks subject them to regulation and reporting.

I wonder if I buy BitCoin in a Caymen Island exchange, sell on the exchange for profit into a Caymen Island bank account, then transfer the wealth into a Canadian account, if I could avoid capital gains. This is all in OP's comment though where the institutions responsible for taxation have a wealth of domain knowledge. The tax code is complicated because people with a ton of wealth on the line have found and exploited every loophole imaginable. Nothing I can think of hasn't already been considered.

That's interesting. How does it work with hard forks like Bitcoin Cash?

I think you'd treat it as found money (income, but at what value? it would be really hard to say what the value is on Day 1 of the hard fork, but you could go by what the markets said it was worth... or do you use the value of the BCH from when you first "claimed" it and moved it to a BCH address? or use the value it had when you first sold it? what if you were holding BTC at the time of the fork but never claimed your BCH, do you have any way to prove that? Do you need to?)

Then once you transact it just once, it should be easy, same question as any other crypto currency; you pay capital gains on the appreciated value (the gains) after you sell. But what is your "cost basis" in that calculation?

I don't want to overpay taxes, but I think the safest thing to do would be to treat that first sale as pure income and pay the regular marginal income tax rate on the full value, because truly you'd actually have no cost basis until you had actually bought some BCH.

At least, I would believe that's the spirit of the law.

So if you're buying NEO with BTC, you log two trades: a SELL of BTC (to USD), and a BUY of NEO (with USD.)

It's also important to match each of your sale orders with prior buy orders (for calculating taxable profit/loss.)

I haven't used this product and I'm not vouching for it in any way, but it looks like a solid thing, and I intend to use it this year to figure out how much I owe for my trades.

It appears to have grown since I looked at it last, for $20 you get the ability to import as many transactions as you want from CoinBase, GDAX, and ~15 or so others, and you get your answer in a form that TurboTax can include in your returns.

Last time I looked, I think that it supported CoinBase but not GDAX. (So it appears to have grown since then.) I don't know how much I trust a tax service for $20, but I think I trust it further than I can throw a spreadsheet that I created and populated with trade information by hand...

https://bitcoin.tax

I think that, CoinBase and GDAX are not in the business of helping you file your tax returns. They may even incur liabilities if they helped you do it wrong.

If coin trading platforms at-large are not solving this problem, then CoinBase has no need to compete on that point. There aren't any markets that try to help you file your taxes better, they are all busy solving the problems of holding cryptocurrency securely and making sure that trades are executed and accounted for reliably and in a timely fashion.

This is not the only company that suggests API use for a customer. I was somewhat bewildered when I asked Pivotal if there was any more convenient interface to Story Tasks, and told Pivotal that I was writing a client for their API because it was too onerous to make sense of Project/Story/Task workflow through their application's interface, and they responded (in brief) "that's actually exactly what we'd recommend, good luck!"

If they help you get a spreadsheet, you're going to blame them when it's too confusing for you (or your accountant) to distill into the form of a tax return correctly. What do you do with cancelled trades? How do you make sure they are discarded? (They should probably reflect on the data sheet somehow, right?) And what do you do when you trade on more than one market, or when you bring cryptocurrency from another source that already has a cost basis? Your itemized gains and losses are now incorrect, unless you provide an interface to express that cost basis into the system. And now you aren't just a market, you're an accounting platform.

This sounds more and more like a problem for bitcoin.tax to solve, and not Coinbase.

An API is the way to provide an interface to the data that is stored in your service (for customers, or anyone else.)

The data that is not inside of your service, you don't need to take responsibility for as a service provider. As an API or service provider, there is an opportunity to answer these kinds of questions insofar as you feel responsible, in the interface documentation.

Like buying EUR/USD then going into EUR/AUD

nope

you really don't have to go in and out of USD with crypto currency .. you never have to touch USD again. sure they can try auditing your assets vs your salary and come up with some bullshit number you will then have to fight, but there will be many ways to come up with how much you owe

and what if you elect to get your salary in crypto currency? if that currency inflates what taxes are you paying?

hmm lots of down votes. didn't think my statements were that offensive or ridiculous :) nor am i a "Bitconian" really own 0.2 of BTC. Simply trying to understand what IRS is doing here..

> I really don't think its that simple. Do you get taxed when dollars deflate ? do you claim a loss when dollars inflate?

Are you trying to argue that Bitcoin is on the same footing as USD, because it is not. Bitcoin is treated like gold or any other asset. It has a value when you acquire it and it has a value when you sell it. This value is in USD as far as the IRS is concerned.

> you really don't have to go in and out of USD with crypto currency .. you never have to touch USD again. sure they can try auditing your assets vs your salary and come up with some bullshit number you will then have to fight, but there will be many ways to come up with how much you owe

Your Bitcoins are worth a specific value at any moment in time. Again, when you buy it, it is worth X amount of value and when you sell it, it is worth Y amount of value. That value is in USD. Do the math like you bought or sold gold or silver.

> and what if you elect to get your salary in crypto currency? if that currency inflates what taxes are you paying?

Simple. You are paid X amount in USD and that is given to you in Bitcoin. Your employer is writing in their ledger that they paid you X amount of USD. If you get your paycheck in gold or silver or Bitcoin is irrelevant. Your value is in USD as far as the IRS is concerned and you and your employer will pay taxes on that.

If, for example, they decide your transactions are a deemed disposition an an asset, you owe capital gains tax on it. It really is that simple.

That's not how it works, with Bitcoin or any other asset.

Is this different than BTC?

No.

i am not saying you don't get taxed with bitcoin. you still pay income tax, sales tax when you use them etc. but when your dollars gain in value due to deflation, do you pay tax on that ? seems that is what we're talking about here. btc gaining value.

You seem to be trying to make the analogy of bitcoin being a currency, so a better comparison would be to look at tax law for foreign currencies. Luckily, the IRS puts out documents about that very thing: https://www.irs.gov/pub/int_practice_units/fcu_cu_c_18_2_1_0...

Now, whether bitcoin is a currency or an asset is not fully settled, although the IRS treats it as an asset, not a currency: https://www.irs.gov/newsroom/irs-virtual-currency-guidance

Just because the gain isn't in actual dollars, doesn't mean there wasn't a gain. If the gain is somehow denominable in, or reducible to, a number of dollars, then for tax purposes it is a gain.

You realize those gains at the time of the sale or trade. That's when they're taxable.

Edit: if you bought it, but haven't sold it you haven't realized a profit and don't have to pay taxes on the gains yet, but you definitely have to pay taxes on the income as Bitcoin. If you are buying everything with Bitcoin you have just created an accounting/auditing nightmare for yourself, because you owe additional taxes on asset appreciation every time you "use" it.

No, because there was no taxable event. For income to be taxed, it has to be realized. Realization can be a tricky concept, but it basically means when the income is earned or when a non-cash asset is exchanged for cash. By law and under IRS regulations, the US dollar is the functional currency for US taxpayers, which means it is the final currency by which all taxable income must be measured. You don't recognize any gains or losses on its fluctuations because it is itself the measuring stick for gains and losses.

Another way to look at it is this: as soon as you receive a dollar, you have realized income and you cannot be forced to realize income on the same asset again if there has been no change in ownership and there has been no change in its dollar value (which there can never be for a dollar unless the Fed or Congress do something really whacky). And this makes sense. Your tax burden is measured in dollars, so it scales and declines in tandem with the value of the dollar. If the dollar deflates, your tax burden increases relatively, but your income in dollars was worth more anyway. And, in the regular course of events, there shouldn't be that much currency fluctuation in the single year over which you incur and pay taxes anyway.

>and what if you elect to get your salary in crypto currency? if that currency inflates what taxes are you paying?

This is actually extremely common with stock options. People accept equity in lieu of cash payment. The tax code taxes "income from whatever source derived," which is basically a roundabout way of saying literally anything can be income if it has value, including stock options or crypto currency. Unlike stock options though, the income on crypto would need to be recognized immediately because the value is realized immediately (you get taxed on stock options when you exercise them).

Similarly though, if you were paid in crypto and then the crypto declined in value, you could recognize a loss on that once you sold the crypto. And just to clarify since you don't seem very familiar with tax law, losses are good for tax purposes because you can net them against gains to offset taxable income. So it's not all bad.

Unlike stock options though, the income on crypto would need to be recognized immediately because the value is realized immediately (you get taxed on stock options when you exercise them)...Similarly though, if you were paid in crypto and then the crypto declined in value, you could recognize a loss on that once you sold the crypto.

so the part that's not covered here is when you hold crypto, it gains in value, but you don't sell it to USD. That was my only point with this crazy thread.. At what point do you get hit with capital gains? Is it when you buy a boat with bitcoin? They will charge you sales tax, and then figure out your capital gains based on the boat value vs your purchase price of btc?

That would be taxed as a barter exchange. It's basically the same as selling the crypto and then paying with USD. You are taxed on the fair market value of the boat that exceeds the amount that you paid for the crypto or it's fair market value when you received it for your services if it was income (that's your basis in the asset). In addition, depending on the state, there may be sales tax implications for one or both parties.

This is why people don't pay their rent with stock. It would be an absurd loophole if you could avoid paying income tax simply because you never touched cash.

But to answer your question more generally, income is taxed when a taxable event occurs, as I stated in my previous post. It varies depending on whether the taxpayer is an accrual method or cash method taxpayer, but as an individual you are on the cash method, which means income is taxable when received.

The tricky part is defining income. In Commissioner v. Glenshaw Glass Co., the Supreme Court held that income means, "[1] undeniable accessions to wealth, [2] clearly realized, and [3] over which the taxpayers have complete dominion." It later held in Helvering v. Bruun that "the realization of gain need not be in cash derived from the sale of an asset."

So anything that meets those three tests qualifies as income, regardless of whether it was converted to cash at any point in the transaction. If someone gives you a bunch of bitcoin in exchange for your services, you have clearly gained something of value, which you have received into your possession, and over which you have complete and undisputed control. Thus, it is immediately taxable at its fair market value when received, and likely as ordinary income and not as capital gains (otherwise everyone would pay all of their employees in some liquid asset so that they don't have to pay payroll taxes and can pay the lower capital gains rate). Bad luck for you if the value immediately crashes to zero and never recovers because you still owe tax on the full amount at the time it was received.

If you purchase bitcoin, that is not an accession to wealth which has been realized, because the value can just as easily decline and it is only worth whatever you paid for it at that time. This is also true for subsequent increases in the value of bitcoin you receive in exchange for services. So you are not taxed on BTC price fluctuations, even when the bitcoin increases in value. When you exchange appreciated bitcoin to someone else for something of value, whether USD or GPB or barter, you have realized the increase in value of the bitcoin and then will owe taxes on that increase. In that case, the excess of the FMV of the sale over the basis will be taxed at capital gains, regardless of whether you initially received the BTC as payment for services or purchased it.

If you get paid in crypto then you owe income tax for its value at the time of salary payment.

If your salary is specified in BTC you should be prepared to pay lots of tax when you are paid. If it is specified in USD but paid in BTC then accounting will be easier.

I hope you have a good accountant and a good lawyer, especially if you are one of those the IRS is investigating.

but what if you earn money in that currency and never exchange it for any other currency just use it for life. the government would literately have to audit your savings account and proclaim that you owe X because your savings went up in value (and im not talking about interest paid by bank, i'm talking about just buying power of underlying currency).

that is no different than owning a gold necklace and government taxing you on it because gold went up in price. I don't think this is happening right now

I don't know what you mean by "use it for life"- yes, you can hold onto Bitcoin (or gold or whatever) and not get taxed, but as long as its sitting under your mattress it doesn't do you any good regardless. There's no way to use the value to get anything else without getting taxed.

You're taxed on the realized gain (or loss) when you sell the asset.

The same as you are when you convert a currency back into USD.

Holding bitcoin while it goes up in value isn't realizing a gain or loss.