You might be the very person that the OP is talking about. You bring up topics that were resolved years ago in tax law and think they are new topics.

> 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.

Here is something simple. You don't get to decide what BTC is for tax purposes. That is decided by whatever country or countries you are tax resident.

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.

Is that how it works? Then I'll just ask to be paid in pounds rather than dollars and therefore avoid all U.S. taxes. Brilliant!

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

Honest question: if I get paid in USD but then change all my money to British pounds, do I need to pay tax when British pounds increase in value and I trade back to USD?

Is this different than BTC?

Indeed you would- trading on the foreign exchange market, as it's called, works much the same way as trading on the stock market. How taxes work for it are apparently specialized and complicated (see https://www.investopedia.com/articles/forex/09/forex-taxatio...), but you would definitely get taxed.

Yes.

No.

Yes, you do.

not sure I understand the analogy.

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.

Taxes are paid in dollars, so when your dollars change value because of inflation or deflation, your taxes will go up or down by the same amount because they are being paid in the same currency. A dollar can never inflate or deflate relative to itself.

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

I agree, so i think a good analogy would be, you buy a tractor and hold it and for whatever reason that tractor gains value, and you exchange it for a boat next year. At what point do you pay capital gains on that tractor? (it's not a currency, but you're using an asset like a currency)

If the tractor sells for more than you paid for it — or, in your specific example, the boat you traded it for is worth a larger number of dollars than you paid for the tractor, at the time of the trade — then yes; that is the very definition of "capital gains".

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.

For most assets, you only pay taxes on the gains when you sell the asset. If you buy stocks, for example, you only pay capital gains if you sell the stock.

You can't simply claim you are a bitcoinian and now all of your income and assets are referenced to BTC. You are still subject to the currency of your resident country. That is the basis of value reference. Not bitcoin.

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.

BTC and USD are not on the same level. That's why your analogy doesn't work.

>Do you get taxed when dollars deflate ? do you claim a loss when dollars inflate?

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.

thanks for this! I appreciate the thoughtful response.

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?

> Is it when you buy a boat with bitcoin?

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.

You don't claim a loss when dollars inflate because dollars are the official currency of the US. Any other asset (BTC, fiat, etc) is assessed on it's value relative to USD. If you sell back to USD you owe on the difference -- whether you do it all at once or one purchase at a time.

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.

Forex traders do on their positions when they realize a gain or loss. So yes.

ok im no accountant so maybe i just don't understand it the way i thought i did, but in this case FX traders are using a currency like an asset you buy and sell.

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

Its worth pointing out that when you spend Bitcoin (or other currency), that is the same as selling it.

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.

They are not taxing bitcoin this way either, nor do they for a stock share that you own.

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.

No. To the US Government, there is no other currency than the dollar. If you are a US Citizen, and working in the US, then you are using US Dollars. Everything else would be an asset. So if you are getting paid in BTC, that, to them, would be the same as you being paid in an equivalent amount of USD, then purchasing that much BTC. When you buy something using BTC, that would be the same as selling that amount of BTC, and then spending the USD.

> when they realize a gain or loss.

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

Holding bitcoin as it goes up in value isn't a gain. Selling or exchanging it for another currency / coin would be when someone would realize a gain or loss.