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>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

by stult 9y ago

>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.

SonicSoul 9y ago
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?
- stult 9y ago
  > 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.

by stult 9y ago

SonicSoul 9y ago

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?

stult 9y ago
> 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.