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Investors in Bitcoin and other cryptocurrencies face hefty tax bills

magnetic 9y ago
tl;dr - profits from crypto investments seem to be taxed like other types of capital gains and inexperienced investors get burned because they don't know how taxes on investments/capital gains work (or were secretly hoping things would be different with crypto).
Taniwha 9y ago
Yes, if you realise a capital gain you owe taxes ... That's the way taxes work, the can probably write their losses off in subsequent years provided they last the year without bankruptcy an have some future gain to write it off against. This is not a new thing here on HN lots of people screwed themselves almost the exact same way during the 90s dotcom boom when they bought their shares (and realised a gain) then just when the IRS came knocking the sitcom bust happened and their shares were worthless .....
- Simon_says 9y ago
  It's not really comparable to how monstrous the tax situation with ISOs are. If you exercise options to buy the stock, you have a tax liability, even though you get no cash from the transaction. It's economically inefficient in the sense that it ties employees to companies that they'd otherwise not continue to work for. This has no analogy to the crypto market.
  - Taniwha 9y ago
    It's basically the same mechanism that causes the tax liability though, I wasn't arguing for the size of the issue In the stock option case you only get a tax liability if you buy something that's worth more than you paid for it - if you have options, either buy them the day they are granted (and take the risk that you wont stay, or the company will die, etc) and lock in the lower long term capital gains tax, or wait until the day you sell the stock and do an exercise/sell transaction which will likely be taxed at source and end up on your W2, at your full marginal rate. The thing you should not do is the middle thing - buy your stock between these two dates then you'll pick up a tax liability on the capital gains to that point. Talk to someone who understands ISOs and taxes - when you are first granted your stocks and whenever you plan on changing their state
WheelsAtLarge 9y ago
You only have to pay taxes if you realize a gain for the year. Or you traded the same asset over and over within a 30 day period, called a wash sale. In a wash sale, you can't deduct the losses. So unless they were really reckless they will only pay on the gains they made. No, I won't shed a tear because they have to pay taxes on gains. Now to the techies that ended up with a large tax bill after the dot com collapse, they got the bill because they exercise their options to buy shares in their respective companies. Those were gains because they got to buy the stock at a highly discounted price. But later the shares lost all their value, but they still had the recorded gains to deal with. In many cases, they really got shafted because they got the stock but at no time were they able to sell any of the stock that they got and was recorded as a gain. So the gains were all paper gains. I suspect that the IRS had to make some concessions in that situation. But that's only a guess on my part. Another part of their pain was that many borrowed money to buy the stock. When the share price collapsed, they had the taxes plus the cost of the loan and worthless stock they could not use to cover either. Ouch!

tl;dr - profits from crypto investments seem to be taxed like other types of capital gains and inexperienced investors get burned because they don't know how taxes on investments/capital gains work (or were secretly hoping things would be different with crypto).

Taniwha 9y ago

Yes, if you realise a capital gain you owe taxes ... That's the way taxes work, the can probably write their losses off in subsequent years provided they last the year without bankruptcy an have some future gain to write it off against. This is not a new thing here on HN lots of people screwed themselves almost the exact same way during the 90s dotcom boom when they bought their shares (and realised a gain) then just when the IRS came knocking the sitcom bust happened and their shares were worthless .....

Simon_says 9y ago
It's not really comparable to how monstrous the tax situation with ISOs are. If you exercise options to buy the stock, you have a tax liability, even though you get no cash from the transaction. It's economically inefficient in the sense that it ties employees to companies that they'd otherwise not continue to work for. This has no analogy to the crypto market.
- Taniwha 9y ago
  It's basically the same mechanism that causes the tax liability though, I wasn't arguing for the size of the issue In the stock option case you only get a tax liability if you buy something that's worth more than you paid for it - if you have options, either buy them the day they are granted (and take the risk that you wont stay, or the company will die, etc) and lock in the lower long term capital gains tax, or wait until the day you sell the stock and do an exercise/sell transaction which will likely be taxed at source and end up on your W2, at your full marginal rate. The thing you should not do is the middle thing - buy your stock between these two dates then you'll pick up a tax liability on the capital gains to that point. Talk to someone who understands ISOs and taxes - when you are first granted your stocks and whenever you plan on changing their state

WheelsAtLarge 9y ago

You only have to pay taxes if you realize a gain for the year. Or you traded the same asset over and over within a 30 day period, called a wash sale. In a wash sale, you can't deduct the losses. So unless they were really reckless they will only pay on the gains they made. No, I won't shed a tear because they have to pay taxes on gains. Now to the techies that ended up with a large tax bill after the dot com collapse, they got the bill because they exercise their options to buy shares in their respective companies. Those were gains because they got to buy the stock at a highly discounted price. But later the shares lost all their value, but they still had the recorded gains to deal with. In many cases, they really got shafted because they got the stock but at no time were they able to sell any of the stock that they got and was recorded as a gain. So the gains were all paper gains. I suspect that the IRS had to make some concessions in that situation. But that's only a guess on my part. Another part of their pain was that many borrowed money to buy the stock. When the share price collapsed, they had the taxes plus the cost of the loan and worthless stock they could not use to cover either. Ouch!