5 ms·

Hacking the IRS with gold coins

37 points by Gibbon 17y ago

grandalf 17y ago
Impressive. It puts into perspective the ceremonious folly of making the gold and silver coins legal tender.
- stcredzero 17y ago
  Actually, the free market will even aggravate such abuse automatically. The fact that they are legal tender is a very special property of the US Mint produced coins. If there is a lot of utility in them, their value will go up. (And there are a lot of people who think that getting out of taxes is dandy.) This will increase their scarcity, and since the US Mint isn't motivated by profit, they have no reason to make more and prices will not come back down. This will cause early gold-payroll recipients to be holding coins that appreciate tremendously! However, the US mint will also prevent this from growing beyond a certain point. It can reduce the supply of such coins any time it wants to. Also, there's nothing to prevent the US government from creating a special "transaction tax" that only applies to the use of such coins.
- jam 17y ago
  Really? My takeaway was the difficulty of trying to uphold otherwise-worthless paper as legal tender.
  - ubernostrum 17y ago
    And gold has some intrinsic value? Gold is worth what the person who buys it from you says it is worth. Paper is worth what the person who buys it from you says it is worth. As "money", both are valueless in and of themselves, and merely stand in for things of actual value (goods and services). These are the fundamentals. Forget them at your peril.
    - ghshephard 17y ago
      The total amount of all gold ever mined is less than a tennis court cubed. In the last 2000 years, gold has been the single commodity that has always held value, particularly in times of disruption and panic. It may be volatile, but it never becomes worthless, is highly liquid (perhaps the most liquid asset around), is mobile, very durable, and stores a great deal of value in a small volume. What other assets can you say share those traits? In the 1900s alone, there have been 20+ times of complete collapse of paper currencies: http://en.wikipedia.org/wiki/Hyperinflation http://en.wikipedia.org/wiki/Hyperinflation While past performance isn't always an indication of future behavior, some trends are worth paying attention to. If you want to scoff at something, let's start with diamonds which can be _manufactured_ to a higher quality, at increasingly lower costs. I mean, we are talking about _carbon_ there!
      - ubernostrum 17y ago
        The amount of gold available in the world is relatively stable; there's not much of it and never has been. The amount of "stuff" -- things of value which we wish to obtain through economic transactions -- is not stable and has not been for quite some time; it has, rather, been expanding at a rapid pace (consider, for example, the number of profitable industries today producing durable goods which did not exist even a half-century ago). This represents a problem: if the total amount of currency available for use in transactions does not maintain rough parity with the total amount of goods and services available to be exchanged in those transactions, then the imbalance will lead to wild price fluctuations. Since this situation is isomorphic to inflation (the only difference is which side of the currency/goods equation harbors the imbalance), the magnitude of the fluctuations will be the same as in an equivalent inflationary situation. Thus, your point would be a strong one if only you were arguing for gold as an investment (since, in an imbalance of the type described above, the market value of gold would increase). As an argument for gold as a currency, it holds no water and in fact tends to undermine that position. In the present age, gold simply cannot be the foundation of a stable currency.
        ghshephard 17y ago
- nradov 17y ago
  It's a bit more than ceremonious folly. See the US Constitution article 1 section 10: "No State shall ... make any Thing but gold and silver Coin a Tender in Payment of Debts". http://www.archives.gov/exhibits/charters/constitution_transcript.html http://www.archives.gov/exhibits/charters/constitution_trans...
byrneseyeview 17y ago
How is this a hack? He failed. It would be a great article if he won, but it looks like he rather transparently ignored the rules on the IRS website, and got busted. "Hacking the War on Drugs: I put weed in my sock drawer, which worked until my roommate called the cops on me as a prank."
- stcredzero 17y ago
  According to the article, the IRS only has instructions dealing with collectible coins that are out of circulation. The coins he used were still in circulation.
  - byrneseyeview 17y ago
    Uh, yeah, but if all he did was place a low value on the coins, then his business is going to have artificially high profits, so the net result is that he goes to court over paying corporate income taxes instead of payroll taxes plus paying his people enough for their Federal taxes. For example, if he earns $60, and his expense is paying someone $50, either: a) He pays them $50, they pay taxes on that $50, and he pays taxes on the $10, or b) He does his coin trick, they pay taxes on, say, $5, and he pays taxes on $55 (because he gives the coins a low value). If all he's doing is buying something at one price, writing down its value, and giving it away, then anyone can do this. Try it with shares of a privately-held company, or golf club memberships, or anything that doesn't freely trade.
    - stcredzero 17y ago
      Yes, but legal tender does freely trade. So, what if you decided to pay your workers in cash? You contract a company to handle this for you, and hauling all those bills is a huge pain in the butt, so they charge you $X over the value of the bills that get handed out to your workers. What if you had each stack of bills individually wrapped in a satin ribbon, resulting in an even higher service fee? Aren't you doing the same thing?
      - 17y ago
patrickg-zill 17y ago
Here is the conundrum that the IRS is in.. The US Government has placed a face value on the coins, a 1-ounce gold coin is marked 50 US Dollars. The intrinsic value of that coin today is right around $1000. IF they argue that intrinsic value should be the determining factor, then what is the intrinsic value of a paper $20 bill (really about 5 cents of paper and ink)? IF the IRS states that face value of the $20 bill is established by the US Government, then the face value of the $50 gold coin must also be taken at its face value - after all, the face value of the coin was established by the same government that established the paper bill's value. I hope I have explained this right... the IRS cannot argue intrinsic value vs. face value without falling into a ditch. I think this is what the defense is counting on.
- sethg 17y ago
  I don't see any conundrum. I don't know what the actual IRS rules are, but common sense tells me that if I am paid with some commodity (dollar bills, silver coins, buckets of crude), then my income for tax purposes is the market value of that commodity. A $20 bill has a market value of $20. A one-ounce gold coin marked "$50" has a market value of about $1000. If aliens shower us with free gold, and the price of gold drops to $40 an once, then we can start caring about the face value of the one-ounce gold coin.
  - noodle 17y ago
    the gold is more than a commodity, it is legal US tender. its illegal to scrap pennies for their precious metals. why is it different for the gold coins, which you must do in order to pull the market value out of them?
    - stcredzero 17y ago
      You sell them off, and it's someone else's problem. (Possibly they take them overseas? It can't be done legally, but it would be someone else breaking the law.)
    - deleted 17y ago
      [deleted]
tptacek 17y ago
If you pay someone a nominal $2500 in $50-denominated gold coins, and that someone sells the coins on the open market for $50,000, haven't they just incurred taxable income?
- gojomo 17y ago
  Clearly the IRS prefers the interpretation that your 'nominal' payment was actually $50K (or included a $47.5K gift) -- so tax is owed even if the recipient sits on the coins. If in fact someone immediately sold the coins and reported the nominal payment plus the short-term 'investment gain', it might push the matter below the level of IRS concern. My understanding is that when the net tax effect is about the same from alternate accountings, the IRS is unlikely to quibble about the particulars (but IANAL or tax accountant).
  - kqr2 17y ago
    http://en.wikipedia.org/wiki/Gift_tax_in_the_United_States http://en.wikipedia.org/wiki/Gift_tax_in_the_United_States In theory, you are allowed to gift up to the $13K tax free each year. I wonder if he could claim that up to $13K minus the nominal value of the coins was a gift.
  - tptacek 17y ago
    I understand the competing preferences here, but even in this guy's best-case scenario, he hasn't avoided income tax; he's just shifted it from payroll tax (which is FICA eligible) to capital gains. You can do a similar thing as an independent contractor just by forming an S-Corp and claiming your income as profit sharing instead of salary. And of course the outcome is similar: you enjoy a nominal benefit for awhile, and then you get audited and taken to court. I don't think the IRS is shaking in their boots over this.
    - gojomo 17y ago
      Right -- the only significant gain is if the coins are held longer (for long-term gains treatment of the phony appreciation) or sold in an unreported transaction (which itself compounds the illegality). And my point was: while any combination of stunts leading to less taxes paid is of interest to the IRS, if you instead engage in bizarro accounting but the end result is you wind up paying about the same amount of taxes, just via different line-item -- no "net tax effect" -- they may as a practical matter ignore you. They care about the money, not the principle.
MaysonL 17y ago
I wonder how he accounted for the cost of the gold coins? Did he attempt to write it off as a business expense?

37 points by Gibbon 17y ago

grandalf 17y ago

Impressive. It puts into perspective the ceremonious folly of making the gold and silver coins legal tender.

stcredzero 17y ago
Actually, the free market will even aggravate such abuse automatically. The fact that they are legal tender is a very special property of the US Mint produced coins. If there is a lot of utility in them, their value will go up. (And there are a lot of people who think that getting out of taxes is dandy.) This will increase their scarcity, and since the US Mint isn't motivated by profit, they have no reason to make more and prices will not come back down. This will cause early gold-payroll recipients to be holding coins that appreciate tremendously! However, the US mint will also prevent this from growing beyond a certain point. It can reduce the supply of such coins any time it wants to. Also, there's nothing to prevent the US government from creating a special "transaction tax" that only applies to the use of such coins.
jam 17y ago
Really? My takeaway was the difficulty of trying to uphold otherwise-worthless paper as legal tender.
- ubernostrum 17y ago
  And gold has some intrinsic value? Gold is worth what the person who buys it from you says it is worth. Paper is worth what the person who buys it from you says it is worth. As "money", both are valueless in and of themselves, and merely stand in for things of actual value (goods and services). These are the fundamentals. Forget them at your peril.
  - ghshephard 17y ago
    The total amount of all gold ever mined is less than a tennis court cubed. In the last 2000 years, gold has been the single commodity that has always held value, particularly in times of disruption and panic. It may be volatile, but it never becomes worthless, is highly liquid (perhaps the most liquid asset around), is mobile, very durable, and stores a great deal of value in a small volume. What other assets can you say share those traits? In the 1900s alone, there have been 20+ times of complete collapse of paper currencies: http://en.wikipedia.org/wiki/Hyperinflation http://en.wikipedia.org/wiki/Hyperinflation While past performance isn't always an indication of future behavior, some trends are worth paying attention to. If you want to scoff at something, let's start with diamonds which can be _manufactured_ to a higher quality, at increasingly lower costs. I mean, we are talking about _carbon_ there!
    - ubernostrum 17y ago
      The amount of gold available in the world is relatively stable; there's not much of it and never has been. The amount of "stuff" -- things of value which we wish to obtain through economic transactions -- is not stable and has not been for quite some time; it has, rather, been expanding at a rapid pace (consider, for example, the number of profitable industries today producing durable goods which did not exist even a half-century ago). This represents a problem: if the total amount of currency available for use in transactions does not maintain rough parity with the total amount of goods and services available to be exchanged in those transactions, then the imbalance will lead to wild price fluctuations. Since this situation is isomorphic to inflation (the only difference is which side of the currency/goods equation harbors the imbalance), the magnitude of the fluctuations will be the same as in an equivalent inflationary situation. Thus, your point would be a strong one if only you were arguing for gold as an investment (since, in an imbalance of the type described above, the market value of gold would increase). As an argument for gold as a currency, it holds no water and in fact tends to undermine that position. In the present age, gold simply cannot be the foundation of a stable currency.
      - ghshephard 17y ago
nradov 17y ago
It's a bit more than ceremonious folly. See the US Constitution article 1 section 10: "No State shall ... make any Thing but gold and silver Coin a Tender in Payment of Debts". http://www.archives.gov/exhibits/charters/constitution_transcript.html http://www.archives.gov/exhibits/charters/constitution_trans...

byrneseyeview 17y ago

How is this a hack? He failed. It would be a great article if he won, but it looks like he rather transparently ignored the rules on the IRS website, and got busted. "Hacking the War on Drugs: I put weed in my sock drawer, which worked until my roommate called the cops on me as a prank."

stcredzero 17y ago
According to the article, the IRS only has instructions dealing with collectible coins that are out of circulation. The coins he used were still in circulation.
- byrneseyeview 17y ago
  Uh, yeah, but if all he did was place a low value on the coins, then his business is going to have artificially high profits, so the net result is that he goes to court over paying corporate income taxes instead of payroll taxes plus paying his people enough for their Federal taxes. For example, if he earns $60, and his expense is paying someone $50, either: a) He pays them $50, they pay taxes on that $50, and he pays taxes on the $10, or b) He does his coin trick, they pay taxes on, say, $5, and he pays taxes on $55 (because he gives the coins a low value). If all he's doing is buying something at one price, writing down its value, and giving it away, then anyone can do this. Try it with shares of a privately-held company, or golf club memberships, or anything that doesn't freely trade.
  - stcredzero 17y ago
    Yes, but legal tender does freely trade. So, what if you decided to pay your workers in cash? You contract a company to handle this for you, and hauling all those bills is a huge pain in the butt, so they charge you $X over the value of the bills that get handed out to your workers. What if you had each stack of bills individually wrapped in a satin ribbon, resulting in an even higher service fee? Aren't you doing the same thing?
    - 17y ago

patrickg-zill 17y ago

Here is the conundrum that the IRS is in.. The US Government has placed a face value on the coins, a 1-ounce gold coin is marked 50 US Dollars. The intrinsic value of that coin today is right around $1000. IF they argue that intrinsic value should be the determining factor, then what is the intrinsic value of a paper $20 bill (really about 5 cents of paper and ink)? IF the IRS states that face value of the $20 bill is established by the US Government, then the face value of the $50 gold coin must also be taken at its face value - after all, the face value of the coin was established by the same government that established the paper bill's value. I hope I have explained this right... the IRS cannot argue intrinsic value vs. face value without falling into a ditch. I think this is what the defense is counting on.

sethg 17y ago
I don't see any conundrum. I don't know what the actual IRS rules are, but common sense tells me that if I am paid with some commodity (dollar bills, silver coins, buckets of crude), then my income for tax purposes is the market value of that commodity. A $20 bill has a market value of $20. A one-ounce gold coin marked "$50" has a market value of about $1000. If aliens shower us with free gold, and the price of gold drops to $40 an once, then we can start caring about the face value of the one-ounce gold coin.
- noodle 17y ago
  the gold is more than a commodity, it is legal US tender. its illegal to scrap pennies for their precious metals. why is it different for the gold coins, which you must do in order to pull the market value out of them?
  - stcredzero 17y ago
    You sell them off, and it's someone else's problem. (Possibly they take them overseas? It can't be done legally, but it would be someone else breaking the law.)
  - deleted 17y ago
    [deleted]

tptacek 17y ago

If you pay someone a nominal $2500 in $50-denominated gold coins, and that someone sells the coins on the open market for $50,000, haven't they just incurred taxable income?

gojomo 17y ago
Clearly the IRS prefers the interpretation that your 'nominal' payment was actually $50K (or included a $47.5K gift) -- so tax is owed even if the recipient sits on the coins. If in fact someone immediately sold the coins and reported the nominal payment plus the short-term 'investment gain', it might push the matter below the level of IRS concern. My understanding is that when the net tax effect is about the same from alternate accountings, the IRS is unlikely to quibble about the particulars (but IANAL or tax accountant).
- kqr2 17y ago
  http://en.wikipedia.org/wiki/Gift_tax_in_the_United_States http://en.wikipedia.org/wiki/Gift_tax_in_the_United_States In theory, you are allowed to gift up to the $13K tax free each year. I wonder if he could claim that up to $13K minus the nominal value of the coins was a gift.
- tptacek 17y ago
  I understand the competing preferences here, but even in this guy's best-case scenario, he hasn't avoided income tax; he's just shifted it from payroll tax (which is FICA eligible) to capital gains. You can do a similar thing as an independent contractor just by forming an S-Corp and claiming your income as profit sharing instead of salary. And of course the outcome is similar: you enjoy a nominal benefit for awhile, and then you get audited and taken to court. I don't think the IRS is shaking in their boots over this.
  - gojomo 17y ago
    Right -- the only significant gain is if the coins are held longer (for long-term gains treatment of the phony appreciation) or sold in an unreported transaction (which itself compounds the illegality). And my point was: while any combination of stunts leading to less taxes paid is of interest to the IRS, if you instead engage in bizarro accounting but the end result is you wind up paying about the same amount of taxes, just via different line-item -- no "net tax effect" -- they may as a practical matter ignore you. They care about the money, not the principle.

MaysonL 17y ago

I wonder how he accounted for the cost of the gold coins? Did he attempt to write it off as a business expense?