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It seems there are hypothetical scenarios where your taxes could exceed your net worth. If you mine a bitcoin worth $1000, and then it's value falls to $100, y

It seems there are hypothetical scenarios where your taxes could exceed your net worth. If you mine a bitcoin worth $1000, and then it's value falls to $100, you could owe taxes on $1000, and the $900 capital loss would only carry forward to the next year.

RyJones 13y ago
This is pretty much what happened to a lot of people in the valley during the dot-com bubble pop - your stock losses could be carried forward until the heat death of the universe, but you paid on 100% of the (illusory) gains.
- ChuckMcM 13y ago
  I was going to say this exact same thing. I was writing off 'losses' from stock losing value from 2001 to 2012 at $3,000 a year. It would have been longer except that you can, in some cases, offset gains made later against those losses. And yes, all under the auspices of 'alternative minimum tax' for which I have a special place of loathing in my heart for whomever thought that was a good idea.
  - loumf 13y ago
    Do you know (remember) the mechanics of how the AMT affected this? Were you given stock that you didn't have a chance to sell? My understanding that only the initial grant of stock and the subsequent selling are taxable -- and didn't realize the AMT affected this.
    - ChuckMcM 13y ago
      Note, the tax code changes every year and I'm not an accountant, just a victim :-) Whenever I have exercised an option, my taxes have included an AMT calculation based on adding in the difference in value between exercise price, and market price, of those options as additional ordinary income. When the AMT tax calculation yields a 'tax owed' number that is larger than the non-AMT version (which it always did when exercising shares to make down payments) the IRS asked for the bigger number. Meaning that even if I had not sold the shares I exercised, the IRS wanted me to pretend that I had and pay tax on that money that I was pretending to have received. In exchange for doing that, the tax basis becomes the market price at the time of exercise. If you don't actually sell the stock (because, for example, you are waiting for escrow to close), and the stock value goes down significantly, you can reach a point that the value of the stock drops below the tax liability you incurred by exercising the stock option in the first place. In some cases the stock can become worthless. (my best score has been $120/share stock going down to $0.52 share) If you realize this is going to happen before the tax year is over you can dump the stock take the loss and it all works out in the wash (loss cancels gain). If you cross over a tax year boundary then you owe the tax anyway (even though you don't have a way to pay it) and when you sell the stock in the following tax year you get a 'loss' but you don't have any gains to offset that against and you can't just take it out of the taxes owed. You can however write it off, $3,000 per year against your ordinary income.
      - itbeho 13y ago
        How would you determine market price for stock options in a startup that's not public yet?
        loumf 13y ago
        It would not be prudent to exercise options that are not liquid. There is no benefit to doing that. You don't, for example, usually get meaningful voting rights with those shares.
        kalkin 13y ago
        Well, it is not uncommon for options to expire after you leave a company if they are not exercised. So if you take a new job and don't want to throw away your options...
        sokoloff 13y ago
        You might want to exercise options before a new priced round (series B, C, D, etc) or before an S-1 filing. Yes, this exposes you to some adverse treatment (AMT for ISOs, and the risk of paying income tax on shares that later crash or become worthless), but it also establishes an ownership date (for the LTCG holding period) and a basis (which will presumably be higher in the next priced round or IPO, even though they're illiquid now. (And as kalkin observes, if you're leaving the company with in-the-money options.)
        ChuckMcM 13y ago
        Periodically, the board of directors will go through a process for determining the value (aka the market price) for stock options. If you exercise your option and the exercise price is less than the current valuation price, then you will experience a 'taxable event.' I would guess that you'd be hit with the AMT in the US if computing the tax based on that exercise value was higher than your non-AMT computed tax. But you would want to check with your accountant. Some companies allow you to file an 83b election, which is to exercise all your stock immediately, and as it is worth exactly what you are paying for it, no taxable event, and then take ownership of it as it vests. A person might choose to do that because in the event of going public or any time when the common stock becomes liquid, you would only pay long term capital gains rather than short term gains. The downside is that if the company exits where the common stock is worthless (not an uncommon occurrence for startups) then you would lose that money you paid originally. (but you could write off that loss, $3,000 a year, against future income :-)
- loumf 13y ago
  Mostly this happened to people that got bad advice (I really hope all of the entrepreneurs reading this site are smarter now). For most, the issue was exercising their options. This is a tax event -- and the tax is owed on the difference in your strike price and the current price of the stock. If you find yourself in this situation -- immediately sell enough stock to cover the tax. If you are given stock -- that is the tax event. You need to have enough cash to cover taxes on stock given to you -- if the stock is illiquid, and this is a bonus or something, then you should ask for part of the bonus to be in cash (to cover tax). If the stock is liquid, immediately sell enough to cover tax. If you are a founder, and your stock just goes up in price, that is not a tax event. Being given at-the-money options is not a tax event. You only owe <s>stock</s> tax once you exercise. IANAA (not an accountant) EDIT: replace "stock" with "tax" in the second to last paragraph
  - Anderkent 13y ago
    Doesnt selling stock immediately rather than after a year mean your tax rate on it is higher?
    - thrownaway2424 13y ago
      No, because the exercise is taxed as income at the time of the exercise. If you sell it, there's not _more_ tax to be paid, because your gain after the exercise is zero. If you sell it after some, you'll pay long-term capital gains rates on the delta between your sale price and your exercise price. Exercise-and-hold is a bad idea for most people in most cases.
    - deleted 13y ago
      [deleted]
    - Consultant32452 13y ago
      Generally, yes. Short term capital gains are taxed at a higher rate than long term capital gains.
    - ogreyonder 13y ago
      Yes; for people participating in an employee stock purchase program, it is called a Disqualifying Disposition. It puts you in the short-term capital gains bracket (with about 15% higher tax). However, it's still a VERY good idea to do if you plan on holding stock. I know stories of several people who were exercised options on 7 figures of stock, only to see the price collapse before they were able to sell. The taxes they owed because of that eclipsed their net worth several times over.
loumf 13y ago
According the article this is not true. The tax event is turning the bitcoins into currency or spending them. So, the issue could be you have $1,000,000 of bitcoin, and you spend it. You now owe capital gains on the difference in price between when you bought and sold. Now, even if you have the $x00,000 in bitcoin to cover this, you better convert it fast (like simultaneously). Or, never spend bitcoin directly -- convert enough to dollars to buy and pay tax, then spend the dollars.
- jstalin 13y ago
  Actually, it says that you are taxed on their value at the time they are mined.
  - loumf 13y ago
    Miners are taxed at the time they are mined. This is probably consistent with diamonds.
    - oijaf888 13y ago
      It seems pretty backwards compared to any other sort of creation. If I build a house, my basis is how much I spent building it, not how much my neighbor's house is worth.
      - loumf 13y ago
        I don't think this has anything to do with basis. The difference is that mining the coin is considered a tax event -- so you pay tax on the mined value -- with the cost being deductible. This makes sense because the coin is liquid and can be sold in part without reducing the utility of the remainder. That is not true of a house. It isn't as liquid and it's hard to sell part of the house to cover tax.
        tellmetwice 13y ago
        so if you mined gold you get taxed at the moment you caught sight of it and not when you take it to market? And if you knew how mining pools worked it takes it on a totally different course with shelved shares, etc
slg 13y ago
You can use the $900 in capital losses to offset your income (up to $3000). According to the IRS, you would have only $100 in income ($1000 - $900). So in your example, you would have $100 cash and tax liabilities on $100 in income. You will only run into a problem when you exceed $3000 in capital losses, that is when you would have to rollover your losses to the next year.
- humanrebar 13y ago
  Still seems like a problem to me.
  - slg 13y ago
    How so? These aren't new rules, just old rules that are newly applied to Bitcoin. As others have noted, this is how things work for employer issued stock. You only put yourself in danger if you are ignorant of the rules and don't take necessary precautions. If you are investing enough to open yourself up to a capital gains loss of more than $3000, you have no excuse to be ignorant. Tax tip from a non-lawyer/non-accountant - Immediately sell a percentage of your newly mined bitcoin equal to your marginal tax rate. If your tax rate is 25%, sell 25% of your bitcoin as soon as it is mined. Those coins already belong to the US government. If you don't convert to cash immediately, you are basically leveraging the government's money to invest in Bitcoin speculation.
    - SilasX 13y ago
      The fact that "it's always been that way" is no refutation of the fact that "it's a problem" that you could lose money and yet still owe taxes as if you had gains because capital losses (hysteretically) saturate at $3000.
      - adventured 13y ago
        Capital gains (the losses) don't saturate at $3,000. If I have accumulated $100,000 in capital losses over the prior ten years, I can wipe all of that out in one shot by producing a large enough capital gain in one year. Capital losses saturate when applied to ordinary income.
wmf 13y ago
If you spent $900 in depreciation and electricity to mine $1,000 worth of BTC, would you owe taxes on $100 or $1,000?
- loumf 13y ago
  Taxes are typically paid on profit. BTC are not the only things with cost to acquire and carry (e.g. Cattle) -- and I believe those costs are taken into account.
deleted 13y ago
[deleted]
baddox 13y ago
> It seems there are hypothetical scenarios where your taxes could exceed your net worth. That's trivially true for traditional income tax and pretty much any other tax, right?
molsongolden 13y ago
This seems insane. If I build 3 chairs I do not include the market price of 3 chairs on that day in my gross income, I sell the chairs and recognize the income generated by the sales.
- jedberg 13y ago
  That's not true. If you build 3 chairs and don't sell them by the end of the year, you pay inventory tax on the 3 chairs, i.e. you pay taxes on them without selling them. This is why stores that sell physical goods to a blowout sale at the end of the year.
  - molsongolden 13y ago
    I'm not sure what you mean by inventory tax. If I haven't sold the chairs then I haven't recognized any income. Even if I had to value my inventory then I would value it at the lower of cost or market and in the case of Bitcoin that would be cost which would be computer depreciation and electricity, much less than the market value on the day of mining.
- gamblor956 13y ago
  Bitcoins earned through mining are considered compensation for providing resources to the Bitcoin network to compute hashes verifying transactions. IOW, it's not at all analogous to building 3 chairs yourself.
  - sokoloff 13y ago
    Should I file a Schedule F (income from farming) for my herb garden? I actually looked through the instructions for schedule F and I don't find any clear basis to allow me to not file it. In practical terms, I'm not worried, as I suspect that I'd have a net loss, but assuming a net gain (that the fair market value of the parsley and sage I got from the herb garden exceeded my out-of-pocket costs to run the garden), I think I have to file a Schedule F per the regs. For the record, it seems perfectly consistent to treat BTC as capital property; it doesn't seem reasonable to treat them as ordinary income.

RyJones 13y ago

This is pretty much what happened to a lot of people in the valley during the dot-com bubble pop - your stock losses could be carried forward until the heat death of the universe, but you paid on 100% of the (illusory) gains.

ChuckMcM 13y ago
I was going to say this exact same thing. I was writing off 'losses' from stock losing value from 2001 to 2012 at $3,000 a year. It would have been longer except that you can, in some cases, offset gains made later against those losses. And yes, all under the auspices of 'alternative minimum tax' for which I have a special place of loathing in my heart for whomever thought that was a good idea.
- loumf 13y ago
  Do you know (remember) the mechanics of how the AMT affected this? Were you given stock that you didn't have a chance to sell? My understanding that only the initial grant of stock and the subsequent selling are taxable -- and didn't realize the AMT affected this.
  - ChuckMcM 13y ago
    Note, the tax code changes every year and I'm not an accountant, just a victim :-) Whenever I have exercised an option, my taxes have included an AMT calculation based on adding in the difference in value between exercise price, and market price, of those options as additional ordinary income. When the AMT tax calculation yields a 'tax owed' number that is larger than the non-AMT version (which it always did when exercising shares to make down payments) the IRS asked for the bigger number. Meaning that even if I had not sold the shares I exercised, the IRS wanted me to pretend that I had and pay tax on that money that I was pretending to have received. In exchange for doing that, the tax basis becomes the market price at the time of exercise. If you don't actually sell the stock (because, for example, you are waiting for escrow to close), and the stock value goes down significantly, you can reach a point that the value of the stock drops below the tax liability you incurred by exercising the stock option in the first place. In some cases the stock can become worthless. (my best score has been $120/share stock going down to $0.52 share) If you realize this is going to happen before the tax year is over you can dump the stock take the loss and it all works out in the wash (loss cancels gain). If you cross over a tax year boundary then you owe the tax anyway (even though you don't have a way to pay it) and when you sell the stock in the following tax year you get a 'loss' but you don't have any gains to offset that against and you can't just take it out of the taxes owed. You can however write it off, $3,000 per year against your ordinary income.
    - itbeho 13y ago
      How would you determine market price for stock options in a startup that's not public yet?
      - loumf 13y ago
        It would not be prudent to exercise options that are not liquid. There is no benefit to doing that. You don't, for example, usually get meaningful voting rights with those shares.
        kalkin 13y ago
        Well, it is not uncommon for options to expire after you leave a company if they are not exercised. So if you take a new job and don't want to throw away your options...
        sokoloff 13y ago
        You might want to exercise options before a new priced round (series B, C, D, etc) or before an S-1 filing. Yes, this exposes you to some adverse treatment (AMT for ISOs, and the risk of paying income tax on shares that later crash or become worthless), but it also establishes an ownership date (for the LTCG holding period) and a basis (which will presumably be higher in the next priced round or IPO, even though they're illiquid now. (And as kalkin observes, if you're leaving the company with in-the-money options.)
      - ChuckMcM 13y ago
        Periodically, the board of directors will go through a process for determining the value (aka the market price) for stock options. If you exercise your option and the exercise price is less than the current valuation price, then you will experience a 'taxable event.' I would guess that you'd be hit with the AMT in the US if computing the tax based on that exercise value was higher than your non-AMT computed tax. But you would want to check with your accountant. Some companies allow you to file an 83b election, which is to exercise all your stock immediately, and as it is worth exactly what you are paying for it, no taxable event, and then take ownership of it as it vests. A person might choose to do that because in the event of going public or any time when the common stock becomes liquid, you would only pay long term capital gains rather than short term gains. The downside is that if the company exits where the common stock is worthless (not an uncommon occurrence for startups) then you would lose that money you paid originally. (but you could write off that loss, $3,000 a year, against future income :-)
loumf 13y ago
Mostly this happened to people that got bad advice (I really hope all of the entrepreneurs reading this site are smarter now). For most, the issue was exercising their options. This is a tax event -- and the tax is owed on the difference in your strike price and the current price of the stock. If you find yourself in this situation -- immediately sell enough stock to cover the tax. If you are given stock -- that is the tax event. You need to have enough cash to cover taxes on stock given to you -- if the stock is illiquid, and this is a bonus or something, then you should ask for part of the bonus to be in cash (to cover tax). If the stock is liquid, immediately sell enough to cover tax. If you are a founder, and your stock just goes up in price, that is not a tax event. Being given at-the-money options is not a tax event. You only owe <s>stock</s> tax once you exercise. IANAA (not an accountant) EDIT: replace "stock" with "tax" in the second to last paragraph
- Anderkent 13y ago
  Doesnt selling stock immediately rather than after a year mean your tax rate on it is higher?
  - thrownaway2424 13y ago
    No, because the exercise is taxed as income at the time of the exercise. If you sell it, there's not _more_ tax to be paid, because your gain after the exercise is zero. If you sell it after some, you'll pay long-term capital gains rates on the delta between your sale price and your exercise price. Exercise-and-hold is a bad idea for most people in most cases.
  - deleted 13y ago
    [deleted]
  - Consultant32452 13y ago
    Generally, yes. Short term capital gains are taxed at a higher rate than long term capital gains.
  - ogreyonder 13y ago
    Yes; for people participating in an employee stock purchase program, it is called a Disqualifying Disposition. It puts you in the short-term capital gains bracket (with about 15% higher tax). However, it's still a VERY good idea to do if you plan on holding stock. I know stories of several people who were exercised options on 7 figures of stock, only to see the price collapse before they were able to sell. The taxes they owed because of that eclipsed their net worth several times over.

loumf 13y ago

According the article this is not true. The tax event is turning the bitcoins into currency or spending them. So, the issue could be you have $1,000,000 of bitcoin, and you spend it. You now owe capital gains on the difference in price between when you bought and sold. Now, even if you have the $x00,000 in bitcoin to cover this, you better convert it fast (like simultaneously). Or, never spend bitcoin directly -- convert enough to dollars to buy and pay tax, then spend the dollars.

jstalin 13y ago
Actually, it says that you are taxed on their value at the time they are mined.
- loumf 13y ago
  Miners are taxed at the time they are mined. This is probably consistent with diamonds.
  - oijaf888 13y ago
    It seems pretty backwards compared to any other sort of creation. If I build a house, my basis is how much I spent building it, not how much my neighbor's house is worth.
    - loumf 13y ago
      I don't think this has anything to do with basis. The difference is that mining the coin is considered a tax event -- so you pay tax on the mined value -- with the cost being deductible. This makes sense because the coin is liquid and can be sold in part without reducing the utility of the remainder. That is not true of a house. It isn't as liquid and it's hard to sell part of the house to cover tax.
      - tellmetwice 13y ago
        so if you mined gold you get taxed at the moment you caught sight of it and not when you take it to market? And if you knew how mining pools worked it takes it on a totally different course with shelved shares, etc

slg 13y ago

You can use the $900 in capital losses to offset your income (up to $3000). According to the IRS, you would have only $100 in income ($1000 - $900). So in your example, you would have $100 cash and tax liabilities on $100 in income. You will only run into a problem when you exceed $3000 in capital losses, that is when you would have to rollover your losses to the next year.

humanrebar 13y ago
Still seems like a problem to me.
- slg 13y ago
  How so? These aren't new rules, just old rules that are newly applied to Bitcoin. As others have noted, this is how things work for employer issued stock. You only put yourself in danger if you are ignorant of the rules and don't take necessary precautions. If you are investing enough to open yourself up to a capital gains loss of more than $3000, you have no excuse to be ignorant. Tax tip from a non-lawyer/non-accountant - Immediately sell a percentage of your newly mined bitcoin equal to your marginal tax rate. If your tax rate is 25%, sell 25% of your bitcoin as soon as it is mined. Those coins already belong to the US government. If you don't convert to cash immediately, you are basically leveraging the government's money to invest in Bitcoin speculation.
  - SilasX 13y ago
    The fact that "it's always been that way" is no refutation of the fact that "it's a problem" that you could lose money and yet still owe taxes as if you had gains because capital losses (hysteretically) saturate at $3000.
    - adventured 13y ago
      Capital gains (the losses) don't saturate at $3,000. If I have accumulated $100,000 in capital losses over the prior ten years, I can wipe all of that out in one shot by producing a large enough capital gain in one year. Capital losses saturate when applied to ordinary income.

wmf 13y ago

If you spent $900 in depreciation and electricity to mine $1,000 worth of BTC, would you owe taxes on $100 or $1,000?

loumf 13y ago
Taxes are typically paid on profit. BTC are not the only things with cost to acquire and carry (e.g. Cattle) -- and I believe those costs are taken into account.

deleted 13y ago

[deleted]

baddox 13y ago

> It seems there are hypothetical scenarios where your taxes could exceed your net worth. That's trivially true for traditional income tax and pretty much any other tax, right?

molsongolden 13y ago

This seems insane. If I build 3 chairs I do not include the market price of 3 chairs on that day in my gross income, I sell the chairs and recognize the income generated by the sales.

jedberg 13y ago
That's not true. If you build 3 chairs and don't sell them by the end of the year, you pay inventory tax on the 3 chairs, i.e. you pay taxes on them without selling them. This is why stores that sell physical goods to a blowout sale at the end of the year.
- molsongolden 13y ago
  I'm not sure what you mean by inventory tax. If I haven't sold the chairs then I haven't recognized any income. Even if I had to value my inventory then I would value it at the lower of cost or market and in the case of Bitcoin that would be cost which would be computer depreciation and electricity, much less than the market value on the day of mining.
gamblor956 13y ago
Bitcoins earned through mining are considered compensation for providing resources to the Bitcoin network to compute hashes verifying transactions. IOW, it's not at all analogous to building 3 chairs yourself.
- sokoloff 13y ago
  Should I file a Schedule F (income from farming) for my herb garden? I actually looked through the instructions for schedule F and I don't find any clear basis to allow me to not file it. In practical terms, I'm not worried, as I suspect that I'd have a net loss, but assuming a net gain (that the fair market value of the parsley and sage I got from the herb garden exceeded my out-of-pocket costs to run the garden), I think I have to file a Schedule F per the regs. For the record, it seems perfectly consistent to treat BTC as capital property; it doesn't seem reasonable to treat them as ordinary income.