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The author argument would probably not hold up under an IRS audit, and doesn't fully match up with how bitcoin works. First, many bitcoin users "own" their bit

by marcell 13y ago

The author argument would probably not hold up under an IRS audit, and doesn't fully match up with how bitcoin works. First, many bitcoin users "own" their bitcoins using a managed web wallet like Coinbase. In that case, you cannot trace the individuals coins on the blockchain. It is up to the tax payer to report their cost basis. Moreover, it is not obvious from looking at the blockchain which transactions are use to buy goods (a taxable event, according to the IRS), and which transactions are used to transfer money to yourself (the equivalent of moving money from one pocket to another; not a taxable event). Thus, the IRS ruling, while onerous, does not really affect the "fungibility" of bitcoin.

thisiswrong 13y ago
> the IRS ruling, while onerous, does not really affect the "fungibility" of bitcoin. But it's going to be another hard blow to US tech innovation, which will simply move abroad - far from the IRS and NSA.
patio11 13y ago
The IRS is not limited to the technical realities of Bitcoin in coming up with explanations for how it interacts with the tax laws of the United States. "Individual coins cannot be traced on the blockchain" doesn't affect their operations in an iota. The IRS is well-adapted to environments where there does not exist a single public record of every transaction, principally because that is pretty novel. If the IRS believes that people are misreporting bases in such a manner as to meaningfully affect their tax obligations via using Coinbase, all they have to do is send Coinbase a letter.
acomjean 13y ago
I think this will effect corporate use of bit-coins. It might slow bitcoin adoption a bit, but it also has the effect of making them legit. This should also keep accountants busy. They always seem to be anyway, now more so. Its part of bitcoin "growing-up", so to speak and the IRS getting ahead of all the newfound wealth generated from these coins.
clarkm 13y ago
The reference client doesn't even provide a way to choose specific bitcoins to use when sending a payment. And even if it did, do they really expect users to keep track of every single address in their wallet and the date of acquisition of its individual bitcoins? As it currently stands, if your client decides to spend a bitcoin from an address you owned for less than a year, any gains would be taxed as ordinary income.
exelius 13y ago
Since most users store their money in wallets with exchanges like Coinbase, how trivial would it be to write trading algorithms that minimize shifts in capital gains? E.g. Coinbase would try to balance capital losses and gains on a continuous basis, then come tax time they sell off an appropriate number of BTC to pay the tax bill on the net appreciation of their coins over that time. I think this will accelerate the shift towards Bitcoin exchanges operating as banks under the law. If you, as a consumer, deposit $1000 with Coinbase, they could store this as $1000 USD if they were a bank. Then, upon you actually wanting to spend the Bitcoin, they perform the transaction to another bank. It all happens so fast that the price of BTC doesn't change so the consumer pays no capital gains taxes. Likewise, if you choose to maintain your BTC wallet yourself, TurboTax could write a module where you provide them your wallet address and they let you know your tax burden by comparing your transactions over the last year with the spot price of BTC when they were performed. It's not obvious from looking at the blockchain, but if you have the blockchain plus the addresses of all the various wallets owned by a person, you could do it. Transactions within that set of wallets are non-taxable, transactions outside of it are. If you don't provide all your wallet addresses, that's effectively tax fraud and is no different than keeping a Swiss bank account. At the end of the day, the government has the power to throw you in jail if you don't pay your taxes, and that gives them the power to regulate the economy. This is all predicated on the assumption that Bitcoin will never serve as a true currency; which I think all signs are that it won't because governments just aren't willing to give up enough control over the economy to make it possible. But Bitcoin can still be useful as a method of transaction, which is why I think we're seeing regulation pop up around it.
- maxerickson 13y ago
  If Coinbase is holding dollars because bitcoin have scary tax implications, why is the receiving party going to want bitcoin (instead of dollars)? It's sort of an obnoxious way to put it, but you are essentially saying that it will be like payments today, except with some bitcoin sprinkled on it to make it exciting or cheaper or something. (I do understand that bitcoin might enable international transactions where some sort of technological escrow takes the place of contracts and trust, I just haven't seen any real compelling explanations as to why the technological escrow will end up cheaper.)
bunderbunder 13y ago
First, many bitcoin users "own" their bitcoins using a managed web wallet like Coinbase. In that case, you cannot trace the individuals coins on the blockchain. It is up to the tax payer to report their cost basis. My broker handles stock in a very similar way. My shares of stock are held in street name by my broker, and my name is not directly assciated with individual shares. Instead, the broker keeps the shares and has a separate ledger keepting track of how many I own. So far, the IRS hasn't used this situation as an excuse to pwn me. I don't think they'd even see anything particularly remarkable about it. After all, it's standard operating procedure for essentially every brokerage.

by marcell 13y ago

thisiswrong 13y ago

> the IRS ruling, while onerous, does not really affect the "fungibility" of bitcoin. But it's going to be another hard blow to US tech innovation, which will simply move abroad - far from the IRS and NSA.

patio11 13y ago

The IRS is not limited to the technical realities of Bitcoin in coming up with explanations for how it interacts with the tax laws of the United States. "Individual coins cannot be traced on the blockchain" doesn't affect their operations in an iota. The IRS is well-adapted to environments where there does not exist a single public record of every transaction, principally because that is pretty novel. If the IRS believes that people are misreporting bases in such a manner as to meaningfully affect their tax obligations via using Coinbase, all they have to do is send Coinbase a letter.

acomjean 13y ago

I think this will effect corporate use of bit-coins. It might slow bitcoin adoption a bit, but it also has the effect of making them legit. This should also keep accountants busy. They always seem to be anyway, now more so. Its part of bitcoin "growing-up", so to speak and the IRS getting ahead of all the newfound wealth generated from these coins.

clarkm 13y ago

The reference client doesn't even provide a way to choose specific bitcoins to use when sending a payment. And even if it did, do they really expect users to keep track of every single address in their wallet and the date of acquisition of its individual bitcoins? As it currently stands, if your client decides to spend a bitcoin from an address you owned for less than a year, any gains would be taxed as ordinary income.

exelius 13y ago

Since most users store their money in wallets with exchanges like Coinbase, how trivial would it be to write trading algorithms that minimize shifts in capital gains? E.g. Coinbase would try to balance capital losses and gains on a continuous basis, then come tax time they sell off an appropriate number of BTC to pay the tax bill on the net appreciation of their coins over that time. I think this will accelerate the shift towards Bitcoin exchanges operating as banks under the law. If you, as a consumer, deposit $1000 with Coinbase, they could store this as $1000 USD if they were a bank. Then, upon you actually wanting to spend the Bitcoin, they perform the transaction to another bank. It all happens so fast that the price of BTC doesn't change so the consumer pays no capital gains taxes. Likewise, if you choose to maintain your BTC wallet yourself, TurboTax could write a module where you provide them your wallet address and they let you know your tax burden by comparing your transactions over the last year with the spot price of BTC when they were performed. It's not obvious from looking at the blockchain, but if you have the blockchain plus the addresses of all the various wallets owned by a person, you could do it. Transactions within that set of wallets are non-taxable, transactions outside of it are. If you don't provide all your wallet addresses, that's effectively tax fraud and is no different than keeping a Swiss bank account. At the end of the day, the government has the power to throw you in jail if you don't pay your taxes, and that gives them the power to regulate the economy. This is all predicated on the assumption that Bitcoin will never serve as a true currency; which I think all signs are that it won't because governments just aren't willing to give up enough control over the economy to make it possible. But Bitcoin can still be useful as a method of transaction, which is why I think we're seeing regulation pop up around it.

maxerickson 13y ago
If Coinbase is holding dollars because bitcoin have scary tax implications, why is the receiving party going to want bitcoin (instead of dollars)? It's sort of an obnoxious way to put it, but you are essentially saying that it will be like payments today, except with some bitcoin sprinkled on it to make it exciting or cheaper or something. (I do understand that bitcoin might enable international transactions where some sort of technological escrow takes the place of contracts and trust, I just haven't seen any real compelling explanations as to why the technological escrow will end up cheaper.)

bunderbunder 13y ago

First, many bitcoin users "own" their bitcoins using a managed web wallet like Coinbase. In that case, you cannot trace the individuals coins on the blockchain. It is up to the tax payer to report their cost basis. My broker handles stock in a very similar way. My shares of stock are held in street name by my broker, and my name is not directly assciated with individual shares. Instead, the broker keeps the shares and has a separate ledger keepting track of how many I own. So far, the IRS hasn't used this situation as an excuse to pwn me. I don't think they'd even see anything particularly remarkable about it. After all, it's standard operating procedure for essentially every brokerage.