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let's say that i purchase a bitcoin for $150. this is my cost basis. the next day, the bitcoin appreciates in value to $200. i use this single bitcoin to purcha

let's say that i purchase a bitcoin for $150. this is my cost basis. the next day, the bitcoin appreciates in value to $200. i use this single bitcoin to purchase a $200 camera. in this transaction, i have spent $200, but i only paid $150 for it. this means that i have essentially received $50 for free. the IRS wants to tax this "free" income. under IRS guidance, this additional $50 that you got "for free" is taxed at a capital gains rate (which is up to 20%). if the IRS had declared bitcoin a currency, this $50 in gain would be taxed at ordinary income rates (which is up to 39.6%). since we'd ideally like to be taxed at a lower tax rate, we wouldn't want it to be considered a currency for tax purposes because currency is taxed at the 39.6% rate. it's also REALLY important to note that the way currency is defined in the tax code is different than how currency is defined for other parts of government, be it another arm for the treasury department (fincen for instance) or even the SEC. so even though bitcoin is not considered a currency in the tax code specifically, doesn't mean that it should be considered less of a currency. am i just talking in circles now? i hope this answers your question.

7Figures2Commas 13y ago
> let's say that i purchase a bitcoin for $150. this is my cost basis. the next day, the bitcoin appreciates in value to $200. i use this single bitcoin to purchase a $200 camera. in this transaction, i have spent $200, but i only paid $150 for it. this means that i have essentially received $50 for free. the IRS wants to tax this "free" income. under IRS guidance, this additional $50 that you got "for free" is taxed at a capital gains rate (which is up to 20%). There's one huge problem with your example: you have a short-term capital gain, not a long-term capital gain. Short-term capital gains are taxed at the same rate as your ordinary income.
- beachriot 13y ago
  yes, i am aware of the holding period necessary to be able to use capital gains rate. i left it out merely to simplify the example for non-tax folk. but if you understand tax, then instead of, "the next day," my example should say, "a year and a day later."

7Figures2Commas 13y ago

> let's say that i purchase a bitcoin for $150. this is my cost basis. the next day, the bitcoin appreciates in value to $200. i use this single bitcoin to purchase a $200 camera. in this transaction, i have spent $200, but i only paid $150 for it. this means that i have essentially received $50 for free. the IRS wants to tax this "free" income. under IRS guidance, this additional $50 that you got "for free" is taxed at a capital gains rate (which is up to 20%). There's one huge problem with your example: you have a short-term capital gain, not a long-term capital gain. Short-term capital gains are taxed at the same rate as your ordinary income.

beachriot 13y ago
yes, i am aware of the holding period necessary to be able to use capital gains rate. i left it out merely to simplify the example for non-tax folk. but if you understand tax, then instead of, "the next day," my example should say, "a year and a day later."