Bitcoin Forum

It's well known that Bitcoin is used as a currency for many illegal activities.  Before we go down that road, so are all other currencies but it got me thinking about other reasons why Bitcoin may be adopted by lets just say, less than honest individuals.

I read an article in Forbes recently that the wealthiest of the wealthy in the US make their income not off of wages, but off capital gains.  In other words, the rich get richer because they own "stuff" not because they're necessarily productive.  And capital gains are treated more favorable, taxwise, than ordinary income.

But what happens if you're able to eliminate capital gains tax altogether?  Is this where Bitcoin steps in?  A wealthy individual, private equity fund, whatever, comes in and purchases X Bitcoins at $10 and sells at $20.  The second those BTC's are converted back to fiat, the gain is taxable.  But who reports the gain to the IRS?  I don't think MtGox does.  And yeah MtGox =/= Bitcoin but they're the largest exchange so I'm just using them as an example.  Wouldn't it be fairly easy for someone to hide their capital gains this way? 

Now lets look at gambling.  If I go to Vegas and hit a jackpot, they gave me the cash on the spot but they also gave me a 1099.  If I were to win the same equivalent amount at say, SatoshiDice, there's no 1099.  Presumably because you're winning in BTC's but that's easily convertible back to fiat not to mention you're relatively anonymous so they wouldn't be able to identify you let alone know what country of origin you're from.  This may further expand as larger gambling operations come online and accept Bitcoin.

To be clear, I'm NOT advocating cheating on your taxes just as I wouldn't advocate buying on silk road, etc.  But the fact remains there are some who can and will do it.  The rich are always looking for tax loopholes.  Maybe they found one in BTC and it is helping propel its price.  Or maybe it's yet to be widely discovered and could potentially propel the price in the future.  Thoughts?

I've wondered about this too. BTC is like gold in that you don't need someone to manage it for you (and report back to the IRS on your behalf).

Presumably it would be impossible for the gov't to know what you originally paid for your BTC, so it would be up to the taxpayer to report any gains.

Bitcoins does not earn interest or other capital gain. That just like having dollar bills in your mattress. There is speculative gain, but that is a zero sum game, some looses some wins.

To earn capital gain, you have to either buy capital goods, work factors and produce and sell the result, or do the same through ownership in a company that does the same, or lend out your bitcoins.

Capital gains are paid on precious metals that appreciate. In fact they don't qualify for the lower 15% rate used for long term capital gains (in the US). Metals like gold are considered a "collectable" and gains are taxed at 28%.

It seems likely the IRS would apply the same rules to bitcoins. They're certainly collectable!

It doesn't need to be interest bearing to incur a capital gain.  Zero sum is also irrelevant.  Options are zero sum and you need to pay gains on options.  It also does not have to be a tangible asset, capital gains must be paid on intangible assets (goodwill, patents, etc.).

If I'm not mistaken, anytime the amount realized on the disposition exceeds the purchase price, it's a capital gain.  

Edit:  To put it another way, if Bitcoin is a currency then like any other Forex trader, gains made would be taxable.

I did not talk about taxes, maybe I misunderstood. I have no knowledge of US taxes.

The bank you withdraw to will report you recieving money.
I think it's certainly possible to pay 0% tax on your gains in bitcoin and it`s not that hard for an average citizen, but if you are going to try large amounts, it gets alot harder to spend any gains.

Hmm good point, I forgot about Currency Transaction Reports.  I think they're mainly used to combat money laundering but I can see how that would make it difficult to receive a large amount of funds without drawing suspicion.   

Yeah, bitcoin is not really a vehicle for tax shelter any more than doing everything in cash.  The point is that you are not reporting your transactions.  This works as long as your transactions are not worth going after.  It gets trickier when you start talking about dividend paying funds like what you have on the bitcoin exchanges.  Those behave like dividend paying stocks but with regular stocks everything is regulated very closely with steep penalties for not obeying the current laws.  The current bitcoin exchanges do not operate under a regulatory authority so they don't report gains that the tax collection agency can check against your tax return.  This is probably why gblse had to shut down.  The reason why this is tricky is that the exchanges require you to create an account to do anything (fund an entity, own stock) and the anonymity of just owning bitcoin is shattered.

It is worth thinking about the fact that bitcoin is still so small that there isn't room for 1 actual rich person without substantial value expansion.

[Edited]

A tax loophole is a legal method of paying less taxes by eploitating tax law.  This is usually because some "loophole" was either specifically written into the law to cause some behavior or was somehow overlooked, allowing the filer to pay a lower amount of taxes than others who aren't eligible to use the loophole or omit to do so.

Not reporting capital gains is not a "loophole".

What makes you think only the rich consider tax implications when making decisions?

Yeah you're right it's not a loophole.  The old adage about the difference between "tax avoidance and tax evasion."  I realize not paying is the latter.  And by no means do I think the rich are the only who consider tax implications, but for the purposes of this conversation I was trying to figure out if big money could be moving to Bitcoin to avoid taxes.  The average person cannot move markets (unless done en masse) and is therefore not really important to me in this context.

Some countries have no capital gains.

Hold your bitcoins there.

So how should I deal with taxes if I did buy them on an exchange and the spent them after they gained value?

- http://www.offshorepress.com/offshoretax/otcurrency.htm

Bitcoin isn't recognized as a foreign currency so there might be many arguments about how it would be treated for tax purposes, with varying methods based on tax jurisdiction.

Here's more info:
 - http://en.bitcoin.it/wiki/Tax_compliance

Staying Between the Lines: A Survey of U.S. Income Taxation and its Ramifications on Cryptocurrencies
 - http://theclag.org/CM%231001Final.pdf

The same way you would do so for any other asset that has appreciated. 

Thanks ! Very useful !
 ;D

File taxes and report your gain. Have you CPA or attorney compute your basis and gains. B sure to keep a log of everything relating to your business. All expenses are deductible, as are your losses.