I am an accountant, working towards CPA, who currently has a job in corporate tax. The problem with your scenario is that the tax code is not black and white, there are many areas of gray that the IRS sets up for situationse exactly like this, it is in my professional opinion that you would still owe capital gains tax (which btw has now been increased to 20% if you were to make that much of a gain), because of the fact that you can buy more gold now than you would previously been able to, aka a gain.
I do like your scenario though, unfortunately as previously stated, the code is not black and white, and even if you can fully show compliance, the IRS has the power to simply say, "No, we dont agree and you owe tax on this gain" regardless of what the code says. Then you could either pay the tax or take them to court, which would inevitably end up costing you much more than its worth to just pay the tax.
Although I agree that no penalties or interest would be assessed, although dont take my word for it, I have seen some pretty strange stuff be enforced for weird reasons, I still dont think they would care as long as you paid the back taxes or agreed to some kind of compromise on the amount owed.
Thanks, DebitMe. I'm fully aware this is definitely a gray area. None of this would matter until tax time next year anyways, at which time maybe there will be more clarification on the matter. If I do try and show full compliance, and the IRS ends up taxing me, well, then I'm in the same position I was in had I just paid the taxes up front. My understanding is that the 20% rate is only for those in the highest tax bracket (for ordinary tax), although I've seen different charts where 20% extends all the way down. I'm not sure which is more up to date for 2013. |
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As you pointed it out in the end of your message, it depends .... For instance, if you buy something in Europe, within paxing the tax, you will have to pay the tax before entering back the US. Let's say you paid 500 USD for an iPhone, duty free. You have to declare this good before leaving the previous country / entering the new one. But with your example: it's not the same to use your money for hobby / tourism / and so on, and to make invest it and make profit. Buying gold, bitcoins, or whatever, and selling it with a higher price is a business which provide you an extra income that you should declare and pay a tax for it. You can't buy EUR / USD / Gold / crude oil / silver / JPY / kroners on a forex market without paying tax on your incomes (you can even pay less taxes if you lose money  ). Yes you definitely have to pay a duty or sales tax on things you buy overseas. But that is different than a capital gains tax. You don't to pay anything on the appreciation of the currency you spent. The difference is trading your dollars for bitcoins isn't exactly an investment. What are you investing in? You are simply trading currencies. It is not a security as there is nothing it represents. You can certainly buy foreign currencies and not pay taxes. And it is even easier to buy gold. Now you are supposed to declare and pay taxes when you convert them back into dollars, but if you never do, you never owe anything. |
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If you won almost a hundred thousands bucks do you really care to pay 30k to comply with laws ?
If you get caught (for whatsoever reason) trying to fraud, you might lose everything.
I do not know how it works in the US, but here, if you make like a 1 000 euros deposit into your bank account, your bank will most likely contact the government and they will ask where the money come from.
I'm talking tax avoidance, not evasion. I'm trying to do everything legally. In the event that I was audited, I'd point to the bitcoins I bought, claim them as a currency which I used to purchased gold. What could likely happen at that point is the IRS would say, "no, you can't do that" and I would owe back taxes on the appreciation. Worst case scenario is I could be hit with interest and monetary and possibly criminal penalties, but that is not likely as long as the IRS believed I wasn't deliberately evading taxes or laundering money. The fact is there is no clear guidance from the IRS as to how bitcoins should be taxed and the announcement from FinCEN implies that bitcoins are a currency, meaning that isn't too far-fetched that they be treated as such when it comes to tax purposes. Simple host your kit in Hong Kong... the tax is 0% on bitcoins I'm a US (and Irish) citizen and the US doesn't like US citizens not paying taxes, even if they live overseas. |
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Bitcoins cannot be considered as foreign currency because that would mean there is a country somewhere that views it as legal currency. You could see many tax advisors and accountants but as we're still waiting for official regulations regarding it, they just won't be able to give you a correct answer, and neither can I.
But logic says capital gains regulations should apply.
Perhaps we can get Sealand to declare it their nation currency, lol. |
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I never went to US, and have no idea how it works. But I find it quite strange that you can "avoid" 30 % fees with a trick like that.
In my opinion, bitcoin can be considered as a "foreign currency", and you can buy gold with it if you want.
The main problem is that it is quite new, and people don't know much about it, and laws did not imagine that.
Instead of asking an accountant, you might ask a tax office (?). (not sure if it's the correct name)
It is strange, indeed, but the tax laws in the United States are quite complicated and loopholes like this are not that uncommon. This rule makes sense in other situations. Take this example: You are traveling to Europe for a month on vacation. You exchange $10,000 into Euros a couple of weeks before you travel. For simplicity sake, let's say that gives you 10,000 euros. When you arrive in Europe, you look at the exchange rate and see that the Euro has strengthened vs the dollar and those 10,000 euros would be worth $12,000 if you exchanged them back to dollars. You don't exchange them back, though, you spend them all in Europe on dinners, hotels, rental cars, souvenirs, etc. That's what you exchanged them for. You don't owe capital gains tax on the difference between what you bought the euros for and what they were actually worth when you spent them, even though it's $2000 because you never exchanged them back, you spent them! It would be silly to except you to pay capital gains tax because the value of the euro fluctuated as you held them. Now, take this same scenario, but instead of euros, substitute in bitcoins. And instead of a 20% increase, imagine a 10x increase like we've seen in the past 6 months with bitcoin. This wouldn't work for bitcoins mined. You'd still owe income tax on those. But this could work for bitcoin appreciation on bitcoins you purchased with dollars. |
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If you won almost a hundred thousands bucks do you really care to pay 30k to comply with laws ?
If you get caught (for whatsoever reason) trying to fraud, you might lose everything.
I do not know how it works in the US, but here, if you make like a 1 000 euros deposit into your bank account, your bank will most likely contact the government and they will ask where the money come from.
I'm talking tax avoidance, not evasion. I'm trying to do everything legally. In the event that I was audited, I'd point to the bitcoins I bought, claim them as a currency which I used to purchased gold. What could likely happen at that point is the IRS would say, "no, you can't do that" and I would owe back taxes on the appreciation. Worst case scenario is I could be hit with interest and monetary and possibly criminal penalties, but that is not likely as long as the IRS believed I wasn't deliberately evading taxes or laundering money. The fact is there is no clear guidance from the IRS as to how bitcoins should be taxed and the announcement from FinCEN implies that bitcoins are a currency, meaning that isn't too far-fetched that they be treated as such when it comes to tax purposes. |
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Or you could just buy stuff.
It's too many bitcoins to exchange for cash directly and too much to actually buy stuff with. If only my landlord accepted bitcoins for rent! |
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If you have that much you can afford to talk to an accountant/attorney that will give you the best advice. Otherwise just find a couple people who will trade for cash and keep it in a safe somewhere. If it doesn't go through a bank no one will know you have it.
I've talked to an accountant already but it wasn't much help as he knew nothing about bitcoins at all. It's hard to find an accountant that has even heard of them, and even harder to find one that has dealt with paying taxes on them. I might consult him again as this was a relatively new idea that I had. |
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This is an idea for people who have made significant gains on the recent increase in the value of your bitcoins.
Here is an example.
Let say you bought 1000 bitcoins at $10 last October.
Presently they are worth $100,000 assuming you sell now for $100 per coin.
If you sold right now (in the US), and you considered your bitcoins to be property you'd owe short-term capital gains on $90,000.
That could be about $30,000 depending on your tax bracket and what state you live in.
You could hold the bitcoins at least a year and pay long-term capital gains of 15% (plus whatever state capital gains tax you have) assuming you are not in the highest tax bracket.
This will still cost you a lot of money, though.
If you considered bitcoins a foreign currency, though, and you spent them, you would not owe any capital gains as long as you spent the currency on goods and services and didn't exchange it back to dollars.
So why not just use the bitcoins to buy gold directly, and then later sell the gold for dollars when you need dollars.
This seems like it would be perfectly legal, at least until the IRS says something about how bitcoins should be treated.
The potential pitfalls are:
1) You might have trouble considering bitcoins to be a foreign currency. The recent FinCen guideline imply that bitcoins that address "virtual currencies" imply that bitcoin might fall under currency regulations. This is essential in that you owe no capital gains tax on appreciation of foreign currencies that you actually spend.
2) I'm not sure whether the purchase of gold bullion can be considered the purchase of a good or something that is an investment. I know that gold falls under the "collectables" laws for it's own appreciation. Certainly if you used the bitcoin to purchase a car or a boat it would be ok. But do you owe tax on it once you sell that car or boat? I don't believe so.
Any thoughs?
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Why can't you just use dwolla and transfer the money out and back to your bank account?
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I don't think this stuff is well established at all. I would imagine you "should" pay capital gains on it. Each year you'd add up how many additional USD-value your Bitcoins have compared to last year, and that's how much you'd owe capital gains on. So if you bought $100 worth of Bitcoins at the beginning of the year, and come tax-time they're worth $300, then you'd owe capital gains tax on $200. If you mined them then it would be their current worth at the end of the year, minus your cost to mine them.
That said, Bitcoins are so discreet that you could basically just do whatever you want. There's no way anyone at the IRS could touch it. You'd start getting into trouble as soon as you start cashing them out. But I'm sure that's avoidable too.
Actually you don't owe the taxes until you cash them out anyways. So even if you bought them at $100 and they are worth $300 now you don't owe taxes until you realize those gains, which occurs when you cash them out or otherwise spend them. And yes, the IRS may never notice. Or you could get audited and they want to know where that $50,000 deposit in your checking account came from. You can try to avoid taxes and risk financial and possibly criminal penalties in the future if you are caught or you could at least show the IRS that you tried to pay what you believed to be the correct amount of taxes on your capitals gains. You might still owe more taxes and possibly penalties but you'll be better off than if you are caught deliberating avoiding taxes. |
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Anyways back to the original issue.
I think my original point stands if you treat bitcoins as a foreign currency rather than a good you barter with.
From "A Lawyers Take On Bitcoin and Taxes":
"Individuals do not need to report a gain when they use their appreciated foreign currency to purchase things directly."
The citation is treasury reg 1.988-1(a)(9)(ii)
I will post the text of the regulation later but basically I believe it is there to protect people who exchange dollars for another currency and then spend that currency from having to owe taxes because the foreign currency increased in value before they spent it. Otherwise, every time you traveled to a foreign country, you'd have to declare the value of everything you spent foreign money on and pay capital gains tax on the difference between the dollars you spent on the currency and the estimated value of the goods and services you received.
Now perhaps this argument is moot since finCEN is implying that bitcoins are not a foreign currency.
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If you mined the bitcoins there is no capital gain in $ value but if you sold them you report the $ ammount as income. If you bought bitcoins with $ and they gain in value then you have a capital gain on an investment to report. USA also made all barter trades taxable, so even if you don't use $, you are still subject to tax if you barter for goods and services. So even if you mine Bitcoins and spend them as Bitcoins you're not going to escape US tax! http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Bartering-Tax-CenterWhy would it matter if they are mined or not? Wouldn't you have to pay income tax on the value of the coins you mined plus capital gains on any gaiend value when you sell them? Or perhaps capitals gains on the whole thing. I don't think it is any different whether you mined or bought them. |
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I've seen several places that you do not owe taxes if you buy bitcoins with dollars, then use those bitcoins to pay for goods or services directly, even if the value of the bitcoins has appreciated since you purchased them!
From "A Lawyer's take on bitcoin and taxes":
"If an individual buys a yacht directly with bitcoins that have appreviated in value $1 million since the were acquired, that gain is not taxable."
Some people seem to disagree though, believing that you would actually owe tax on the appreciated value of the bitcoins when you make the transaction.
Which is it?
This could be a away to not have to pay capital gains taxes for people who have speculated in bitcoins provided there are enough places you can spend bitcoins, or perhaps when that bitcoin debit card ever becomes available. Maybe I can convince my landlord to accept bitcoins as rent.
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