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1  Bitcoin / Legal / Re: Bitcoin Is Property Not Currency on: April 05, 2014, 04:41:16 PM
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In the October 2000 issue of the JofA, t wo tax articles discussed day traders and day trading. One, “Being a Trader in Securities”(page 118), was an excerpt from a longer Tax Adviser article, “Securities Trader Reporting Requirements,” by Thomas Rolfe Pudner. It said a “trader’s activity is not subject to self-employment tax.” The second article, “Paying the Piper: Some Tax Rules for Day Traders” (page 115), by Marc I. Lebow and P. Michael McLain, said day trading is subject to self-employment taxes. The JofA and the authors received many inquiries asking for clarification. Below is a second article by Lebow and McLain (joined by Wayne Schell, an associate professor at Newport University) that explains why they believe the tax law in this area is ambiguous and why a day trader may want to pay self-employment tax.

In the October 2000 JofA, we argued that taxpayers whose trade or business is trading marketable securities (a.k.a day traders) should report gains and losses from their business on schedule C, form 1040, so they can ignore the $3,000 capital loss limitation. However, another alternative is for the taxpayer to report business expenses on schedule C while reporting gains and losses on schedule D. In this instance, the $3,000 capital loss limitation applies. If the taxpayer elects to use schedule C for both expenses and gains, the net gains are subject to self-employment taxes.

We have received several requests for a clarification of our position. Most concerns related to the practitioners’ interpretation of IRC section 1401, which says, “The 1998 act provides that the rule treating gain or loss as ordinary by reason of the taxpayer’s election to apply mark-to-market rules does not apply for purposes of applying IRC section 1402 (rules relating to the self-employment tax).” In other words, gains or losses caused by the mark-to-market election do not affect self-employment tax expense and liability.

Tax practitioners have told us that many accountants advise clients they are not liable for any self-employment tax on their day-trading activities. This position comes from a misunderstanding of the mark-to-market concept. In its explanation of mark-to-market, the code says, “In the case of a person who is engaged in a trade or business as a trader in securities and who elects to have this paragraph (mark-to-market) apply to the trade or business:

“Such person recognizes gain or loss on any security held in connection with the trade or business at the close of any tax year as if the security were sold for its fair market value on the last business day of such taxable year, and

“Any gain or loss is taken into account for such taxable year. (IRC section 475(f)(1)(A).)”

The code then explains that gains and losses from applying the mark-to-market provision, while they may be ordinary income or loss, they are not subject to self-employment taxes (IRC section 475(f)(1)(D)). That is, the ability to avoid self-employment taxes from this section does not apply to realized gains or losses; it merely applies to the revaluation of a portfolio of securities from cost to market value occurring at the end of a tax year.

The argument that day traders are liable for self-employment taxes follows a different path. First, we argued the day trader will want to report business transactions using schedule C to avoid the $3,000 limitation on capital losses. The courts ruled that individuals whose main business was gambling on fluctuations in the value of securities were in a trade or business and thus subject to the self-employment tax. For example, in Groetzinger v. Commissioner, (480 U.S. 23; 107 S. Ct. 980 (1987)), a person involved in a trade or business was identified as one whose activities were regular, frequent, active and substantial. The case involved a gambler who was recording his income and losses on schedule C. In a footnote, the U.S. Supreme Court cited Barrish v. Commissioner (49 TCM 115 (1984)) and Baxter v. United States (633 F.Supp 912 (1986)), and determined that there was no distinction between a gambler and an active market trader (a day trader). The Court also said “the courts have properly assumed that the term includes all means of gaining a livelihood by work, even those which would scarcely be so characterized in common speech.”

In Trent v. Commissioner (291 F.2d 669, 671 (CA2 1961)), the courts ruled that gamblers involved in trade or business are subject to self-employment taxes. An example of this relationship can also be found in the court ruling in Groetzinger :

“If a taxpayer, as Groetzinger is stipulated to have done in 1978, devotes his full-time activity to gambling, and it is his intended livelihood source, it would seem that basic concepts of fairness (if there be much of that in the income tax law) demand that his activity be regarded as a trade or business just as any other readily accepted activity, such as being a retail store proprietor, or, to come closer categorically, as being a casino operator or as being an active trader on the exchanges.”

In another case, Meredith v. Commissioner (TC Memo 1984-651), an active trader of securities was also defined as a gambler. To quote the ruling, “one may gamble in stocks while another may gamble in dogs.” Finally, citing Fuld v. Commissioner (139 F.2d 465 (1943)), 26 section 1236 USCS Interpretive Notes and Decisions says, “Taxpayers purchasing and selling securities for themselves for speculation may constitute a ‘trade or business’ for reporting taxes on profits derived from such dealings.”

A taxpayer who follows the logic of the gambling and similar cases, knows that gains and losses should be reported on schedule C, and therefore be subject to self-employment taxes and not be subject to the $3,000 loss limitation.

This is not to say the courts were unanimous in their rulings. In King v. Commissioner, (89 TC 445, 458 (1987)), for example, the Tax Court found traders “occupy an unusual position under the tax law because they engage in a trade or business [that] produces capital gains and losses.”

Using the logic of King , the gains from the sale of capital assets (marketable securities) should be treated as capital gains and not be subject to self-employment taxes. The argument here is that day trading is a unique business that generates capital gains and losses. Logically, the $3,000 loss limitation would apply. This position is strengthened if the taxpayer is not considered to be in a trade or business but is instead merely an investor.

The difficulty lies in determining whether the taxpayer is in a trade or business. In King , the court ruled that “a trader’s activities must seek profit from short-term market swings, unlike those of an investor who seeks capital appreciation and income and who is usually not concerned with short-term developments that would influence prices on the daily market.”

In Paoli v. Commissioner (TC Memo 1991-351 (1991)), the court found 326 trades during the year did not make the taxpayer a trader. If the taxpayer had other employment or other sources of income in a taxable year, he or she might not be able to report gains and losses on schedule C. It was also noted in King that not every individual who trades in securities is considered to be participating in a trade or business. In Beals v. Commissioner (TC Memo 1987-171 (1987)), the IRS initially took the position that someone who managed investments was subject to self-employment taxes but later said that its initial position was in error—that one who merely managed investments was not subject to the tax. In a response to a September 1999 taxpayer inquiry on this subject, the IRS said, “Self-employment tax does not apply since the sale of a capital asset is involved and the profit or loss is ordinary only because of the mark-to-market election.”

Whether or not a day trader is subject to self-employment tax is ambiguous. If the taxpayer is in trade or business and elects to report both expenses and gains and losses on schedule C, there is significant case law supporting that position. As a matter of consistency, the taxpayer would be subject to self-employment taxes and not subject to the $3,000 capital loss limitation. If the taxpayer follows King and similar cases, gains and losses may be reported on schedule D and self-employment taxes are not relevant. Here, the $3,000 capital loss limitation applies. An interesting solution to this problem has been proposed by several tax practitioners. The taxpayer elects to report income on Form 4797, Sales of Business Property, and expenses on schedule C. This will allow him or her to maximize both trading losses and business expenses. The appropriateness of reporting gains and losses on the sale of marketable securities on form 4797, however, is not addressed in this article.

—Marc I. Lebow, CPA, PhD, and Wayne Schell, CPA, PhD,
associate professors of accounting at Christopher Newport University
in Newport News, Virginia, and P. Michael McLain, CPA, DBA,
assistant professor of accounting at Hampton University, Hampton, Virginia.


Looks like yet another ambiguity to which we must face steep fines and jailtime.
2  Bitcoin / Legal / Re: Bitcoin Is Property Not Currency on: April 05, 2014, 04:22:41 PM
When calculating your taxes, don't forget the roughly 13% self employment tax which the IRS also says is due............................

My $.02.

Wink

For capital gains?
3  Bitcoin / Legal / Re: Bitcoin Is Property Not Currency on: March 28, 2014, 05:24:09 PM
Receipts are proof of nothing though, i could fabricate them all day, are simple unprovable records all auditors are looking for, or do they require proof, and if so what proof could you possibly give them that you sold your tv for $200 and not $800, or that you sold your tv and not an ounce of weed?

If the IRS thinks all your receipts look legit, they won't investigate further. But if anything looks suspicious, they will investigate a few items and see if your story is true.

For example, if you write on your taxes that you gave $1,000 in charity to your church (a tax write-off)... if the IRS audits you, they will ask you for your receipts. You tell them you gave cash, you have none. They will then ask for the name of your church. They'll follow up to see if you go there regularly. If the pastor knows you, they might think your donations are legit. They won't trace further than this, they'll trust you.

However, if they ask your friends about your church, and they say you don't go, and the pastor never heard of you.... well the IRS will get upset, and charge you with fraud and fine you.  They will then investigate deeper everything on your taxes, and audit you for previous years, and also audit you repeatedly in the future. YOU have to prove that you gave $1,000 in charity to your church, not the other way around. If the IRS is just suspicious, that's enough for them to charge you.

(If you wrote that you gave $50 to your church, however, they won't even think of pursuing it, so how MUCH money matters a lot)




Thanks for the explaination. The point really wasnt about how much you can get away with or how to dodge an audit, its about how you can follow the rules and what impact they have on our daily activities. In your example you gave the name of a church, that is simple to investigate, but if i tell them i sold my coin to an anonymous person over the internet who made a cash deposit and they ask for proof of that, then what do i tell them? I can give them the amount i sold for (hey there it is in my bank account), the amount of coin, the price per coin, the difference in value from when i obtained it, etc.... but i can never give them proof that the coin was in fact mine and that im not just pointing to some arbritrary address on the blockchain. They suspect that i was selling coin for a favorable longterm capital gains rate and not the newer coin i just purchased recently, i can only point to the address i have given them, then what happens?

I think people are vastly downplaying the impact this has on off-exchange and off-blockchain transactions, this could very well make anyone who doesnt register themself on an exchange be charged with some very serious crimes.
4  Bitcoin / Legal / Re: Bitcoin Is Property Not Currency on: March 28, 2014, 05:04:26 PM
The bigger problem (in my opinion) is that even if people WANT to comply, it may be difficult or impossible to do so.

I agree, this is a big problem, but the real problem here is that reporting any transaction where both parties havent identified themselves and are being monitored by a 3rd party may open onself up to being charged with tax evasion.
5  Bitcoin / Legal / Re: Bitcoin Is Property Not Currency on: March 28, 2014, 04:59:33 PM

Get receipts for your face to face transactions. Problem solved. I really think you are making this out to be much more difficult than it needs to be.

Receipts are proof of nothing though, i could fabricate them all day, are simple unprovable records all auditors are looking for, or do they require proof, and if so what proof could you possibly give them that you sold your tv for $200 and not $800, or that you sold your tv and not an ounce of weed?

http://www.billofsale-form.com/blank-bill-of-sale/

Does someone hold your hand when you pee?

When you have a garage sale, do you hand all your customers a legal document asking for their name and home address?
6  Bitcoin / Legal / Re: Bitcoin Is Property Not Currency on: March 28, 2014, 04:56:02 PM

Get receipts for your face to face transactions. Problem solved. I really think you are making this out to be much more difficult than it needs to be.



Receipts are proof of nothing though, i could fabricate them all day, are simple unprovable records all auditors are looking for, or do they require proof, and if so what proof could you possibly give them that you sold your tv for $200 and not $800, or that you sold your tv and not an ounce of weed?
7  Bitcoin / Legal / Re: Bitcoin Is Property Not Currency on: March 27, 2014, 11:52:43 PM

Either you "own" the private keys which control the address or you don't.


Ive use online wallets, i do not own the private keys to those, the owner of the wallet site does, i am given a password to access those funds, are they no longer mine? Ie also lost many wallets and the private keys held within, does that mean i never owned them in the first place?


Either you have documentation from an exchange or you don't.


I dont because i dont use an exchange to buy/sell, am i required to pay 40% tax because i choose not to use an exchange?

No, this means you are making choices / taking actions which could have a negative impact on your financial situation by increasing the amount of taxes you may have to pay.

I would suggest you start making new choices / taking different actions which would have a positive impact on your financial situation by decreasing the amount of taxes you may have to pay.

There you go, the IRS has successfully deanonymized bitcoin.

I'm confused. Do you want to remain anonymous or do you want to file your taxes with the IRS? You are correct, you can't do both, but this has nothing to do with Bitcoin. These are choices you must make as an individual.

I want to stay true to bitcoins original purpose, to give power back to the people over their money. What this ruling has in effect done, as evidence by your "better shape up or ship out" response to my dilemma (which is reasonable to assume would be representative of most taxpayers), is change the nature of bitcoin from a "keep your nose out of my business" stance to a "if i want to get favorable tax status i should register all my activities with an official exchange and report this to the government" mentality.

Im not anti-government, nor am i trying to dodge paying my dues, but i dont like to trade on an exchange, you know how much money i lost on mt-gox? $0. Do you know how much i will lose on bitstamp when it gets hacked? $0. Now the IRS is in effect saying, you had better use those services or else we will hit you with a full-taxable amount, that is not fair, nor is it reasonable to presume a small time speculator like myself would have the ability to produce solid evidence of a p2p trade. In fact, its not reasonable to presume anyone has the ability to provide evidence of a p2p trade, this is no more possible than if you sold something on craigslist to a stranger for cash and then get audited and asked the details of the transaction, who was the buyer? prove that you sold the item in question and not illegal drugs or stolen property. This is no different, they arent taxing bitcoin, they are effective threatening the entire bitcoin community with fines and jailtime for doing anything that isnt registered with the government. This is what i mean when i say deanonymized, its not hiding, its having nothing to hide from.
8  Bitcoin / Legal / Re: Bitcoin Is Property Not Currency on: March 27, 2014, 11:30:55 PM

Either you "own" the private keys which control the address or you don't.


Ive use online wallets, i do not own the private keys to those, the owner of the wallet site does, i am given a password to access those funds, are they no longer mine? Ie also lost many wallets and the private keys held within, does that mean i never owned them in the first place?


Either you have documentation from an exchange or you don't.


I dont because i dont use an exchange to buy/sell, am i required to pay 40% tax because i choose not to use an exchange?

No, this means you are making choices / taking actions which could have a negative impact on your financial situation by increasing the amount of taxes you may have to pay.

I would suggest you start making new choices / taking different actions which would have a positive impact on your financial situation by decreasing the amount of taxes you may have to pay.

There you go, the IRS has successfully deanonymized bitcoin.
9  Bitcoin / Legal / Re: Bitcoin Is Property Not Currency on: March 27, 2014, 11:02:57 PM

Either you "own" the private keys which control the address or you don't.


Ive use online wallets, i do not own the private keys to those, the owner of the wallet site does, i am given a password to access those funds, are they no longer mine? Ie also lost many wallets and the private keys held within, does that mean i never owned them in the first place?


Either you have documentation from an exchange or you don't.


I dont because i dont use an exchange to buy/sell, am i required to pay 40% tax because i choose not to use an exchange?
10  Bitcoin / Legal / Re: Bitcoin Is Property Not Currency on: March 27, 2014, 10:37:06 PM
No one pointed out the big purple elephant thats staring down its big trunk at bitcoin taxation, how can any of us including the IRS prove one way or another that the owner of an address that transacted years ago for a sum of bitcoin was in fact you? Perhaps if you were on an exchange in which you identified yourself, they would report this and it would be tied to you, but for all the other exchange methods that do not require or have no way of proving ones identity, what proof could any of us offer?

Now lets say instead of wanting to be taxed at the 25%-40% short-term capital gains rates you wanted to be taxed at the 15% long-term capital gains rates, instead of pointing to the addresses holding the coins you bought 6 months ago you could point way back in the blockchain (provided the purported gains did not offset the tax savings) and claim those were your bitcoins you bought from a guy on a forum. They demand proof, what proof? There is no proof, no way of proving that those coins were owned by you, does that mean they will then tax you at whatever rate they wish because there is no way to prove something? I dont know, do we all face maximum taxation unless we register our identities on an exchange?
11  Bitcoin / Electrum / How can i switch out wallet .dats? on: August 17, 2013, 07:37:26 PM
I would like to have multiple wallets but when i switch out the dats in the electrum folder it just rebuilds the old one. I dont want to use the command line as that would give me different dats with the same file name. How can i accommodate multiple wallets?
12  Alternate cryptocurrencies / Altcoin Discussion / Re: StableCoin on: April 22, 2013, 06:23:03 PM
We're not talking bitcoin here, we're talking stablecoin. You quote one part of a 5 paragraph post and say I'm focusing on dumping. Are there any specific things you don't think I've addressed, rather than just leaving it open ended and implying a failure to account for something else?


There is no such thing a free money, this is what the fed attempts to do with quantitative easing and stimulus bills. There is only so much value in a network, if you increase the amount of money in a system without validating its existence, it decreases the value of all money proportionally. What you are suggesting is a tax on the network to the advantage of transactors in an attempt to further stimulate spending.

These inflationary measures will not doing anything but trickle-up, as we have seen in recent years. Creating a central-bank in protocol is opposite to the bitcoin design philosophy.
13  Alternate cryptocurrencies / Altcoin Discussion / Re: TrueCoin <-- coin with moderate inflation on: April 22, 2013, 06:09:39 PM
Why not include the proof of stake, that was considered to be a very good idea.  

And I'd shy away from premining since that(right or wrong) has tarnished the reputation of many coins.

Proof of stake requires centralization, which is against bitcoins design philosophy.
14  Alternate cryptocurrencies / Announcements (Altcoins) / Re: [ANN] Freicoin: demurrage crypto-currency from the Occupy movement (crowdfund) on: April 22, 2013, 06:08:20 PM
I have to agree with Etlase2 here, the whole point of bitcoin was to escape a system whereby few have power over all. This attempt at a currency seems to turn bitcoins philosophy on its head.
15  Alternate cryptocurrencies / Altcoin Discussion / Re: StableCoin on: April 22, 2013, 06:02:19 PM
Your concerns seem to be more geared towards dumping. This is only an issue in the real world when someone with a massive supply can continually dump to create a market dependence on them, but since anyone can be a supplier at any time in bitcoin this isnt an issue.


Are we talking about the same bitcoin where greater than 50% of the currency to ever be created is in the hands of <100k people? Where 20% of it is probably in the hands of a few dozen? I don't know how you can possibly make the argument that bitcoin mining is somehow a solution to demand when it is, by design, a choke point of the currency. My concerns are not "more geared towards dumping", they are geared towards providing a stable currency base that is difficult to manipulate by those who mine, those who have coins, or anyone else. This is without resorting to some kind of centralized solution or being tied to hard formulas that will not be able to adapt to reality.

This chokepoint you speak of was the result of a fixed block reward coupled with a moving difficulty. In the early days the difficulty was so low anyone could earn the block reward easily, this being the same block reward that as of last winter took incredible amount of investment to earn. Had the block reward been pegged to the difficulty then it would not have cost its users any more to win the same amount of currency than had they been the first and only miner.

This is why most of the currency is in the hands of so few people, when you have a pit full of gold and no one else to compete with, then winner takes all. Widen the pit with the influx of new miners and now everyone will have an equal take no matter how many join.
16  Alternate cryptocurrencies / Altcoin Discussion / Re: The ultra-stable price-validated adaptive cryptocurrency: qbit³ on: April 22, 2013, 04:21:26 PM
If the majority of the speculators who drive the price are not miners (which I believe to be the case, especially during bubble conditions,) how is jiggering with the mining parameters going to influence their perception of anything? I have trouble making sense of this.

Its an issue of supply vs demand, we already have a network that fluxuates with the market, all we need is a supply that fluxuates with the network.

Price goes up -> Hashpower goes up -> Mint rate goes up -> price stabilizes with influx of new currency.

Price goes down -> Hashpower goes down -> Mint rate drops -> price stabilizes above cost-floor.
17  Alternate cryptocurrencies / Altcoin Discussion / Re: StableCoin on: April 22, 2013, 04:10:13 PM

I am not sure who you're replying to, and Red has taken a crack, but I will take one as well.

It goes back to game theory. The Evil Guys or whomever may want to lower the value of the coin by minting unprofitably. However, with free coins given away, their unprofitability will be profit in the hands of others. The deeper they want to go, the more significant the investment that needs to be wasted to achieve further instability. This will likely only be accomplished when the network is small. These evil guys will make money for everyone else, and everyone is fairly likely to know what is happening, and no one is really worse for wear other than those who wasted the time, effort, and money to cause the problem. As transaction activity grows, the ability for anyone to do something like this diminishes.

What destruction are you accomplishing when you force other people to profit off of your expense? Evil Guys' attack fails at game theory.


Your concerns seem to be more geared towards dumping. This is only an issue in the real world when someone with a massive supply can continually dump to create a market dependence on them, but since anyone can be a supplier at any time in bitcoin this isnt an issue.
18  Alternate cryptocurrencies / Altcoin Discussion / Re: The ultra-stable price-validated adaptive cryptocurrency: qbit³ on: April 21, 2013, 05:09:18 PM
So you are trying to build a table of peer IPs and geolocate them to their local electricity price ? You should really read Douceur's sybil attack paper and let it sink in for a few days, then take another stab at this.

Ascertaining the densest geographical location of nodes was an example that could be used to determine the typical electric prices of miners that would be then used to determine what the average base cost is of mining for each node in the network; this was used to demonstrate how the block reward should scale, but isnt used in the scaling algorithm. The only reason to use this formula in protocol would be for getting a figurative idea of what the price would be used if one wanted a decentralized way to ascertain a % fee. 
19  Alternate cryptocurrencies / Altcoin Discussion / Re: StableCoin on: April 20, 2013, 11:08:25 PM
Ultimately the issue you will run into with free handouts or enforced penalties is that neither provides an incentive to do anything in particular, that is people will continue to do whatever it is they want. Its specious to say that because we have X system that this will produce Y behavior in its users.

There are some known variables of behavior that we can rely on:

It costs $ to make Coin
Miners have to remain liquid despite desire to hold
Miners wont dump coin for less than it cost them unless the whole market is on a downward spiral
Users dont care about price of coin, they just want to use it.
Speculators will do anything to destabilize the market to profit from the difference. 

Now if you give spenders free money to spend, then its going to enter the economy unvalidated, that means not only will you lower the price of coin (if that is your goal), but you will also lower the confidence in the value of the coin, this could have severe repercussions in the long run.

The issue here is the effect speculators have on the market, and without a central bank there is only one way to handle them, by increasing the monetary supply in concert with demand, in a controlled validated manner, that is by bitcoins very design solely through its miners.
20  Alternate cryptocurrencies / Altcoin Discussion / Re: The ultra-stable price-validated adaptive cryptocurrency: qbit³ on: April 20, 2013, 10:52:23 PM
Interesting concept, well writen paper.

One thing I'm very sceptical about is relying on data from an exchanger, though. It's a big vulnurability.

True, but if you are referring to the network hashrate this can be gleaned clientside.
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