How to hedge a BTC top without selling to cash and taking a capital gains tax event? One opinion from a CPA in the USA was that if you keep your fiat in the exchange, then there is no capital gain. When you withdraw fiat there is a capital gain. But exchanges can have thefts and take all your money. Regulatory actions are coming as well so possible frozen assets such as recently for BTC-e.
http://fortune.com/2017/07/10/bitcoin-irs-coinbase/Careful. I talked to a CPA and known Bitcoin tax guy about selling into USD on exchanges. Still a taxable event, and still risky with the IRS. Coinbase may have to give up everything including trading logs to the IRS
Afair, I had seen that
some CPA association (here is
that document) had adopted
a self-determined guideline stating that sales to USD on the exchange are
§1031 “like kinded” (see
also this) for a trader who is repurchasing other tokens with those funds and not pulling the funds out of the exchange. Because while your funds are on the exchange, you do not hold any tokens. You hold IOUs from the exchange, thus its like you are inside a self-contained game. Only when you pull out actual tokens or funds, do you have a taxable event. The losses and thefts at exchanges indicate they are not as good as tokens or dollars, because they do not have the oversight and regulations that banks or bank vaults have. So that seems to support the hypothesis.
I usually go by
https://bitcoin.tax/faqWhich has been analysed by many CPAs
I sold a lot of BTC on an exchange into USD…
Most CPAs are presumably not aware of what I wrote above. Perhaps the light bulb will turn on after they read my idea? Afaics, you did not sell for USD. You sold for some IOUs. You did not have USD nor tokens until you took them out of the exchange. It is not like a stock exchange where your shares were actually transferred in an external widely convertible clearinghouse. Possibly all your trades were internal IOUs of the exchange? But does that mean moving tokens into an exchange is a taxable event or only if take non-tokens out of the exchange (i.e. not a §1031 “like kinded” withdrawal)?
Note the IRS guidelines (quoted below) were specifically only for “convertible” virtual currencies, thus since the exchange’s IOUs are not generally/widely/independently convertible (except by them), presumably their trade is not covered by the IRS guidelines.
(also the mining guideline wouldn’t apply to premined tokens which aren’t yet convertible)Please if possible ask your CPA about what I wrote and feedback to me. Also even if that ends up being wrong, the IRS will have to allow for the fact that it was a theory that has a reasonable basis and thus they will need to work with taxpayers to help them reach reasonable settlements.
I think perhaps you are referring to
a Fortune article by a CPA? That guy appears to unaware of the logic above. Note the logic above is my own and is the first time I have read it any where, but it may be the logic being employed by some CPAs, but I dunno.
The best way to financially benefit from your bitcoins is to:
1) Leave the US with your bitcoins.
2) Live in some other country that has less onerous taxation.
You will still be accessed a capital gains tax for the portion of the time you held the asset while still a USA citizen. Ditto for tax home residents of an nation.
Additionally the USA now has a law where if your net worth is more than $2 million when renouncing your USA citizenship, the CGT is accessed on their current value at the time of renunciation. This could be quite unfair if the assets are highly illiquid and you can’t raise funds (e.g. sell altcoins with low volume of trading) without crashing the prices of your assets.
Disclaimer: IANAL nor a CPA (although my father is an attorney and my grandfather and sister were both CPAs before they died). This is not legal nor accounting advice.
Countries that Treat Virtual Currencies as Foreign CurrencyAvoiding Taxes on Bitcoin Gains
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.
[…]
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.
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.
Decentralized issuance and management of the currency could theoretically still be considered to be foreign. It certainly isn’t domestic where the only domestic currency is the USA dollar (or what ever is the legal tender in your nation).
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.
However, the IRS at least has already ruled against the foreign currency classification:
Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?
A-6:
Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency. See Publication 544, Sales and Other Dispositions of Assets, for information about the tax treatment of sales and exchanges, such as whether a loss is deductible.
[…]
Q-12: Is a payment made using virtual currency subject to information reporting?
A-12:
A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. For example, a person who in the course of a trade or business makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee. Examples of payments of fixed and determinable income include rent, salaries, wages, premiums, annuities, and compensation.
Note that
proposed legislation in the USA would treat Bitcoin as foreign currency for purchases less than $600.
Yet other countries appear to treat convertible virtual currencies as foreign currency:
Just hodl and hope it gets recognised as a currency so you won't have to pay capital gains on purchases.
1. Hold And Wait For Legal Recognition
The best option – although also the ones that will make up most of the time – is just to hold onto Bitcoin and wait until your country officially recognizes it as a currency. Capital gains on purchases or conversion are quite annoying. However, Japan has set a legal precedent to legally remove capital gains taxes from Bitcoin purchases. It will be quite some time until the rest of the world catches up with these developments, though.
The European Union
In 2015, the EU’s highest court, the European Court of Justice (ECJ), ruled out that Bitcoin transactions “are exempt from VAT (value-added tax) under the provision concerning transactions relating to currency, bank notes and coins used as legal tender.” Thus, according to the ECJ, Bitcoin is a currency, and not property.
Although purchasing and selling Bitcoin does not incur VAT, Bitcoin transactions may be subject to other taxes, such as capital gains or income tax. The fiscal treatment of Bitcoin for tax purposes differs depending on EU country.
The UK
In the UK, Bitcoin is treated as a foreign currency. The tax rules applying to currency gains and losses apply to Bitcoin transactions. However, Bitcoin transactions that constitute “speculative transactions” may not be subject to any tax. The UK tax authority, Her Majesty’s Revenue and Customs (HMRC), provides rather vague information about the tax enforcement measures related to Bitcoin transactions. HMRC states that each Bitcoin-related case “will be considered on the basis of its own individual facts and circumstances”.
Germany
Bitcoin has been considered a type of private money since 2013. Although Bitcoin is subject to capital gains tax of 25% in Germany, such a tax is levied only if the profits on Bitcoin are acquired within one year after the receipt of Bitcoin. Thus, taxpayers who hold Bitcoin for longer than one year will not be subject to capital gains tax and their transaction will fall within the scope of a non-taxable “private sale”. The treatment of Bitcoin in Germany is similar to the treatment of other investment instruments, such as stocks or shares.
Re: Bitcoin Taxation and Attorney in Canada?According to this website :
http://www.canadiantaxlitigation.com/cra-bitcoins-may-be-specified-foreign-propertyBitcoin counts as foreign property and "under the foreign property reporting rules in section 233.3 of the Income Tax Act." unless you have more than $100,000 CDN worth Bitcoin, you shouldn't pay any tax.
Unless you convert it to fiat or have more than $100,000 CDN you should be fine.
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