Capital gains and Bitcoin

[realnowhereman]

Let's say you are a tax paying citizen, and have no wish to hide your earnings.  Let's also say that Bitcoins are not threatened by government, but are allowed to peacefully coexist.

Dealing with Bitcoins for tax purposes means that any profits you make from them are liable for capital gains tax.  However, that tax is only due at the moment you convert them back into your native currency.

I have two questions for those who know more about tax than I do:

• If I convert BTC to USD on Monday, then that same USD to BTC on Tuesday, is capital gains tax still due?  If it is, then would it be better to wrap all one's BTC transactions in a holding company, so that profit becomes the element that is taxed?
• If the answer to the first question is "no", then what stops me converting all my gross income to Bitcoins and declaring no net income?  I can then drip my Bitcoins back to native currency (if I even have to) as I need to and in this way use Bitcoins to smooth my tax bill over the lean years and fat years.
  

These are hypothetical, and probably based on a flawed understanding of taxation.  I have only the familiarity with taxation that your average non-investing citizen would (i.e. I've never paid capital gains tax because I've never made a capital gain).

[benjamindees]

This assumes Bitcoins represent capital.

[ColdHardMetal]

Just because something follows the letter of the law doesn't mean it's always allowed.  'Tax avoidance' is allowed 'abusive tax avoidance' isn't, look it up.

Tax evasion is the term you're looking for. Avoidance is fine as you said.

[realnowhereman]

Jeez.  Yes you're all so clever.  It's damned near impossible to get a straight answer in this forum for all the people falling over their egos.

It's a hypothetical.  Yes it assumes Bitcoin is capital (since that's what HMRC has said they would treat it as), yes tax evasion is illegal, what has any of that to do with my questions?

Tell you what, cross out the word "bitcoin" in my question and replace it with "gold".

[AntiVigilante]

Jeez.  Yes you're all so clever.  It's damned near impossible to get a straight answer in this forum for all the people falling over their egos.

It's a hypothetical.  Yes it assumes Bitcoin is capital (since that's what HMRC has said they would treat it as), yes tax evasion is illegal, what has any of that to do with my questions?

Tell you what, cross out the word "bitcoin" in my question and replace it with "gold".

No it's not sarcastic. Bitcoin has the potential to become some kind of 3 axis complex number thingie with a value of r^2 = x^2+y^2+z^2. Then what kind of capital is it?

[benjamindees]

Then yes in that case your plan is perfectly legit.  It's not at all "abusive" or whatever others said.  In fact, it's exactly the way taxes are designed to work in a rape-and-pillage-based Anglo-Saxon economy.  During the looting years, you are expected to grab as much as possible.  And then in-between lootings, you live off of your booty.  This makes the job of your monarch easier since she doesn't have to find new targets and perpetrate false-flag-ops and whatnot quite as often.

[AntiVigilante]

This makes the job of your monarch easier since she doesn't have to find new targets and perpetrate false-flag-ops and whatnot quite as often.

I love it. Just another sign of how much ground they've lost.

[Grant]

Jeez.  Yes you're all so clever.  It's damned near impossible to get a straight answer in this forum for all the people falling over their egos.

It's a hypothetical.  Yes it assumes Bitcoin is capital (since that's what HMRC has said they would treat it as), yes tax evasion is illegal, what has any of that to do with my questions?

Tell you what, cross out the word "bitcoin" in my question and replace it with "gold".

Ignore the trolls, they just love to make fool of themself

Answer is yes you can substract if you deposit later or before same year from the "capital gain" you report.

So ie:

Withdraw 1000 $ on monday
Deposit 900 $ on tuesday

You report then only 100 $ as income

[realnowhereman]

Then yes in that case your plan is perfectly legit.  It's not at all "abusive" or whatever others said.  In fact, it's exactly the way taxes are designed to work in a rape-and-pillage-based Anglo-Saxon economy.  During the looting years, you are expected to grab as much as possible.  And then in-between lootings, you live off of your booty.  This makes the job of your monarch easier since she doesn't have to find new targets and perpetrate false-flag-ops and whatnot quite as often.

What on Earth of you talking about?

I'm asking how the tax system works, not how to scam the tax system.  I did say that as the very first sentence.  It's a question not "a plan".  I am asking it of others who know more than I.

I'll ask another way: if I make profit on a capital gain, then that tax is only due when the gain is realised (this I know); what I'm asking is that if one realised a gain and then waited a day and fed that gain back into the same asset you had liquidated, is their still tax due?  Essentially: does "unrealising" a gain negate "realising" a gain?

If so then, if one were a regular trader, would it be better to reorganise ones affairs so that a shell company does all the trading, and then only when a final annual profit is realised aggregated over all trades is there tax to pay.  i.e. you aren't accumulating a tax liability every time you happen to think today is a good day to sell, knowing full well that tomorrow you will buy back again.

This sort of thing is done every day by millions of people.  Organising your affairs to minimise your tax bill is not illegal, and it certainly isn't "abusive" is nothing to do with the monarch and is nothing like "rape and pillage".  But congratulations on your in depth knowledge of tax codes.

[realnowhereman]

Ignore the trolls, they just love to make fool of themself

Answer is yes you can substract if you deposit later or before same year from the "capital gain" you report.

So ie:

Withdraw 1000 $ on monday
Deposit 900 $ on tuesday

You report then only 100 $ as income

Ah... a breath of fresh air.

Thank you very much.

[Anonymous]

Its sad that you need a university degree to work out your tax.

[da2ce7]

Its sad that you need a university degree to work out your tax.

It is sad that you get put in a cage if you don't pay your tax... but that is life.

[TECSHARE]

As far as I understand it the rule is you owe capital gains the moment you receive federal reserve notes (or other national fiat reserve notes in some cases) . What was previously stated by Grant seems to be my understanding. At the end of the tax year you tally up all the notes spent and notes earned and the result is the actual gain that is taxed. In order for the IRS to collect taxes the need to be able to assign a market value for the capital in question.

If some one was looking to reduce their tax liability even further you could use Bitcoins in exchange for other capital, or goods you use every day which are usually purchased with federal reserve notes. By doing so this further complicates the tax liability issue for the IRS because the burden of proof is now on them to assign a market value to 2 goods instead of just 1. Another pitfall to avoid is assigning a dollar value to any item ever. Legal tender means you are required to accept it for debts, but no where does it say that that you must convert to FRNs or use them as a index of value.

A quick search on "linden tax revolt" will show a plethora of stories related to the subject we are discussing here. There are very clear differences between Bitcoins and Linden Dollars (second life currency), but these precedents could pave the way for future taxation issues with Bitcoin. A similar taxation question is raised in regard to the silver and gold bullion that is constitutionally required to be issued by the federal government of the US. It may for example have a face value of $1, but contain metal bullion that is worth $35 to $50 in metal value alone. Since this coin is legal tender, you can legally accept it as payment at face value, and again the capital gains tax liability issue comes up at the moment of conversion back to FRNs.

"No Federal Court of Appeals has ever ruled that the gold coins in question must be reported to the IRS based on FRN market value."

http://www.rapidtrends.com/robert-kahre-vs-the-irs-and-doj/

This is an example of this tax strategy taken to the extreme. In this case the individual won. Others were not so educated. Again and again he downfall seems to be declaring the Federal Reserve Note value of any of the capital in question. Without willingly doing so yourself you leave the burden of proof on the IRS to establish market value. This is not an easy thing to do with a volatile economy like precious metals or even Bitcoins. As with any individual challenging the status quo (lawfully or otherwise), the path is bound to be filled with pitfalls. It is a question of how far you as an individual choose to go in freeing yourself economically or otherwise.

Corporate society is structured in such a way to make sure that the tax liability is pinned onto the end user, and not the corporation. They can mandate the use of federal reserve notes because they are a private entity. You can choose not to deal with them, but this is simply not an option, or too difficult in some industries. Because they assign an FRN value to the goods and services, you thru completing this transaction in FRNs contractually agree to the FRN market value of the capital. Don't use federal reserve notes. Don't assign a federal reserve note market value to any capital. The only winning strategy is not to play.

Again back to the strategy of never declaring Federal Reserve note value to any capital, you have precious metals investors long aware of this situation to some degree. Now enter Bitcoin, a system that not only separates the metal value from the FRN system, it also creates a possibility for near complete anonymity (if you make the effort), as well as a decentralized payment processing structure that has no reporting obligations to the IRS. I predict this is going to create a HUGE inductive effect to metals investors.

 This is already happening to some degree on the forum, especially with silver prices stagnating lately and BTC going thru the roof. Precious metals and Bitcoin are a marriage made in heaven, and they will produce many offspring.

[AntiVigilante]

"No Federal Court of Appeals has ever ruled that the gold coins in question must be reported to the IRS based on FRN market value."

http://www.rapidtrends.com/robert-kahre-vs-the-irs-and-doj/

This is an example of this tax strategy taken to the extreme. In this case the individual won. Others were not so educated. Again and again he downfall seems to be declaring the Federal Reserve Note value of any of the capital in question. Without willingly doing so yourself you leave the burden of proof on the IRS to establish market value. Don't assign a federal reserve note market value to any capital. The only winning strategy is not to play.

Again back to the strategy of never declaring Federal Reserve note value to any capital, you have precious metals investors long aware of this situation to some degree. Now enter Bitcoin, a system that not only separates the metal value from the FRN system, it also creates a possibility for near complete anonymity (if you make the effort), as well as a decentralized payment processing structure that has no reporting obligations to the IRS. I predict this is going to create a HUGE inductive effect to metals investors.

This is already happening to some degree on the forum, especially with silver prices stagnating lately and BTC going thru the roof. Precious metals and Bitcoin are a marriage made in heaven, and they will produce many offspring.
[/quote]

I'm giving out loans in BTC for BTC fees. What now? No FRNs involved.

[realnowhereman]

I'm more lost now. :-)

I don't know what tax day is in the US, but in the UK it's April 6th.

Let's say I am self employed.

Let's say I earned profit, from my normal self-employed work, of £25,000, from April 6th 2010.  On April 5th 2011 I take my gross income of £25,000 and buy Bitcoins with it.  I now have zero cash, and an unrealised capital gain.  Net income = zero, so no tax due.  Unrealised capital gain = not taxed until liquidated.

April 6th 2011 I cash out my Bitcoins.
April 5th 2012 I buy Bitcoins.  Net income = zero, unrealised capital gain = not taxed until liquidated.
April 6th 2013 I cash out my Bitcoins.

When the tax man comes knocking, what is my argument?  There must be a tax law that prevents this because it doesn't require Bitcoins to make it work, it's just easier to do.

The only thing I can think of is that the tax man relies on the fact that in reality you have to cash out and stay out in order that you can buy the things you want in the year.  If you don't though, isn't the above a way of avoiding tax on large sums that you receive but don't use?

[AntiVigilante]

April 6th 2011 I cash out my Bitcoins.
April 5th 2012 I buy Bitcoins.  Net income = zero, unrealised capital gain = not taxed until liquidated.
April 6th 2013 I cash out my Bitcoins.

Buy food at bitmunchies.com

When the tax man comes knocking, what is my argument?  There must be a tax law that prevents this because it doesn't require Bitcoins to make it work, it's just easier to do.

There isn't. Reality doesn't have to comply with government, economic, or political models and neither do laws. The risk is that you will be targeted. But you can win. Eat on a bitcoin budget. Forget the rest.

The only thing I can think of is that the tax man relies on the fact that in reality you have to cash out and stay out in order that you can buy the things you want in the year.  If you don't though, isn't the above a way of avoiding tax on large sums that you receive but don't use?
[/quote]

It's not avoidance if you don't deal in it. Again I'm offering BTC based loans with fees not interest. And I have a solution to the time value problem.

[Cluster2k]

You'll have to pay tax on your bitcoin income, one way or another. 

Created some bitcoins and converted them to cash?  That counts as income.

Traded some bitcoins for profit on mtGox?  That counts as capital gain.  It's very much like trading shares.

The money has to hit a real bank account sooner or later, and not declaring the income/gain runs the risk of the tax office noticing.   Maybe if casinos would take bitcoins there would be an easy way of hiding the income... :-)

[tymothy]

I think the questions you're asking about bitcoin are about the same as if it were gold or the Euro. I'm not a tax professional, but I'm pretty sure that if you make USD from currency speculation, you still owe tax. If you convert a company's revenue to Bitcoins and record this as an expense, the IRS may have you evaluate the USD value of your holdings at the end of the fiscal year when you go to pay taxes. I'm not completely sure, but the issues you're discussing are not novel to Bitcoins and the IRS has probably come up with a boatload of rules regarding currency speculation and non-dollar assets.

[realnowhereman]

I'm certain that tax is due.  As I said I wasn't trying to evade it.

My question was primarily whether buying back into a security cancels out a sale.  Or is it like (personal) income tax, where it doesn't matter how much I spend, I can't deduct that from my income (I know that expenditure as part of your work can be deducted in the US, but that's a different point).

So far, the consensus seems to be that buying back in reduces the capital gain again; and that it is only capital that you keep as cash that is taxed.

[eturnerx]

I think this varies from jurisdiction to jurisdiction and I'm about to ask my accountant a similar question to yours.
I have wrapped/am wrapping my bitcoin activities in a seperate tax entity. The reason for this is so that I can claim legitimate expenses against income.

I could use the "no value until liquidated" rule which would be fine if mining was all I did. But since I made some btc via speculation (on GLBSE) I suspect I'm probably liable for capital gains as a trader. I'll probably need to value all my accounts associated with bitcoin in my native currency then treat that as income. If I do things this way then I'll have to pay capital gains every tax year but I also get the benefit of a taxation loss if the value of bitcoin falls.

I'll see what my accountant says. I suspect that I can treat mining activity like "inventory" but all other sources of bitcoin income would need to be converted to a value in my native currency, either on the day of the transaction or on tax day.