Capital Gains (US) - Day trading and Arbitrage

[bayamos]

Assuming one does pay taxes when buying USD with BTC, would EACH conversion of BTC -> USD incur capital gains? That is, if BTC are modeled after forex or securities in tax terms.. don't you have to set aside something for taxes each time you realize a gain?

The reason I ask is because I see a lot of people mentioning market day trading, "selling high buying low" every day. Similarly, I hear about people having bots that perform arbitrage between exchanges where the "profit" is larger than the fees incurred.

However, usually I do the math, and if short-term capital gains are considered, most of the above transactions that happen in regular volatility and not BIG volatility actually lose money or barely break even. As an example:

Spend $10,000 on BTC at $100, get 99.4 coins after mtgox fees.
Later that day, sell 99.4 coins at $120, get $11856 after mtgox fees.
This is a capital gain of $1856, set aside a third for taxes. You now have $11237 in fiat.
Later that day, buy back in at $112. You get... 99.4 coins back.
All you have accomplished is a) making some money for the IRS and none for yourself b) resetting the timer for long-term capital gains tax rates.

Am I missing something, or is the above interpretation accurate? Is the takeaway just that a lot of US-based traders don't plan on paying taxes or haven't looked into them enough?

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[Luno]

Every trade is not taxed, it's the net result at the end of the year : (balance december - Balance January)

If thats a positive number, you have had capital gains!!

[SgtSpike]

Assuming one does pay taxes when buying USD with BTC, would EACH conversion of BTC -> USD incur capital gains? That is, if BTC are modeled after forex or securities in tax terms.. don't you have to set aside something for taxes each time you realize a gain?

The reason I ask is because I see a lot of people mentioning market day trading, "selling high buying low" every day. Similarly, I hear about people having bots that perform arbitrage between exchanges where the "profit" is larger than the fees incurred.

However, usually I do the math, and if short-term capital gains are considered, most of the above transactions that happen in regular volatility and not BIG volatility actually lose money or barely break even. As an example:

Spend $10,000 on BTC at $100, get 99.4 coins after mtgox fees.
Later that day, sell 99.4 coins at $120, get $11856 after mtgox fees.
This is a capital gain of $1856, set aside a third for taxes. You now have $11237 in fiat.
Later that day, buy back in at $112. You get... 99.4 coins back.
All you have accomplished is a) making some money for the IRS and none for yourself b) resetting the timer for long-term capital gains tax rates.

Am I missing something, or is the above interpretation accurate? Is the takeaway just that a lot of US-based traders don't plan on paying taxes or haven't looked into them enough?

You are assuming that the trader falls into a high tax bracket (where their ordinary tax rate would be 33%).

It is a good habit to set aside taxes though.  And keep in mind, even though in your example you don't show any personal benefit, you actually DID have a benefit, because you now have $11,237 worth of coins + USD in after-tax cash, vs the $10,000 that you used to have.

[unk]

All you have accomplished is a) making some money for the IRS and none for yourself b) resetting the timer for long-term capital gains tax rates.

Am I missing something, or is the above interpretation accurate? Is the takeaway just that a lot of US-based traders don't plan on paying taxes or haven't looked into them enough?

yes, and yes.

that said, you could perhaps make an aggressive argument that you haven't made any bitcoin profits until withdrawing the proceeds of your trades, as if the whole thing internally was a game. that argument would likely lose if the IRS challenged it.

[PachucoBro]

...and the IRS would know about all this how?

Ok, well at above $10,000 there is a possibility of paperwork being reported, but for amounts less than that... pretty sure no one, but you knows.

[Tomatocage]

Does one have to pay capital gains tax if you sell your BTC on MtGox but leave the money in the MtGox acct (not actually transferring it to your attached bank acct)?

[PachucoBro]

By US tax code... yes, because you converted it to US currency.

If you converted it to Yen the answer would (i think) be no because you cannot be taxed on foreign currencies IN a foreign country. Now if MtGOX was located here in the US like some exchanges then the answer would be yes.

This is akin to people with Swiss bank accounts with Swiss Francs? and those Francs are located in Switzerland (foreign country).

[SgtSpike]

...and the IRS would know about all this how?

Ok, well at above $10,000 there is a possibility of paperwork being reported, but for amounts less than that... pretty sure no one, but you knows.

Pretty simple, really.

I imagine the IRS picking people for audits goes something like this:

1) [Incoming deposits to all bank accounts for individual] - [reported income] = [difference]
2) Sort by [difference] DESC
3) Audit the list, starting at the top.

They do have access to our bank accounts, remember.  And they know exactly how much money was transferred or deposited into those accounts.

[davidspitzer]

Assuming one does pay taxes when buying USD with BTC, would EACH conversion of BTC -> USD incur capital gains? That is, if BTC are modeled after forex or securities in tax terms.. don't you have to set aside something for taxes each time you realize a gain?

The reason I ask is because I see a lot of people mentioning market day trading, "selling high buying low" every day. Similarly, I hear about people having bots that perform arbitrage between exchanges where the "profit" is larger than the fees incurred.

However, usually I do the math, and if short-term capital gains are considered, most of the above transactions that happen in regular volatility and not BIG volatility actually lose money or barely break even. As an example:

Spend $10,000 on BTC at $100, get 99.4 coins after mtgox fees.
Later that day, sell 99.4 coins at $120, get $11856 after mtgox fees.
This is a capital gain of $1856, set aside a third for taxes. You now have $11237 in fiat.
Later that day, buy back in at $112. You get... 99.4 coins back.
All you have accomplished is a) making some money for the IRS and none for yourself b) resetting the timer for long-term capital gains tax rates.

Am I missing something, or is the above interpretation accurate? Is the takeaway just that a lot of US-based traders don't plan on paying taxes or haven't looked into them enough?

In the US, If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200.00. If the gain is more than $200.00, report it as a capital gain. Capital gains are reported on Schedule D, Capital Gains and Losses, and line 13 of the Form 1040, U.S. Individual Income Tax Return (2005). For more information, please refer to Publication 525, Taxable and Nontaxable Income.

[simplydt]

um... Before you act on any of this advice, speak with an actual accountant.

 

Exactly, if you make any meaningful money just dish out $100-$200 on an accountant. It's worth it. They also know all the ins and outs so if you see them in person, they may find a way to save you some money.

[zakoliverz]

By US tax code... yes, because you converted it to US currency.

If you converted it to Yen the answer would (i think) be no because you cannot be taxed on foreign currencies IN a foreign country. Now if MtGOX was located here in the US like some exchanges then the answer would be yes.

This is akin to people with Swiss bank accounts with Swiss Francs? and those Francs are located in Switzerland (foreign country).

interesting facts , Thank you for making this crystal clear.