Planning your Bitcoin Withdrawals

[Elwar]

One thing some people may want to consider that I am currently taking advantage of is the fact that you do not have to pay US taxes up to the highest income bracket (around $100k) if you live outside of the US for 330 days out of the year. The income break covers the time away, not tax year.

I am currently out of the country making money tax free (up to the high bracket) and will likely continue to do so.

You have to keep your US residence so you should try to find a state with no income tax (I use Florida for my residence). Otherwise you will have to claim residency of the country you are in and have to pay taxes there.

So if you wanted to you could cash out up to $100k of your BTC while staying in another country...get a nice place in Costa Rica while working on a Bitcoin project from your computer...all tax free.

[sickpig]

While most of us around here tend to be long-term bullish on Bitcoin’s future, nobody knows for certain what its value will be in one year, five years, or ten years.  With an investment where the upside potential easily hundred-fold, and the downside risk is one-fold (100% of your original investment),deciding how much to withdraw on the way up can be a torturous problem.

The ultimate goal is to find your personal balance between these two questions:

-If Bitcoin goes to $0 tomorrow, will I be able to live with the gains I locked in up to this point?
-If Bitcoin firmly establishes itself, reaching global equilibrium with other currencies, will I be able to live with the number of Bitcoins I sold along the way?

I use a spreadsheet to help play around with different withdrawal amounts. Its general approach is this: For every X% Bitcoin appreciates in value, sell Y% of my remaining Bitcoins.  Adjusting X% controls the granularity – how often and sizable each transaction is.  Adjusting Y% controls how much profit is realized on the way up, rather than left for future gains.

Feel free to adjust the numbers in the green boxes, and play around for yourself.  You're also welcome to copy and use the sheet personally.

https://docs.google.com/spreadsheet/ccc?key=0AqpoRK3q-_aKdHdwd0VubzdJbkQ5OF9GRlplVXRVY2c&usp=sharing

I don't think of this spreadsheet or plan as a trading strategy, such as entering and exiting the market based on movements above and below weighted averages. You could consider it a very long-term trading strategy whose aim is buy-and-hold, with the only trading done being to incrementally lock in gains at predefined gains.

Just know that this plan can exist for your long term planning, and you can still trade funds on a shorter time-frame, realizing BTC-based gains and losses along the way.

If you are able to discipline yourself to follow this sheet rigidly, long-term you put yourself in a win-win situation.  If the price continues rising from its relative point, you will still hold the number of Bitcoins you are comfortable with, while holding profits.  If the price downturns after you have sold some long-term funds, you have a choice.  You can do nothing, and continue to keep your long-term profits locked in.  But you'll also have the choice of reinvesting at a lower price, gaining Bitcoins, while setting up to resell them once again at a predefined future sell price.

I hope some of you find it valuable.

I'm sort of a newbie but I'd dare to give this advice to anybody that is going to start "trading". Read all kranen.com trading guide and in particular pay close attention to order types section. (I'm not affiliated with kraken by the way)

[humanitee]

I have been told by others on this board that if you buy something with Bitcoin you don't have to pay capital gains. That seems sensible.

Now say I buy gold, silver, or some other asset and then cash that out. How does that end up working? How can I pay capital gains on something where I buy and sell it in the same day for no (or very little) gain (when priced in USD)?

[superduh]

i feel bad for the people who get their coins stolen and noone believes them and they are forced to pay taxes on stolen coins. that would really suck

[tvbcof]

i feel bad for the people who get their coins stolen and noone believes them and they are forced to pay taxes on stolen coins. that would really suck

That seems to me like it would be a legitimate loss and could not be subject to tax in any circumstance.  I've yet to hear any guidance from any government dictating how to store BTC in order to guarantee no loss.

Not only is this a potentially handy avenue for plausible deniability, but it is also a grave and legitimate risk.  Indeed, that is part of the reason it is so plausible.

I've left a trail of lost BTC along the path, and a much bigger trail of donated BTC which I've not kept records of.  That is, in fact, the truth, and I suspect it is for many of us relative old-timers.  Fortunately I happen to be able to account for the BTC I acquired with some precision having done so in a relatively narrow window of time and mainly through an exchange who kept convenient records for me to download.

---

As I was writing this, it just occurred to me that one approach a government might take to 'attack' Bitcoin would be to say, "Ya, it's cool to have BTC, but you need to store them in our on-line wallet service since we can guard against loss and illegal conduct."  And relatedly "If you have nothing to hide, you have nothing to fear."

An advantage to this method of attack is that most people do not know much about Bitcoin but do see it as a potentially dangerous thing often used by criminals.  And of course, they have no BTC themselves so it's not as objectionable to the.  Such a strategy might appeal to a broad swath of individuals many of who would consider a total criminalization to be unfair and uncalled for.

[DeathAndTaxes]

I have been told by others on this board that if you buy something with Bitcoin you don't have to pay capital gains. That seems sensible.

Now say I buy gold, silver, or some other asset and then cash that out. How does that end up working? How can I pay capital gains on something where I buy and sell it in the same day for no (or very little) gain (when priced in USD)?

That is a good question.  If it is a lot of value I would consult a tax attorney.

[Elwar]

I have been told by others on this board that if you buy something with Bitcoin you don't have to pay capital gains. That seems sensible.

This is false.

You are supposed to pay capital gains taxes on any gain that you make, even if it is for a purchase.

If you buy 1 BTC for $10 then buy a $300 watch with that 1 BTC you have to claim the $290 gain when you make the purchase.

All that said...the guy selling you the watch is not going to be reporting that purchase to the IRS.

But being the good citizen I always report everything I do to the government because they know best and IRS agents are my heros.

[DeathAndTaxes]

But being the good citizen I always report everything I do to the government because they know best and IRS agents are my heros.

Solid. 

[mvidetto]

Why are we withdrawing when we can just keep buying bitcoins lol.

[AndrewWilliams]

One thing some people may want to consider that I am currently taking advantage of is the fact that you do not have to pay US taxes up to the highest income bracket (around $100k) if you live outside of the US for 330 days out of the year. The income break covers the time away, not tax year.

I am currently out of the country making money tax free (up to the high bracket) and will likely continue to do so.

You have to keep your US residence so you should try to find a state with no income tax (I use Florida for my residence). Otherwise you will have to claim residency of the country you are in and have to pay taxes there.

So if you wanted to you could cash out up to $100k of your BTC while staying in another country...get a nice place in Costa Rica while working on a Bitcoin project from your computer...all tax free.

Best advice so far.

I thought it was living outside of the USA for 51% of the time?



Anyone looked into offshore LLCs and setting up a "Google" type arrangement?

For instance, the first offshore LLC #1 based in Ireland holds all Bitcoins. Lets call it Bitcoin Holdings LLC.

LLC#1 pays a management or licensing fee to LLC#2 (managed by ... lets call it Bitcoin Management LLC), based in Panama or Bermuda. With this type of arrangement, most of the profit goes to fees to LLC#2.

Effective tax rate under > 5%.


What do you think?

[Elwar]

Best advice so far.

I thought it was living outside of the USA for 51% of the time?

Foreign Earned Income Exclusion - Physical Presence Test
http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion---Physical-Presence-Test

It is 330 days, for 2013 the exclusion is $97,600 plus you can include your housing expenses up to 16% of the exclusion/$15,616 (for a full year).

[calian]

Foreign Earned Income Exclusion - Physical Presence Test
http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion---Physical-Presence-Test

It is 330 days, for 2013 the exclusion is $97,600 plus you can include your housing expenses up to 16% of the exclusion/$15,616 (for a full year).

Couldn't the earned part be problematic if you're just collecting capital gains? So if you're trading the coins at least once every 364 days then gains are just simple income right? Warning, I am not a tax pro or a CPA. However Canada just issued some common sense guidance for their bitcoiners.

http://news.gc.ca/web/article-eng.do?nid=787789

[Elwar]

Foreign Earned Income Exclusion - Physical Presence Test
http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion---Physical-Presence-Test

It is 330 days, for 2013 the exclusion is $97,600 plus you can include your housing expenses up to 16% of the exclusion/$15,616 (for a full year).

Couldn't the earned part be problematic if you're just collecting capital gains? So if you're trading the coins at least once every 364 days then gains are just simple income right? Warning, I am not a tax pro or a CPA. However Canada just issued some common sense guidance for their bitcoiners.

http://news.gc.ca/web/article-eng.do?nid=787789

Good question, I have only had to deal with it for my income. But I thought that if you sell within a year of buying you have to claim it as earned income.

[DeathAndTaxes]

All capital gains are capital gains.   The only difference beween long term capital gain and short term capital gain is the tax rate but they are both capital gains.  The fact that short term capital gains are taxed at the same rate as regular income doesn't mean they aren't capital gains.

So it really comes down to does the exclusion cover capital gains or just earned income.  From the name I would assume the latter but this is why tax attorneys make good money.

[theonewhowaskazu]

All capital gains are capital gains.   The only difference beween long term capital gain and short term capital gain is the tax rate but they are both capital gains.  The fact that short term capital gains are taxed at the same rate as regular income doesn't mean they aren't capital gains.

So it really comes down to does the exclusion cover capital gains or just earned income.  From the name I would assume the latter but this is why tax attorneys make good money.

Isn't capital gain a form of income, though?

[DeathAndTaxes]

All capital gains are capital gains.   The only difference beween long term capital gain and short term capital gain is the tax rate but they are both capital gains.  The fact that short term capital gains are taxed at the same rate as regular income doesn't mean they aren't capital gains.

So it really comes down to does the exclusion cover capital gains or just earned income.  From the name I would assume the latter but this is why tax attorneys make good money.

Isn't capital gain a form of income, though?

Yes.  Everything is income (capital gains, wages, dividends, interest, business profit, gambling wins, etc).  They key was EARNED.  EARNED usually means wages/salary/bonus.

 

[theonewhowaskazu]

All capital gains are capital gains.   The only difference beween long term capital gain and short term capital gain is the tax rate but they are both capital gains.  The fact that short term capital gains are taxed at the same rate as regular income doesn't mean they aren't capital gains.

So it really comes down to does the exclusion cover capital gains or just earned income.  From the name I would assume the latter but this is why tax attorneys make good money.

Isn't capital gain a form of income, though?

Yes.  Everything is income (capital gains, wages, dividends, interest, business profit, gambling wins, etc).  They key was EARNED.  EARNED usually means wages/salary/bonus.

 

Wait, so if I start a company and then I somehow go public, and sell my shares, that's not treated as earned income?

[DeathAndTaxes]

Once again key word EARNED.  Yes it would be a capital gain not wages.  It would be INCOME but not EARNED INCOME.

I think you are really asking "so I don't have to pay taxes?". Yes you have to pay taxes.  You pay taxes on ALL INCOME not just EARNED INCOME.

[Elwar]

Once again key word EARNED.  Yes it would be a capital gain not wages.  It would be INCOME but not EARNED INCOME.

I think you are really asking "so I don't have to pay taxes?". Yes you have to pay taxes.  You pay taxes on ALL INCOME not just EARNED INCOME.

It appears that you are correct. Capital gains do not fall under earned income.

http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion---What-is-Foreign-Earned-Income

[antimattercrusader]

But being the good citizen I always report everything I do to the government because they know best and IRS agents are my heros.

*shoot drink all over screen* *Ahem* Yes, indeed.

This guy is legit.