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Author Topic: US: Capital gains tax on intra-BTC transactions?  (Read 2151 times)
gabbynot
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April 29, 2012, 11:26:36 PM
 #1

Interested in any tax info on the following hypothetical situation:

Buy 1000 BTC @ $4 each.
Use 1000 BTC to purchase security on GLBSE
Sell said security for 1200 BTC.
Later sell 1200 BTC for $6 each.

When would you claim the investment income - when you sell your GLBSE security, or you sell your BTC, or both?
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JDBound
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April 30, 2012, 12:36:47 AM
 #2

This is in no way legal advice.

http://www.theclag.org/cm1001/

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April 30, 2012, 06:19:57 AM
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IANAL, but I'm pretty sure you only pay capital gains tax on a trade or series of trades when your (dollar) gains are actually realised, so in your hypothetical situation, you're buying something for $4000, selling it for $7200, and thus have a taxable gain of $3200 when you finally sell it (until you get actual dollars out of the deal, it's not taxable*). At least that's how I figure it.

*Unless you have to pay an excise tax on the securities (which would be assessed regardless of what kind of money you're using), but I don't think you do; I'm pretty sure capital gains tax is the only one that applies here. Again, IANAL.

Will pretend to do unverifiable things (while actually eating an enchilada-style burrito) for bitcoins: 1K6d1EviQKX3SVKjPYmJGyWBb1avbmCFM4
sunnankar
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May 01, 2012, 06:21:40 AM
 #4

Interested in any tax info on the following hypothetical situation:

Buy 1000 BTC @ $4 each.
Use 1000 BTC to purchase security on GLBSE
Sell said security for 1200 BTC.
Later sell 1200 BTC for $6 each.

When would you claim the investment income - when you sell your GLBSE security, or you sell your BTC, or both?

This is a fairly complicated question and depends on how you treat bitcoins and in the A Lawyer's Take On Bitcoin And Taxes there are four different reasonable methods for treating bitcoins. Also, not included in your fact pattern is (1) the value of the security when (a) purchased and (b) sold, (2) the time you held, which figures into short or long term capital gains, or (3) whether the bitcoins are being used in a trade or business.

The easiest answer and probably least controversial would be to assume all of these transactions happened in 2011. We will assume the security was purchased for 1000BTC and at the time the BTC rate was $5.700 and when sold it was 1200BTC with a rate of $5.85. Then this would likely be how it would play out:

$1000*4=$4000 [basis in 1000 BTC]
$5700-$4000=$1700 [short term capital gain = proceeds - basis; security basis is $5700]
$6142.50-$5700=$442.5 [short term capital gain; basis in 1200 BTC is $6142.50]
$7200-$6142.50=$1057.50 [short term capital gain]
$1700+$442.50+1057.50=$3200 [total short term capital gains]

Do not be tempted to take the short cut of $7200-$4000=$3200 because it may not always work.

Plus, by applying some of the methods in the guide you could probably greatly reduce or even eliminate the tax liability depending on how aggressive you are with each of the methods. Just make sure your record keeping is in order.

If you found this answer helpful then please make a gift, which is not taxable to the donee under IRC 2503(b) in the amount of $10,000 inflation adjusted per year or less for a donor to each donee, to the address: 179toGUZYjWh24unT3K5nstS1vpr3kC7TK

Yes, that was another major hint on potential tax planning options. Bitcoin is, for the creative accountant or lawyer, a gift from the gods.

Thanks!

sunnankar
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May 01, 2012, 06:24:02 AM
 #5

and thus have a taxable gain of $3200 when you finally sell it (until you get actual dollars out of the deal, it's not taxable*). At least that's how I figure it.

Fail.

From the guide on page 6:
Quote
There is another non-approach that is nonetheless probably on the minds of many. Some might be tempted to believe that digital currency transactions are not taxable until they are ultimately exchanged for cash. ... The legal justification for such an approach is extremely weak when compared to other positions and does not reflect the economic reality of the transactions. It is almost a non-position.

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May 01, 2012, 07:51:15 AM
 #6

The easiest answer and probably least controversial would be to assume all of these transactions happened in 2011. We will assume the security was purchased for 1000BTC and at the time the BTC rate was $5.700 and when sold it was 1200BTC with a rate of $5.85. Then this would likely be how it would play out:

$1000*4=$4000 [basis in 1000 BTC]
$5700-$4000=$1700 [short term capital gain = proceeds - basis; security basis is $5700]
$6142.50-$5700=$442.5 [short term capital gain; basis in 1200 BTC is $6142.50]
$7200-$6142.50=$1057.50 [short term capital gain]
$1700+$442.50+1057.50=$3200 [total short term capital gains]

Do not be tempted to take the short cut of $7200-$4000=$3200 because it may not always work.
How would it not always work? If you start with $4000 and make a series of transactions and end up with $7200, all the individual gains and losses must add up to $3200, otherwise where'd the money come from?

Plus, by applying some of the methods in the guide you could probably greatly reduce or even eliminate the tax liability depending on how aggressive you are with each of the methods. Just make sure your record keeping is in order.
Well, if the transactions span across several years, and each individual transaction was under the tax threshold, then yes, I suppose you could reduce your tax liability, though you may have some explaining to do if the IRS notices a single large deposit to your bank account but you claimed it was from multiple transactions over several years. Good luck with that. (I'm not saying that won't work, but in my mind it's easier and safer to just write off the attention-grabbing deposit as a capital gain and be done with it rather than having to explain what Bitcoin is during an audit)

and thus have a taxable gain of $3200 when you finally sell it (until you get actual dollars out of the deal, it's not taxable*). At least that's how I figure it.

Fail.

From the guide on page 6:
Quote
There is another non-approach that is nonetheless probably on the minds of many. Some might be tempted to believe that digital currency transactions are not taxable until they are ultimately exchanged for cash. ... The legal justification for such an approach is extremely weak when compared to other positions and does not reflect the economic reality of the transactions. It is almost a non-position.
The question was specifically about paying capital gains tax on securities, which are not taxed until they are exchanged for cash. Many (indeed, most) other types of transactions are taxable whether they involve cash or not (eg, sales tax, income tax, etc) but that's not what the question was about.

Will pretend to do unverifiable things (while actually eating an enchilada-style burrito) for bitcoins: 1K6d1EviQKX3SVKjPYmJGyWBb1avbmCFM4
sunnankar
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May 03, 2012, 12:32:58 AM
 #7

How would it not always work? If you start with $4000 and make a series of transactions and end up with $7200, all the individual gains and losses must add up to $3200, otherwise where'd the money come from?

You have assumed a fact not currently in evidence which is that the transaction involving the bitcoins, or at least what you are asserting involved whatever these undefined bitcoins are, is a capital gain. There are four main approaches which can have reasonable arguments made and the capital gain is just one of those approaches. You could also use a barter or foreign currency approach or even a super ninja approach which would result in no gain or tax liability (although this may be .... aggressive). Remember, the law is technical and all hinges on technicalities.

Quote
Well, if the transactions span across several years, and each individual transaction was under the tax threshold, then yes, I suppose you could reduce your tax liability, though you may have some explaining to do if the IRS notices a single large deposit to your bank account but you claimed it was from multiple transactions over several years. Good luck with that. (I'm not saying that won't work, but in my mind it's easier and safer to just write off the attention-grabbing deposit as a capital gain and be done with it rather than having to explain what Bitcoin is during an audit)

Have you ever been audited? First, it is a rare occurrence and second it really isn't that big of a deal so long as you have been taking a reasonable approach, founded in law with good record keeping. And if the IRS actually does audit you, given low percentage rates of this happening, then you (or better yet your tax attorney) and the agent may disagree on how a transaction should be treated and reasonable minds can differ on legal interpretation and in most cases the IRS will settle rather than litigate.

If you want to roll over, play dead and pay more taxes than you may be legally required to pay then that is your prerogative. And everyone has to do their own cost benefit analysis on their tax planning in running their business. But Congress has crafted tax law to provide incentives and disincentives for certain behavior and to not avail yourself of advantageous tax treatment would be a disregard for their intent in creating certain tax treatment to illicit certain behavior. While you are at it you can make a voluntary donation via a gift, with after tax money, to the US government:

Quote
You can write a check payable to the Bureau of the Public Debt, and in the memo section, notate that it's a Gift to reduce the Debt Held by the Public. Mail your check to:

Attn Dept G
Bureau of the Public Debt
P. O. Box 2188
Parkersburg, WV 26106-2188

Quote
The question was specifically about paying capital gains tax on securities, which are not taxed until they are exchanged for cash. Many (indeed, most) other types of transactions are taxable whether they involve cash or not (eg, sales tax, income tax, etc) but that's not what the question was about.

"which are not taxed until they are exchanged for cash"

That is a blatant misstatement of the law. The issue is recognition and recognition can happen in many different ways even if cash is not exchanged and in many cases will be calculated at fair market value.

Big Time Coin
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May 08, 2012, 06:04:54 AM
 #8

Interested in any tax info on the following hypothetical situation:

Buy 1000 BTC @ $4 each.
Use 1000 BTC to purchase security on GLBSE
Sell said security for 1200 BTC.
Later sell 1200 BTC for $6 each.

When would you claim the investment income - when you sell your GLBSE security, or you sell your BTC, or both?

$1000*4=$4000 [basis in 1000 BTC]
$5700-$4000=$1700 [short term capital gain = proceeds - basis; security basis is $5700]
$6142.50-$5700=$442.5 [short term capital gain; basis in 1200 BTC is $6142.50]
$7200-$6142.50=$1057.50 [short term capital gain]
$1700+$442.50+1057.50=$3200 [total short term capital gains]

Do not be tempted to take the short cut of $7200-$4000=$3200 because it may not always work.

Thanks!

To use sun's approach, you have to know the price of bitcoin at the time you purchased the security and the time you sold the security, not just the time you bought and sold the bitcoins.  But in this hypothetical situation, there isn't anywhere on your tax forms to put such information, and it would be pretty stupid for this hypothetical "you" to add complexity to the situation and pay their accountant an extra $200 to figure out that extra $400 of income's tax burden.  Better to just bite the bullet and pay the whole tax on the $400 and save the $200 your accountant would charge you for the privilege of you explaining bitcoin to them.

Big time, I'm on my way I'm making it, big time, oh yes
- Peter Gabriel
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