Court Rules IRS Can Seek Information on Bitcoin Customers
wsj.com
wsj.com
Quoting in full since its among the most misunderstood yet important distinctions in tax:
http://www.irs.gov/irm/part9/irm_09-001-003.html
9.1.3.3.2.1 (05-15-2008)
26 USC §7201 – Avoidance Distinguished from Evasion
1. Avoidance of taxes is not a criminal offense. Any attempt to reduce, avoid, minimize, or alleviate taxes by legitimate means is permissible. The distinction between avoidance and evasion is fine, yet definite. One who avoids tax does not conceal or misrepresent. He/she shapes events to reduce or eliminate tax liability and, upon the happening of the events, makes a complete disclosure. Evasion, on the other hand, involves deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events or to make things seem other than they are.
Mining is awkward, since I believe mined coins are taxed as income on the day they are mined, even if you don't transact.
Best to talk to an accountant, of course, and not rely on the advice of a random HN commenter like me.
The IRS has indicated that bitcoins are property and taxed as such, so that seems unlikely. Do you have a source for this?
Thanks.
If you have legitimate money that's reported to the IRS and taxed, what you do with it is largely irrelevant.
If you have illegitimate money (selling drugs, working under the table, etc) then you're not paying taxes on it to begin with. Buying bitcoin doesn't change that.
(And if you're paid in bitcoin, that's bartering and you either report it or you evade it.)
There are ways of buying and selling Bitcoins that do not require you give all your personal information (for instance localbitcoins) but you will likely pay a markup (33% was a number that someone quoted to me) far greater than your taxes and you will only be able to move small amounts of money.
I agree if this is trading, where there are net gains (or losses) from fluctuations in value.
I assume, though, that a notable number of bitcoin transactions are just buying and/or selling merchandise. Buyers convert existing money that's already reported to the IRS (like their salary) into bitcoin, and buy something. Sellers get the money, convert it to dollars, and then deposit into their regular bank account, which then flows into their company books as revenue (again, reported to the IRS).
I'd be curious to know how much of the activity on coinbase was this sort of thing, versus buy/hold/trade speculation.
They're doing this on the basis that there might be evidence of tax evasion in there somewhere. Which is plausible, I suppose.
Thing is: All this same data was also emailed to the customers (as coinbase does email notification), likewise for their competitors.
Which means that the IRS could likely get the same data but more comprehensively by simply demanding Google turn over every single email for every user. I can guarantee this would include much more evidence of tax evasion.
So why is a coinbase dragnet a viable demand where a Gmail one-- which would include the same data plus even more tax evasion evidence-- not one? Or is it simply the case that the Gmail demand will show up after this one clears the courts? :)
Again, I fail to see any legal rational in the court's verdict. This is a bad precedent and I seriously hope Coinbase gets support from other tech giants to take it to Supreme Court. This clearly seems like violation of 4th amendment.
I have no doubt that Gmail will be next.
Bitcoin seems obviously like money to me. But I wonder when the IRS is going to start cracking down on other electronic money you can earn. Think about computer games where you can buy credits, or earn them by playing. That sounds like income tax evasion to me; you're getting paid in Green Rupees instead of US Dollars, but you should still be paying income tax on that! And don't forget about frequent flyer miles. (Which are not counted as income because you "can't" sell them, but anyone who reads flyertalk knows that's not the case.)
It's all very interesting. People have been using alternative currencies outside of the IRS's radar for quite a while, and they've mostly ignored them.
They don't seem concerned with the currency aspect at all.
However, I've never had to sell a single Bitcoin.
In general the US requires consistent treatment of inventory for earnings calculations. It's a little weird to have to worry about that as just a consumer, but if the coins are property and being held then sold, you probably should keep track of gains and losses.
Now, you discuss the question of combining up your two inventories. There are basically four ways of accounting for inventory in US accounting:
FIFO -- First in First Out
LIFO -- Last in First Out
AVCO -- Average Cost
Specific Identification (I think that's the term) -- cost associated with a given item.
It is generally fine with inventory to pick one of these methods and accrue gains / losses appropriately.
So, FIFO: You show a gain of $400. (Note your next sale at $500 will net a loss of $500).
LIFO: You show a loss of $500 (Note next sale will net a gain)
AVCO: You show a loss of $50.
Specific Identification: Depends on the coin.
If you want to change your inventory accounting methods you definitely need to calculate out a charge (or credit) for the switch.
In general, I have thought for some time choosing specific identification rules and instrumenting a wallet to spend in the most tax efficient way possible makes a lot of sense, but it's way down the stack of projects for me at least.
I thought (and I could be wrong) that the normal thing to do with LIFO/FIFO as to track it as if specific lots were sold (even if those aren't the actual items sold), so that if you switched between them you just changed the order in which you were treating the remaining (accounting, rather than actual) lots as being sold, without the charge/credit you would have if you refigured past history of sales to meet the new accounting method.
If you use a tax-lot specific accounting method FIFO/LIFO/highest cost/other specific, you just need to track which "lots" you've already sold out of (fully or partially), and ensure that you don't sell something twice. Now, if you used average cost at some point, you're kinda screwed if you want to switch to specific lot.
It seems like they could have isolated this request down to heavy buy/sell activity where it doesn't look like people are simply buying things. I'm fine with them going after people evading taxes, but this seems like a wide net to cast.
And I'm not sure how the IRS views this, but if you buy 1 BTC for $750, then its value increases to to $1000 for 1 BTC, and you buy $1000 worth of merchandise, isn't that taxable appreciation on the order of $250, because you're getting $1000 worth of goods for $750?
I agree this is a wide net to cast and I hope this is appealed and overturned, but I just don't know from a technical or tax perspective if they can cast the net any narrower.
I wish there were a way to ruin tax sheltering for the wealthy by finding out the exact formula for what they're doing (say register a business in the Cook Islands ), then commoditizing that via an online service (like Wordpress does for websites), and using bitcoin. Now the masses can pay $29.95 to have a VPS on the Cook Islands, set up their bitcoin wallet on it, and have their own little tax-exempt haven.
Try to structure the system the exact same way the rich people do it, so that authorities necessarily have to shut down the rich at the same time.
Lower them to a point at which it isn't worth the cost to shield, and get more out of them than what we are losing to the sheltering.
How is the IRS going to know the difference between that situation, where they have done nothing wrong, and someone who sold them outside of Coinbase and didn't pay taxes on it?
Are they just going to audit everyone over some threshold, or are they going to use this information in existing investigations (or in conjunction with other red flags)
As for your example, it seems to hinge on whether you're required to report holdings or just capital gains to the IRS.
How are they going to know the difference? For one, you can tell them. I don't know what the proper form for this would be, but I am sure an accountant can help out.
Scaremongering aside, I've found dealing with the IRS rather sane.
I would think that the IRS would treat a transfer of coins from a wallet you own to a wallet you do not own as a taxable event. They would take difference in value of the coins between when you acquired them and transferred them away, and if it is positive, would call it a profit.
On the other hand, if you declared that you owned both the source and destination wallet, I would imagine that the IRS would not treat this as a taxable event, in the same was as transferring USD between your checking and savings account is not a taxable event.
The IRS relies in a huge part on you self-reporting things. They do get a lot of info from the source (bank transaction records, 1099's, W2's). In many cases, the onus is on the taxpayer to tell the IRS the information that they need.
By default, the IRS takes self-reported information at face value and believes you. However, sometimes, they may decide to investigate. This is called an audit, and then the onus is on you to prove that what you provided is true.
The longer and less useful answer is that it depends heavily on circumstances. Two relevant ones are "What sort of income do you have here?" and "How much are we talking about?"
If we assume the answers are "You have capital gains because you happened to purchase some Bitcoin, they appreciated, and you sold them, but you weren't conceivably operating a business while doing this" and "Enough money to matter but not enough that your failure to get better advice was clearly negligent" then your resolution is going to be fairly simple. Your CPA will calculate how much money you owe, file a 1040-X (amended return) for the years at issue, and say "On routine review of a prior year tax filing we found that we inadvertently understated income. We're amending the return as appropriate, and have remitted additional tax. We request an abatement for penalties for tax underpayment on the grounds that IRS guidance at the time was unclear and we're coming in voluntarily before you asked us to." You'd possibly get the abatement of penalties; you're likely to pay very modestly more than you would have if you had been more diligent about your obligations, because they don't frequently waive interest.
This is the "middle class Americans screw up their taxes all the time; we like to encourage voluntary compliance" answer. If you're talking about mountains of money, on the other hand... expect rather less leniency. Other things that increase your risk: any hint of other-than-tax illegality around the business ("I underpaid on the capital gains I inadvertently generated in my drug smuggling business -- sorry about that, really didn't set up to be a currency speculator, I'm simply an honest drug smuggler") or the Bitcoins being used in a manner which was clearly straight-up tax fraud, like the prosecuted cases where someone's company paid a Bitcoin exchange $X00,000 for "technology services" and expensed it, took the Bitcoin over to Gox, cashed out, and then repatriated the money. (The Bitcoin here are just a red herring; this is a conspiracy to hide $X00,000 in income from the government. They take a dim view of that.)
Well, according to Wikipedia, you can at least declare income from illegal activities, so that the feds can't jail you for tax evasion in addition to the crime itself. https://en.wikipedia.org/wiki/Taxation_of_illegal_income_in_...
https://www.irs.gov/uac/ten-important-facts-about-capital-ga...
According to the IRS, yes.
> If the IRS considers Bitcoin property, am I just bartering with Dell when I buy a laptop with Bitcoin?
Yes, so if you buy 1 BTC for $750, the price increase dramatically and you buy a top-end gaming system from Dell (lol) then you're bartering and the excess value is taxable.
To read the article in full, please click the "web" link above, between "past" and "[...] comments".
WSJ articles can be read in full, if you click through from Google search results.
Note: simply copying the Google link and pasting it here won't work. Presumably Google needs to be the referrer.
I mean sure, you can go the "click web, then the right Google result" route. But that's like submitting a link to Adobe's most recent Photoshop update and then tell people "you can download Photoshop for free by starting your Bittorent client".
WSJ wants to hide behind a paywall. That's fine for them. But HN shouldn't be sending them traffic and enable that behavior.
The paywall is part of the WSJ's business model. HN submissions include the source of the article. If you choose not to support the WSJ or their business practices, you have the choice of not reading their articles.
Even with the web links, that often doesn't work with WSJ any more with how they cookie; so I'm very supportive of non-paywalled links as a preference.
I've heard people describe problems they have with the WSJ web links. I don't deny that they do, but I'm surprised I haven't seen them myself. I'm just running Safari with Ghostery. Never had an issue with WSJ (and I don't have a subscription).
The barrier to entry is literally clicking or tapping twice.
But that's like submitting a link to Adobe's most recent Photoshop update and then tell people "you can download Photoshop for free by starting your Bittorent client".
No-one's cracking the WSJ site, sharing someone else's subscription, or any other dubious behaviour: we're simply saying that "WSJ choose to disable their paywall for visitors referred by Google, so if you wish to avoid their paywall, you can use this practice, which WSJ allow".
A sufficiently small government can be funded without an income tax, as history shows us.
It's a recursion which has plagued the world for centuries.
The whole system can in theory be replaced with non-profit investments funds, which crowdfund social projects.
You dont even have to elect 'leaders', because citizens will be involved full time in running things (by guarding their investments) similarily to how they now waste time on Facebook.
But good luck changing anything without a nuclear apocalypse :) There are a lot of people who like the system the way it is and they won't give it up because us idealists want a better world for their children..
It really is an old argument. The arrogance of thinking that a small handful of elites should "run things" for the stupid commoners dates back at least as far as Plato's era and the idea of the "philosopher king".
Not sure if you're calling me arrogant or not, by all means I'm all for a new society in which people govern themselves as much as is technologically possible.
I believe that the system of 'elites' has been taken to an extreme globally and is one of the main reasons for the dire state of the whole system, including climate change, pollution, financial bubbles, etc.
What I'm saying though is that the 'old' system is built to perpetuate itself - they have power - military, police, justice...
And they won't give it up for some shiny new ideas, even if it means self-destruction.
I live in a country where we're not ok seeing people in the street and we're not ok seeing sick people who can't pay for medecine. I'm ok with paying taxes for those. What I'm not ok with is having people who use what we all pay for, then try to not pay for their part by evading taxes. If taxes is a problem for you, I'm pretty sure there are a lot of countries where you can move and that you will find adequate.
> people who use what we all pay for, then try to not pay for their part by evading taxes
But tax is not flat rate. The poorest often pay the least tax, but use public facilities the most; how is that "pay[ing] for their part"?
What has unemployment to do here? Are you saying that with no taxes, there is no unemployment? (for reference, I live in France)
> how is that "pay[ing] for their part"?
This is exactly paying for their part: everybody feel their effort as the same as their neighbor. And if you're about to say that poor people are abusing that and stay poor on purpose: find me a poor person that refuses a billion dollar if you offer them. Or even who refuses to earn more than currently, for the matter.
Make statements like "I live in a country where we're not OK seeing" only if the solutions to these problems in your own country is stable - many European countries aren't clearly so, so the idea that these are just matters of public choice isn't fair.
Choice WP snippets:
"The French healthcare system was named by the WHO as the best performing system in the world"
"the rising cost of the system has been a source of concern"
The latter seems to be a common problem, and is what I mean by "stable".
> everybody feel their effort as the same as their neighbor
If this is true, do the rich use public services proportionally more wrt their tax contributions?
What does "feel" the same as their neighbor mean - a service costs $10, my neighbor pays $1.50, I pay $8.50, which is fair because I earn more? Who says I didn't work harder in order to earn more; Where does my neighbor share the burden in that? Maybe I contribute more value to society, which is why I earn more; Why is my reward for that reduced?
Aren't the fixed tax band fairly arbitrary? Let's actually work to reduce corruption and un-fair money-making, but otherwise tax people in proportion to the value they get from society.
If we assume a fixed, minimum cost of living, a richer person can always afford more since they have more money.
What can be afforded, and what is fair payment for public services used are different things. OP was talking about "paying fair share" of public services used.
Also, comparing the very bottom with the very top is extreme. There are plenty more in the middle.
> diminishing marginal utility
What relevance it this to fair tax on individuals?
I live in Spain, there's no such thing here.
What I propose is for people to have the ability to specify what their taxes are spent on. I dislike it when government wastes tax money on useless or corrupt projects, military, police, surveillance and other such things, which I personally would not support if I had the choice.
I would invest that money in more schools, hospitals, etc.
This would change what we now call 'government' from raw money spenders into project managers who seek public funding.
Citizens can fund public projects from their phones and get involved in the debates, votes, etc.
That's real-time democracy - no need for elections or politicians, just technocrats who monitor the needs of society and ask people for funding.
Think about it for a while and you'll notice lots of positive consequences of such a system.
That being said, thinking having a central government is the problem is extreme. Your examples and suggestions simply demonstrate we need more democracy, not less government.
EDIT: yeah, thinking about it twice, it definitely needs to be only a part of the taxes you can choose where to allocate, and thus some kind of administration to decide about the rest. Think about this scenario:
You live in a country where unemployment is high and sickness are low. People will naturally spend most of the budget in reforms allowing for more jobs, because they, or people they know, are unemployed. But there are sick people, with no budget. If the amount sick people pay in tax is enough to heal them, that's ok. Now, imagine it costs more, like, you need expansive medicine to cure a virus. People will still invest in job reforms, until they hear about a big epidemic that threatens them. Only then will they start to allocate taxes to healthcare, which will cost way more because the epidemic will be already there.
With no fixed budgeting failsafe, such a system will naturally create a lot of epidemics, and other problems caused because small problems are not fixed early enough. Also, those who have rare problems are screwed and will fall first, so you'll probably having a less creative and risk taking society.
Also, things that don't affect majority of people will probably never get enough funding. For example blindness. How many blind people do you know? And do you think anyone is going to be convinced that a single kickstarter-type campaign is going to solve it? I imagine even the most motivated donors will start considering dropping out after 2 decades of spending money when they've produced no measurable results to curing blindness (or paralysis, cancer, etc).
EDIT: In fact, the more I think about it, the more it becomes obvious this sort of system couldn't work on a massive scale (such as a scale necessary to do what a government does). Each person is probably only going to be able to comprehend the need to address perhaps hundreds of specific issues. But my guess is that governments, in total, deal with probably 10's of thousands if not more different types of issues on a daily basis. Not only that but those issues that a citizen does comprehend, will he / she need to keep up with how each issue is being addressed? After all, otherwise I'm potentially just throwing money down a rat hole. Sounds like more than just a full-time job on its own. How would one find enough time to do that and still make money to bring home to their families, etc..
I think dogmatic positions are almost always wrong :)
Your being OK with taxes is completely irrelevant to anything outside of yourself. As long as taxation is practiced the way it is here in the US (eg, enforced at the end of a gun barrel) it's theft, and it's immoral, no matter how noble the purported objective(s).
Eliminating taxation does not, however, preclude the idea of voluntary, collective funding for important causes, including the idea of a "social safety net".
If taxes is a problem for you, I'm pretty sure there are a lot of countries where you can move and that you will find adequate
That is also irrelevant. There's no reason the people being robbed should be the ones to move. A better idea would be to construct a social system based purely on voluntary exchanges and interactions altogether.
How so? The government is collecting the money you owe them. And you owe them money because every single day you use and benefit from things the government has funded, such as as infrastructure, police protection, fire protection, military protection and much, much more. It's true that there is no way to "opt-out" of those things but that's simply because it would be impossible to create a system where people can do so that is not massively and incredibly complex.
Besides, do you really want to live in a world where your house burns down because your neighbor has "opted out" of fire protection and their house fire spread to yours?
Admit it. Its socially-excepted extortion from successful where people always increasing welfare spending. I dont know why anyone have to demonize anyone. People are looking after their own self-interest. And successful after their own by evading taxes.
We do have usage-based taxes for things where we can calculate the usage relatively easily, such as tolls for roads. A lot of other things however have to come from your income, because that's the easiest method that, believe it or not, requires the least bureaucracy.
P.S. You can't opt out of police protection because... how would that work exactly?
Much much more... like launching invasions on other countries, giving policemen paid leave after committing brutalities, bailing out mega corporations, providing jobs it's near impossible to be fired from with no incentive for hard work...
The state is structured in such a way that you can't help but use what they provide. That doesn't constitute any kind of consent. If a cartel occupies your area, demands protection money, and provides some services - they are still a cartel.
I think this is very erroneous thinking. Just because a government currently does something, does not mean it cannot be done any other way. Nor does it mean someone against income tax is in favour of it not being done at all.
Imagine if someone proposed nationalising all food production to you, and you recoiled in horror, then they accused you of being OK seeing people starve on the street. It's dishonest.
What I'm not ok with is having people who use what we all pay for, then try to not pay for their part by evading taxes.
The very richest people do not pay income tax proportional to their wealth. The progressive taxation system is largely a myth - when you are very rich you have the means to find ways around byzantine tax rules and you will tend to tie up your wealth in assets.
If taxes is a problem for you, I'm pretty sure there are a lot of countries where you can move and that you will find adequate.
You could literally say that about anything a government does. If you don't like being sent to gulags, I am sure you can leave North Korea, etc etc. It's not much of an argument.
Those are the leaders, they're just 100% more self-appointed and unaccountable. Your whole scheme is just Bolshevism with the terminology changed.
Bolshevism excludes private property and implements the dictatorship of the proletariat, which is a different form of government.
What I propose is a system in which normal people are involved in day-to-day politics - with their votes and their money.
The representative system that most 'democracies' implement today do so because until recently there was no technical alternative to electing people to run things for everyone else, simply because everyone else didn't have the technical means to participate.
Now we have the technical means in which society can be run in a much more decentralised way, people can be consulted in real time using a 'society app' and they can 'invest' into social projects that matter for them - like schools or roads and so on.
What I'm proposing is bringing democracy into the 21st century.
I'm reminded of the UK's "Police and Crime commissioners", an attempt at getting democratic involvement in policing who get elected on turnouts of 15%.
Not necessarily agreeing with the concept, but it only really works when taken to some extremes
Oh ya? Name one.