Hacker News Reader

Comment by lisper | Hacker News Reader

> The taxman can verify that you bought your coins five years ago and sold them this year.

How? The public block chain only contains records of how coins moved from one wallet to another. It doesn't have any information about who those wallets belonged to, or what the terms of the transaction were. Maybe the coins were sold for fiat currency, or maybe they were compensation for goods and services. There's no way to know just from the information in the blockchain.

[EDIT] Let me make this more clear: it is easy to anonymize BTC. It is so easy that the technique even has a name (bitcoin tumbling) and companies that will do it for you as a service (e.g. https://bitlaunder.com). (I thought this was common knowledge around here.) In the face of these facts, how is the IRS going to enforce the tax code against a someone who tumbles their coins?

View on HN

Even if you received the BTC for goods and services, and then held them for 5 years and they 20x in value... you still owe capital gains. It's like saying: 5 years ago I sold goods and services for $100, bought stocks with the $100 and now that stock is worth $2000. When you sell the stock, you pay capital gains on $1900; you also should've reported that $100 in revenue from 5 years ago.

As for anonymity... you lose it when you associate a bank account to get liquidity (as mentioned by GP: "nominate a bank account"). Of course, this assumes you can't get liquidity in some other way... but that's non-trivial with large qty of BTC.

> As for anonymity... you lose it when you associate a bank account to get liquidity

Yes, that's true, but that not enough to enforce the tax code. (See the update to my OP.)

> Yes, that's true, but that not enough to enforce the tax code.

Uh, yes it is. Money came into your bank account, and you'll need to explain its origin if the IRS audits you.

Do you honestly believe the IRS would just give up on enforcing the law because you used a tumbler before you converted the bitcoins to USD and put the money in your bank account? The fact that you have the money in your account at the end of that process is what really matters.

In Canada I believe (don't own any bitcoin) you can withdraw from a few dedicated bitcoin ATM's, as far as I know you don't need to also use a regular bank ATM card in the process.

Sure. But the enforcement is said law of near impossible if you're trying to avoid it and you find a willing BTC purchasing person.

A good chunk of tax law is unenforceable if the evader is really clever. That's like observing you can murder someone and get away with it if you leave no evidence. But it's a big risk. You wanna risk jail to keep 15-18% extra? I know I don't.

If you want to be legit you'll take care of these aspects. For example, I bought bitcoin by moving money through a bank wire to a well regarded bitcoin exchange (Bitstamp). The same for cashing out of bitcoin. So I have a clear money trace.

If you mined or gained your bitcoin by buying it through local bitcoin, the taxman might give you some trouble, but generally, the presumption of good will and non-guilty still applies, meaning that if they don't agree, it kind of their job to prove that you are guilty of something (ie: you got your bitcoin through ransomware)

> If you want to be legit you'll take care of these aspects.

Well, yeah, obviously. The issue is not how to deal with honest actors, it's how to deal with dishonest ones. (See the update to my OP.)

Actually, I think you lost track of the start of this thread which was explicitly about honest actors and whether they get swept up with the dishonest ones.

Yes, you're right. :-(

Sorry about that. I would go back and edit my OP but it's locked already.

The same way as you deal with all other kinds of money - you enforce at the transaction points. If you're spending more than you're earning, or your bank account has unexplained cash, the tax man will ask you what's going on.

The point is that if your records are a mess, then it's your problem - once the taxman gets note of a part of "cashing out" (either by seeing the BTC->dollars transaction, or seeing whatever large you bought for these dollars), they don't need to find out if you earned these bitcoins or at what price you bought them.

They can simply ask you to provide the evidence yourself, and if you cannot, then tax the full rate on the full amount.

"how is the IRS going to enforce the tax code against a someone who tumbles their coins" TL;DR - in the same manner as they enforce the tax code against someone who gets income in under-the-counter cash.

If you obtain large amounts of money, then you (presumably) will want to use it to obtain large amounts of goods and services. You can hide your income, but it's harder to hide your spending.

If you spend it all on food, booze, drugs and minor items, then they don't care about you, since the amounts aren't that large.

If you want to buy mansions, flashy cars, high end jewelry and ownership in companies, then they have evidence of you spending much more money than you have declared income. At that point, it becomes your problem - carefully tumbling your coins simply gives the IRS evidence that instead of treating your situation as "forgot to declare that income" (fines) they can prove that you took explicit steps to hide and disguise that income, which carries a risk of jail for tax evasion.

It's entirely unclear to me why bitcoin tumbling provides any systematic anonymity. Sure, it makes it more difficult, but it's just more transactions which need to be tracked. There is nothing that makes it impossible.

Indeed, in many ways they make things worse for users who attempt to gain anonymity by using it. Once the addresses which are used by the tumbler service are identified it is pretty easy to identify other suspicious transactions.

> How?

In practice, what happens is that they require you to keep records tracing your assets from when you get them to when you sell them, and assume a basis of 0 (i.e. capital gains gets taxed on the entire value of the coin) otherwise.

I think you missed this part of the gp post:

>Assuming I'm willing to pay the tax if it's due has anyone had trouble with authorities questioning your new cash pile say if before this you had no real money and lucked out on Bitcoin?

Yes, someone else already pointed that out:

https://news.ycombinator.com/item?id=13347335

At some point the wallet will correlate with meat space.

Yes, but if you want to enforce the tax code against dishonest actors it is not enough to correlate "at some point". You have to correlate an entire sub-chain and show that all of the intermediate wallets were controlled by the same entity. (See the update to my OP.)

Actually don't rely on my advice but I am pretty sure if you can't prove when you originally bought it and for what price you have to pay capital gains on the FULL amount. The burden is on you not the IRS.

Yep. See the second page of the tax form instructions here: https://apps.irs.gov/app/vita/content/globalmedia/4491_capit...

"If taxpayers cannot provide their basis in the property, the IRS will deem it to be zero."

That means 100% of the sale price of an asset is treated as gains.

> You have to correlate an entire sub-chain and show that all of the intermediate wallets were controlled by the same entity.

That is not true. In fact, the IRS does not care about the vagaries of bitcoin wallets, or the blockchain. The IRS cares that you got money that you didn't have before.

Reply on news.ycombinator.com