IRS sends warning letters to more than 10k cryptocurrency holders
wsj.com
wsj.com
Does anyone have a link to the letters? It drives me mad that journalists refuse to link to primary sources.
https://www.irs.gov/newsroom/irs-has-begun-sending-letters-t...
https://www.reddit.com/r/Bitcoin/comments/chupoe/irs_we_have...
https://www.irsmind.com/audits/irs-begins-targeting-taxpayer...
> Letter 6174– this is a soft notice informing the taxpayer that there is a likelihood that they did not report their virtual currency transactions. The notice asks them to check their return and, if necessary, file an amended return to correct the misreporting. The taxpayer is not required to respond to the notice and the IRS intends not to follow up on these notices. In short, this is information only to the taxpayer and education on how they comply.
> Letter 6174-A– this is a “not so soft notice” from the IRS. As in Letter 6174, this letter tells the taxpayer that there is potential misreporting of virtual currency transactions. However, this notices states that the IRS may follow-up with future enforcement action. Again, no response is required if the taxpayer believes that they are in compliance. Taxpayers who receive this notice should be aware that they have been put on “notice” that they have been identified as a noncompliant taxpayer for potential future enforcement.
> The last notice requires a response – Letter 6173. This notice requests a response from the taxpayer about the alleged noncompliance. The letter provides instructions on responding to the IRS. The IRS intends to follow up on these responses to determine if the taxpayer is in compliance.
Can you be forced to sign anything like this? I would never sign such a document out of my free will (what's the upside?). Tax law is so complicated that I wouldn't be surprised if nearly everyone is not super 100% in compliance. I mean completely independently of this particular Bitcoin issue.
> Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year.
Though of course you are right that anyone should consult a professional in such a case.
Letter 6174-A: http://src.bna.com/KeH
Letter 6173: http://src.bna.com/KeI
Letter 6174: http://src.bna.com/KeJ
If you invested $10k in crypto mining equipment, you can deduct that investment (over 5 years or something similar), you then successfully mine 5 coins. These coins are/were worth whatever exchange rate you could get. Until you use/exchange them, you aren't taxed. If you buy something, you need to declare the value of what you bought and pay income taxes against it. If you exchange it for currency, you need to pay taxes on that currency.
If you bought $25k worth of BTC, and it fell from $25k to $6k, then you turn it back into USD, you can take a deduction on the losses too. This is how most interactions with futures/stocks works. However the tax rates, triggers and rules are more tightly regulated than straight/regular income. If you're operating under a corporation or llc, again the rules may be different still.
Having a tax lawyer and accountant is probaly prudent if you're talking about 5+ figure transactions over a given tax year.
edit: --- based on responses below, I'm probably wrong about mined coins, and you probably have to pay taxes on the value when mined. Again, I'm not a lawyer/accountant, so if you're in a position where you're talking about a significant amount of money, get professional advice.
If you mine any coins, that is income you have to pay taxes on. Just like when my RSU stocks vest, I pay (regular income) taxes on the vested amount. It's treated as if my company gave me the money to buy these stocks I now have. Later when I sell them, I'll pay capital gains tax on the gain/loss.
Now if I buy coins, then I will only be taxed on them when I sell them.
This is also not correct. Crypto-tokens that are not securities are considered property. As such, they are not subject to wash-sale rules, while stocks are. (Not legal advice.)
Before anyone gets excited, despite being considered property, crypto-tokens are explicitly not eligible for 1031 like-kind exchanges after the latest tax bill (although it's debatable that they were allowed prior.)
You are flat out wrong. You are taxed on any income or transaction, no matter the currency used.
When you trade it, that's when you get taxed.
As you're not a tax expert and neither am I, take my objection to this with a grain of salt, I think this is wrong though. When you have income from mining, that's income that should be reported at the market value of the coins at the time that they were income (when you received them.) AIUI they are taxed as income, and you should pay taxes for that income based on your regular (marginal) income tax rate. Once you've paid that income tax, you've established what's called a cost basis for capital gains. (This is also what you have when you have bought a coin rather than mining it. This is considered a "taxable event," even if the money you received in the exchange is never withdrawn from the exchange.)
If you buy something using your crypto asset as payment, or if you exchange them for currency, then you might also owe capital gains tax based on the difference between the cost basis, and the price/value you received for your sale. (If the price went down after your cost basis, then instead you have a loss, and so you don't owe capital gains.)
If you bought something, and the price went up between when you mined and when you made the purchase, then in addition to the income tax, and the capital gains, you will _also_ owe sales tax on the purchase, unless the seller collected the sales tax. (Although unless you are running a scheme to systematically undermine sales tax, and they have you with assets which can't be explained any other way I am not sure how they can ever prove that you owe that sales tax.)
When you are paying capital gains, the usual capital gains rules apply. If you have held the asset for longer than a year, you pay the long-term capital gains tax rate which is lower. The rules are (and this is the point where I'm talking way above my pay grade, but I think I've done my homework) first-in first-out, no like-for-like exchanges, which means if you sell some BTC and receive some ETH as payment, those are two taxable events. (The BTC sale is taxed at the capital gains rate for the USD value of BTC, and the ETH asset establishes a new cost basis at the USD price for ETH.)
If you have held the asset for less than a year before it is sold, then you pay the short-term capital gains rate. If you are not paying capital gains, and your aggregate transaction volume for the year on any given (compliant) exchange is above 10 or 20 thousand dollars, then you are very likely to be on their radar.
If you have losses over the whole year, and no corresponding gains to cancel them out fully, then you can take the excess loss against your income for a deduction in income taxes (subtract the taxable value lost from your income).
Please don't take my word for it though, I have someone that does my taxes for $200 or $300 and I use http://bitcoin.tax to extract the data from the exchange and provide them with the data in a form that they won't balk at. But you can take this as some free tax advice from someone who filed and paid their crypto taxes last year (and obv. also took the loss this year!)
Just a word of advice to anyone who may be receiving letters like this in the future. Do not, under any circumstances, sign a statement that you have followed the law without consulting with qualified counsel first. You should know that every time you sign off on something to the federal government, if it turns out not to be true, they got you on a count of Lying to the Federal Government. (Yes, each signature is a separate count. At least that's the way our lawyers explained it to us when advising us on FDA approval for our product.) So you can easily rack up years behind bars in this situation right? There's the original forms in you return. How many times did you sign papers there? Then there's this statement that they want you to sign. That's another potential count.
What's worse, you may have made an honest mistake, and you really do believe that you are in compliance. So you go ahead and sign such a statement. Only you weren't in compliance. Now what? I hate to say this, but just don't. Don't sign it. Get everything looked over by the experts first. Maybe they can even negotiate with the IRS on your behalf if you have made a mistake.
But you don't want to be in the position of having signed something like that with honest mistakes potentially out there in your documentation.
The IRS on the other hand with these kinds of notices is not out to get you, and I don't believe I've ever heard of someone being charged with perjury for signing an IRS document that wasn't true (and they genuinely thought it was true), especially from the perspective of a small time residential investor who is making an effort to be compliant with tax law.
I think a more sane proposition is this, if you only have a few thousand USD in crypto, you probably don't need to hire a tax lawyer or tax accountant (or both) to review your documents and compliance.
But if you're at 5 figures or above (10k USD+) then spending hundreds of dollars, up to a thousand or more, just to retain a lawyer and/or accountant could be a smart move for you to ensure that everything has been handled appropriately.
And it's not "hire a lawyer to review this one document", it's hire a lawyer and/or accountant to review your compliance with all tax laws and investment laws federal and local, and it's something you should do regardless of receiving a letter like this. If you have a lot of money in crypto and have never spoken with a lawyer or accountant about it, you should probably consider doing that sooner rather than later.
Even if you do "lie" to the IRS, and they think you have, they aren't going to have you charged for lying and put you in jail, they're just going audit you or determine you owe them money without you admitting it, then send you a bill and enforce that bill over time through wage garnishment, account levy, tax lien, etc. They would much rather tell you that you have debt and garnish your wages than lock you up.
Generally they save the courts for extremely egregious and offensive cases of intentional tax evasion (like people who use the 861 argument)
Citation needed. The IRS can be among the most vicious of any federal agency. Having dealt with FATCA situations with overseas Americans, Treasury is, in my experience, nobody’s friend.
The IRS will generally take the most effective tack it can in getting the money it is owed. For honest mistakes, that usually means sending you a formal notice that it believes you are out of compliance and requesting that you pay them. If you pay them, all is forgiven. If you can show to their satisfaction, with supporting documentation, that you don't actually owe the money, all is forgiven. (I once got a notice that I owed $11K because of some stock sales I'd forgotten to report and education credits they didn't believe I was entitled to; after producing documentation on the cost basis of these sales, a course transcript from the educational institution, and an amended tax return, the total was reduced to $50, I enclosed a check for that, and I got a notice back that the matter was closed.) If you try to pull any funny business or argue with them and your arguments are not backed up in fact, they will viciously hound you until you pay the money that you owe.
If you pay them, they go away. Or sometimes they pay you and go away. (My first IRS letter was after my first semester of college, which was a bit disturbing since my whole income that previous year was ~$1k, but opening it revealed that I had neglected some sort of new education credit and they were giving me a small check to account for it.) My only remaining "fear" of the IRS is the scary Audit, because I know my record keeping is terrible and I don't want the anxiety of calling places and hunting down receipts or getting sworn letters from people that such-and-such checks were used for rent sharing not income/paying for services, and so I only hope that any audit could just be resolved by paying a lump sum even if with a bunch of effort that could get reduced...
I don't believe I've ever heard of someone being charged with perjury for signing an IRS document that wasn't true
You could look for some perjury charges if you disbelieve.
I have a friend who took this advice way too literally when we were 18.
I was in the car when he got pulled over for speeding once, and he refused to say a single word to the officer. He handed over his license, registration and proof of insurance, but wouldn't answer any questions.
The cop asked how him how fast he thought he was going, and my friend didn't even tell the cop that he wouldn't answer his questions. It was just the straight silent treatment. The cop was clearly getting agitated. I was begging my friend just to answer the questions, even if just say he didn't remember or something, but he refused.
Fortunately, his grandma is in the backseat and really saved the day by apologizing for her idiot grandson. My friend wound up only getting a warning thanks to his grandma, but no doubt we would have gotten a big ticket at the minimum if he kept the silent treatment up.
Another time, we both got busted for launching bottle rockets in a public park a couple weeks after the 4th of July. There were several witnesses including the people that called the cops, but once again my friend did the exact same silent treatment to the cops. I sang like a bird about my own actions while being careful not to say that my friend had also launched rockets.
Fortunately the questions were directed at both of us, and we weren't asked specifically who all was involved before my friend felt guilty that I was taking all the blame and started talking to the cops himself.
Good thing because in Ohio launching bottle rockets is an M-1 misdemeanor carrying up to a six month prison sentence. The cops could have been jerks, but instead they recommended that the prosecutor drop charges after we did some community service. Had my friend stuck with the silent treatment, I fully believe we would have been punished more severely.
Again I urge common sense. Every situation is different. Had it been someone else or somewhere else or a slightly different situation, being quiet could have been the right decision. This could be an example of white privilege, but so far in my life, I've never regretted just being honest with the cops.
> [..] I urge common sense [..]
That's the problem with your post.
You fully believe [..] and you urge common sensen.
You fully believe, but you don't know for sure what would've happened in your alternative reality. We miss a lot of details as well. For example, are you POC? What about your friend? White privilege is still real in 2019 (and I say that as someone who's whiter than white). I fully believe I got away with things in my youth someone who's POC would not have gone away with. Not just cops specific, but also community specific, neighbor specific, etc.
The point being, what might be common sense to you or me might not be common sense to any random person.
Here's a famous video [1] of a lawyer and former cop who suggest you never talk to the police. ACLU also has videos online with examples of how you may incriminate yourself even whilst you're fully innocent.
I wonder if we're thinking of the same kind of bottle rocket... like a plastic soda bottle propelled into the air by water and/or compressed air? Why is the penalty so severe?
Anecdote time. Having been stopped by police in the States four times (that I can recall offhand) over the years -- with a legitimate justification in each case -- my experience has been that courtesy and cooperation have served me well. On a couple of occasions when I could quite reasonably have been ticketed and fined, I have instead been sent on my way with a friendly warning to be more careful. I strongly suspect taking a strict "don't talk to the police" line would have cost me quite a bit more stress, time, and money.
When "never talk to police" comes into play is when they are doing a criminal investigation. And even then, when to pull out the fifth amendment card depends on individual circumstances. It can definitely escalate an otherwise innocuous situation if you overuse it.
Also, try to remember that what makes the news is newsworthy for a reason.
Alternatively, we see politicians walking back false statements or changing stance daily because the thing they said previously was what they believed based on the facts present at the time -- and they are never held to account.
At the end of the day, the IRS just wants their money.
On the other hand, IANAL, but a tax lawyer once said to me the only thing you go to jail for is hiding money. You can claim weird deductions, invent new depreciation schemes, misapply rules and all the IRS will do is say "No" and stick you with a bill. But if you're hiding income, it really upsets them.
It's incredibly easy to do what you think is the right thing but still "lie" because you didn't know/understand all the facts, implications, and details.
Always, always, always, get qualified legal/accounting counsel involved.
No, your uncle the family law attorney is not qualified.
It's also quite entertaining.
Until you've sat across from a pair of investigators, it's hard to guess how you'll respond to relatively simple questions.
I've run mock interview sessions for these and it's incredibly easy to trip someone up once you get them angry or get them agree to something you've purposely misstated.
From an expected value perspective the result has a negative sign but a small magnitude, so you avoid it whenever you can but not if doing so comes at a significant cost. But low probability events with large negative consequences are the category of thing that worries people a lot; other instances in this category are things like plane crashes, child abductions, forcible rape and terrorism. It's not strictly rational to be as afraid of them as many people are.
However, in this case there's also the consideration that the probability of the law being selectively enforced against you has a lot to do with whether the government doesn't like you, so if you're the sort of person the government (or some plausible future government) might try to stick something to, then the "low probability of enforcement" side of the equation changes and you're in entirely different territory.
And we also generally, as a pro-social activity in solidarity with those populations, might want to err on the side of encouraging everyone to behave in a way similar to what those vulnerable populations would have to, to normalize it and make that sort of selective prosecution more difficult. At least as long as we continue to have these disproportionate penalties for what are in practice honest mistakes and everyday behavior.
Cryptocurrencies seem to offer the exact opposite experience. Wild swings in value that are extremely difficult to predict and may or may not follow other markets.
If preserving value, priced in dollars, is your only goal, holding dollars is guaranteed lossless (modulo tiny costs).
The impression I get is you need to invest in things that are short term risky and long term safeish like stocks to even attempt to store value. If you look at how pensions are usually reallocated from stocks to cash as you near retirement this is a clue.
But even then who is to say the ratio of Vangard to 1 months rent or 1000 calories of nutritious food will be the same in 20 years time?
Gold hasn’t performed too well over the last few years by the way.
(Money supply is not the only factor in price level, despite what everyone seems to think in crypto space)
Houses decay, land can erode or land uses can shift destroying the social value.
If your friend asks you to help him move, next week he'll return the favor, but try going back after not talking to him for thirty years and cashing that favor it.
Just like any other good, there is a fluid rate of demand for money. If the supply of money is unable to increase with the demand for money, the relative value of the money increases.
This is exactly why USD is a poor store of value (it reliably depreciates by 1-3% annually) and a good currency (well-managed supply vs demand results in long-term predictability about the value of 1 USD, making it reliable to transact in).
That assumes that the demand for cryptocurrencies remains constant. If the demand for cryptocurrencies drops faster than the deflation of the currency, then the value goes down.
Overall, I believe that a successful crypto will behave more like an asset than a currency. The failing ones are just dust.
Say I get paid 100 BTC for doing a job worth $100/BTC at the time or $10000. Now, say BTC drops to $1/BTC. I owe income tax on the $10000. Let's say I owe $2000 (20%) in taxes. However, I only have $100 now. My effective tax rate is 2000%.
This does allow for a small deduction of capital gains each year. However you can only deduct $3000 a year in capital gains. In a larger scenario, this would take decades to fully receive your total deduction.
Good god, no it is not different.
When the internet bubble collapsed in 2000, it literally bankrupted some people who had been compensated with stock options because of taxes. Exercising the options not only had resulted in greater income, but it caused AMT to kick in.
Moreover, some of the exercised options yielded stock that was still in lock-up due to IPO agreements. (People were anxious to start the long-term capital gains clock.) Shares plummeted even before they could be sold to pay off the taxes due.
The moral of the story is: Make sure to set aside money (liquid, USD) for taxes if you get hit with a sudden windfall. (edit addition, JumpCrisscross comment below has it right.)
Here's a couple of links to that history:
https://www.chicagotribune.com/sns-tech-taxes-story.html
https://www.mercurynews.com/2008/11/10/rescue-bill-offers-re...
Best practice is to sell stock sufficient to pay for taxes when exercising options. (Same for workers subject to U.S. taxation being paid in a foreign currency.)
https://www.acceleratedfi.com/real-world-options-example-how...
(Check the details of your contracts with an attorney and financial advisor; I've heard that some lock-outs now explicitly forbid trading in derivatives of the stock to prevent doing what Cuban did. With financial engineering being as advanced as it is, though, it's always possible to create a "synthetic" derivative that is nearly guaranteed to have the same value as a particular options strategy without mentioning the particular asset involved.)
Other than that yeah, get a collar or just straight up buy some puts. Or like others recommended - sell some % instantly and put in high grade bonds, or a savings account. Forgetting taxes is a big mistake.
The story most applicable to cryptocurrencies is the one where the stock was publicly traded [1]. Those exercisers chose not to sell.
(With respect to ISOs for private stock, yes, it's different. Best practice is not to exercise until you have a plan for paying taxes. This could be lining up a loan or a secondary sale, or only exercising what you can pay for.)
[1] https://www.chicagotribune.com/sns-tech-taxes-story.html
This is why I was annoyed when Congress bailed out these dot-com specu-vesters. They knew the risks, or should have. I chose not to exercise because of the tax consequences. They were no secret. Anyone buying stock options should know what they are and how they're taxed.
Coincidentally, I was the engineer at Zenpayroll (now Gusto) who was working on enabling employees to be paid in crypto back in 2013/2014. We never got to the implementation phase because of precisely this scenario. Bitcoin is so volatile that it's a very scary way to be paid. The downside risk (you can't pay rent because bitcoin did something weird that week) is really really bad for users and most people don't understand those or the tax implications. So we scrapped the feature.[0]
A parallel would be stock options issued by companies. Let's say you get 100 stock options with a strike price of $1/per share. You wait a year to exercise and by that point the common stock is valued at $2.50 per share. If you exercise, you still pay $100 for the 100 shares but you owe taxes on the $150 gain, even though you might think that your compensation was always $100.
If you acquire an asset at one price and sell it at another, you owe taxes on the difference. If you acquire an asset for less than it's worth, you owe taxes on that.
[0]: this is one reason why I will never understand people defending btc as "a store of value". That's a terrible store of value!
That said, unless there are tax implications of paying/getting paid in BTC that cause you to e.g. not realize gains, it's really no different than just paying the employee in all cash and letting them purchase as much crypto as they want with it.
There were other issues as well that contributed to the decision, namely:
- Legality: there are specific regulations around how employees can be paid. These stem, historically, from companies paying employees in coupons only redeemable at other company stores (think: railroad workers paid in coupons for the general store owned by the railroad.
- Reversibility: What happens if the payroll needs to be reversed? With bitcoin you can't. This is important for cases of fraud (e.g. stolen credentials), user error (e.g. mistyping hours worked), or bugs on our end.
- Anti-money laundering: We needed to be reasonably sure you weren't laundering money. In case you were, having a bank account makes tracing the money much easier. Coin tumblers and the like make obfuscation and cleaning dirty money trivial.
- User adoption and education: How many people really want this feature versus others in the pipeline? If we ship it, what load does this put on our support team to handle calls about bitcoin? About losing their private key?
These are a subset. There are many concerns. I hear you about employees taking that money and buying it anyway, but we did have additional concerns to think about. We weren't against crypto, but it wasn't a good fit for our platform, userbase, size, priorities, etc.
I'm not sure the option to be paid in numerous currencies concurrently is a big feature for payroll.
If you are paid in meat, you get something like 100 kg of pre-formed frozen ground beef patties. That doesn't have a dollar value unless you can find a buyer for it. Which is pretty easy to do if it's a commodity.
So let's try a more broken example. You get paid in sandstone triangular prisms machined to be 31 mm on the two longer sides, 19 mm on the short side, and 9mm in height. These then have a square(-ish) hole drilled in them, slightly off center, and then the sides are grooved, and the faces engraved. These triangles are called fubaar.
Fubaar have no fixed exchange rate with the dollar. For a job, you are paid 1000 fubaar. The value of a fubaar is very stable. One has been able to purchase the traditional formal attire of Barbazia for exactly 5 fubaar, for over 800 years. But you can't buy much with them on the international market except quuxfruit--which bruises easily, and smells like durian crossed with feet after four days.
At the end of the year, I could report that I earned 1000 fubaar since last year, and mail about 250 of them to the treasury. It's not my problem if the government can't convert them to dollars. They can go buy quuxfruit with it. But the treasury won't take anything but dollars. My only recourse is to say the fubaar represent $0 in income, because they really are essentially worth $0, having no inherent value.
The problem is that the gov't is levying taxes in dollars on income that is not dollars, and exporting the inconvenience of conversion to those least able to get a good conversion rate. Congress has the enumerated power to regulate the value of foreign coin. Why not use it? The Treasury also has the ability to accept foreign coin. For a good length of US history, much commerce was conducted in Spanish silver dollars, not US-minted coin. Those were acceptable for payment of taxes.
Also your example is very convoluted, and with all due respect, I can't tell if it's satire or not.
While I agree, it's kind of backwards to ask for this now, after the IRS is finally making their moves/intentions clear. I know a majority of the crypto crowd was quietly hoping the IRS wouldn't keep track of the absurd money people were making, so this just feels like a reckoning.
But they really have no way to know whether you are lying. As a result, people lie about the value of traded goods, or art, or land properties, or unlisted financial instruments, to reduce the amount of income tax they purportedly owe. This is a major tax-evasion (not avoiding) and/or money-laundering loophole employed by the rich, especially when employing art and real estate, which may be justifiably non-comparable to similar goods due to uniqueness.
A law-obeying person would liquidate enough of the subjective-value goods to pay income tax at the maximum withholding rate at the time of receipt, and send that amount to the IRS at the end of the quarter, then claiming a refund from that amount with their return at the end of the year.
A practical, law-breaking person would just keep their mouth shut about it, and allow the IRS to claim it was income that had value, and only pay taxes on it (or dispute the amount demanded) if the IRS actually demanded an amount.
The enforcement on Bitcoin-holders is not to raise revenue in any meaningful sense. It is to discourage use of cryptocurrencies as a means of tax evasion--probably because middle-class people could make use of it. With respect to the means employed by the rich to evade and avoid taxes, an equivalent effort would likely return 1000 times greater rewards.
The problem in your scenario is not really to do with tax, it's that one has effectively expended $10,000 worth of effort for $100.
If someone was worried about this, they shouldn't be accepting BTC as payment, or they should convert it to fiat currency immediately upon receipt.
Say I get paid $10,000 for doing a job, and buy bitcoin at $100/BTC. Now, say BTC drops to $1/BTC. I owe income tax on the $10000. Let's say I owe $2000 (20%) in taxes. However, I only have $100 now.
The smart way to handle that would be to deduct approximate income taxes "immediately" and convert to USD. This scenario is part of why income taxes are deducted per-paycheck instead of just once at the end of the year.
But you could also say that you shouldn't accept payment as the entity that will pay taxes. That's what Apple, for example, does for non-US revenue. And what Mirimir does, in a small way.
When my RSU stocks vest, I pay (regular income) taxes on the vested amount. It's treated as if my company gave me the money to buy these stocks I now have. Later when I sell them, I'll pay capital gains tax on the gain/loss.
What you describe is exactly this, with stocks instead of BTC. If my employer gives me any stocks, I have to pay income tax on the value of the stock calculated on the day I received it.
Now I know stocks are volatile. If I decide not to sell them immediately (at essentially 0% capital gains tax), I am deciding to take the risk in price fluctuations.
BTW, if your BTC drops to $100 value in under a year, simply sell them and claim the loss. It will typically be taxed at the same rate as your income, and you'll effectively only pay income tax on $100.
Sounds like a pretty good reason not to get paid in Bitcoin, no? How is the ridiculous volatilty the government's problem?
It's not.
I travel to India every year, and I always carry with me a few hundred USD worth of rupees (the local currency).
It would be insane for me to try and track the value of the rupees (in USD) for every time I bought something, and calculate the deltas between that and what I originally gave to the money changer. It is completely impractical to do that, and while I'm not an accountant, I have an intuition that for any reasonable amount of money that any traveller would be carrying with them, the fluctuations are irrelevant.
And yet this is what people using cryptocurrencies are expected to do.
Obviously if there is a large capital loss or gain, then this should be reported on your taxes, and I suspect the same is true for foreign currency exchange.
I guess to ask a question: are individuals expected to track the fluctuations in USD value of their cash while travelling? If so: is there a threshold? Why is crypto different (other than some belief that it might be more convenient).
This is similar to income-shaped small transfers of money within families; there would be Congressional hearings if the IRS found a deficiency in mandatory withholding taxes on babysitting money, which is unambiguously earned income of a statutory employee.
Maybe because the IRS declared years ago that cryptocurrencies will be treated similar to other commodities?
And while I don't know the tax code, I suspect if you convert your USD into rupees, and those rupees suddenly increased value tenfold, and you started buying Mercedes with them, the IRS likely will come after you there as well :-)
Crypto is basically different because the high volatility resulted in large gains being realized.
Source: publication 525 https://www.irs.gov/pub/irs-pdf/p525.pdf
So why shouldn't the IRS do the same?
Many people do not treat bitcoin like gold, they treat it like a paypal account.
It is much more impractical to track the value of fluctuating (maybe x1000 more fluctuations than the USD?) cryptocurrencies though.
What I suspect is happening here is that the IRS is figuring out how to prioritize it's investigations. Sign or don't, it only determines when you are investigated. Once they've identified a holder of bitcoin it's likely that an investigation will be forthcoming.
https://www.ccn.com/u-s-bill-would-ease-bitcoin-tax-regulati...
Things get weird when you use a strange currency for any transaction.
[1]: https://www.irs.gov/individuals/international-taxpayers/fore...
Say you purchased X amount of CAD a few years back for $0.70 USD. It doesn't matter how much you purchased.
Now some time goes by, and the current market rate for CAD is $1.00 USD. You go ahead and purchase your $5 CAD coffee. By doing that, you've realized $5 CAD of your investment, which is currently worth $5 USD, but when you bought it it was only worth $3.50 USD. So you made a capital gain of $1.50, and you have to report and pay tax on that.
Whether you purchased a coffee or converted to USD doesn't matter -- the important part is that you made a gain on the CAD over time, then used it for something.
Europe is an instructive example here. Most of a continent was sick enough of the hassle that they eliminated 19 currencies in favor of the Euro [1]
Another good example is Ecuador. In the 1980s, both currencies were in use, with dollars being used by wealthier people for larger transactions, including savings. That was due to financial instability that got worse; eventually Ecuador just gave up and adopted the dollar. [2]
So to answer your question, it probably doesn't make sense, which is why approximately nobody uses Bitcoin as digital money. In contrast, look at the digital money scheme M-Pesa, which started around the same time. It has many millions of users and has seen widespread adoption. [3]
[1] http://webs.schule.at/website/European_Currencies/old_eu_cur...
Not so with bitcoin, which the IRS taxes every transaction, no matter how small.
[1] https://avc.com/2017/08/store-of-value-vs-payment-system/
And I understand that in cryptocurrency land there's always a future thing that people will use. Wake me when that happens, as 10 years in I've stopped holding my breath. Especially since, as I said upthread, other technologies in the same period have found widespread adoption.
And spending appreciated crypto, even on coffee, or anything else, is a taxable event.
So the point stands that using crypto as "spending money" vs purposefully saving it as store of value is going to be a real pain, for all of the technical reasons but also the tax complexity.
To see why this is the case, imagine someone saved BTC as store of value, then years later exchanged it for a house.
They didn't sell if for $. But they used its appreciated value to buy something. There is a capital gain involved, and so taxes as well.
They're 'offering IRS guidance' or from the 'department of taxation'
* H&R Block and Intuit have good lobbyists who prevent it from happening.
* Republicans want to make filing taxes difficult so that people won't like taxes. In particular Grover Norquist has managed to get essentially all federal level Republican politicians to sign a pledge not to raise taxes, and Norquist considers making filing simpler to be effectively raising taxes.
https://www.politico.com/agenda/story/2018/07/18/tax-filing-...
So basically the only reasons for filing taxes are for exotic revenues (for example crypto !) or to ask for exemptions. Free lancers still have report their revenue themselves but I would say that for a very very vast majority of people, they already have all the information needed.
Actually we receive our forms with some fields (salary for example) pre filled, you only have to check if this is correct.
The tax form is just some kind of confirmation, most of the time.
Filing tax forms is almost always a good idea for salaried workers because of the plethora of expenses that can be deducted from your taxable income:
- handyman bills
- expenses for the commute to work
- donations to political parties and registered charities (I save 400€ in taxes on that item alone because of regular donations to my hackerspace)
- some types of insurance premiums
- etc.
There's a recent Planet Money podcast on it. The regulatory lock in for tax filing is ridiculously profitable, and companies like Intuit certainly rent-seek to solidify their revenue stream.
https://www.npr.org/sections/money/2017/03/22/521132960/epis...
For example, we don't have a simple tax system based on a percentage of salary. The amount they want as a tax depends on your marital status, how many kids, how much your spouse earns, and if you itemize deductions it gets even worse WRT every medical provider's bill you've ever paid and weird details of interest payments on mortgage loans.
Honestly the error rate of trying to gather all that big brother data is almost certain to be higher than the fraud rate of people in general.
Also people push agendas, so if you want to spread the idea that fraud is rampant, if I get free coffee at church and starbucks has proven 52 coffees per year is about five hundred bucks, not declaring that coffee as income is fraud; with paper money and barter the IRS can't get all "weird" about little details, but with digital currency if you buy a donut, there will be a reckoning simply because its possible.
The $20 gift from grandma is exempt, but not because they don't demand insight into intra-family transfers.. it's only non-taxable because of its size. If you have a rich grandma and she gives you $20k, that needs to be reported.. even if no tax is ultimately due, it probably reduces the future value of her estate tax exemption. Dying is a very complex taxable event!
If you want to follow the thousands of pages of rules to the letter - sufficient to sign a letter declaring under penalty of purjury, etc - the tracking and compliance burden on many US taxpayers is enormous, even with assistance from the commercial closed-source SW packages that you are more or less forced into buying each year because they won't let you e-file with them directly over HTTPS+JSON or whatever.
Even if the IRS had perfect info about all your income and investments, there are decisions you can make which effectively make taxes non-deterministic. Suppose on two different dates, you bought shares of a company. Then on a later date, you sold one share. You get to choose which purchase date to count the sale as being against. This is important because you pay on the profit made based on that assumption. It also effects whether you pay short-term or long-term capital gains taxes for the sale.
Say for example you bought 1 share for $100 two years ago, and another share for $500 one month ago. One week ago, you sold one share for $1000. If you count it as selling the $100 share, then you must pay taxes on $900 in profit, BUT you enjoy the lower long-term capital gain tax rate. If you count it as selling the $500 share, you must pay taxes on only $500 in profits, BUT you suffer the short-term capital gain tax rate. Which of the two should you do (if you're a hypothetical perfectly rational actor who always makes absolutely optimal decisions)? Depends on what you plan to do with the other share, what you think is going to happen to the stock price, and so many other factors you could write a 10,000-page book about them...
(This of course is all US tax code, not applicable to US states or other countries.)
If it's transaction-time then that's totally unenforceable since this discussion applies to things as diverse as trading physical goods for other physical goods in an ad hoc unrecorded environment. It would make no sense for it to automatically be FIFO anyway, for example a person with amnesia might temporarily forget their ownership of longer-term holdings.
And for just one example where FIFO would be suboptimal despite a rising market, merely suppose that you know you're about to die and your children are about to inherit everything with a higher cost basis, but you need a bit of cash right now. (I highly doubt tax optimizer software has achieved the strong AI that would be necessary to know if you're about to die.)
You can't start talking about other capital gains in the same sentence as regulated securities as the reporting requirements are going to be different.
Perhaps you're trying to make a different point now, or I misunderstood your original one.
You can already contest how much the IRS claims you owe. Why would this hypothetical be any different?
Yes, it's probably impossible for the IRS to perfectly account for every American-person's income. They already make mistakes and it's not terribly difficult to show them how they got it wrong. Whether they are incentivized to adjust to your lower claimed liability is another question... but that's why we have independent courts.
That stocks and some types of deduction means it needs amending to be “optimal” is pretty clear.
"Gemini is required to report gross proceeds paid to US customers from bitcoin or ether sales on the Gemini exchange on IRS Forms 1099-K when applicable reporting thresholds are met. Typically, Form 1099-K reporting will be required by Gemini where the number of bitcoin or ether sales transactions on the exchange exceeds 200 transactions per year AND the total sales proceeds from all sales transactions exceeds $20,000 per year."
If you earn a dollar for your labor, and then hold on to it while its purchasing power increases before making a purchase, that increase is not taxable of course. It's not even quantifiable. Purchasing power can increase faster relative to a specific commodity that gets cheaper faster than other goods.
If you buy a currency and sell it later at a profit, that is taxable.
What is taxable, in a nutshell, is the result of any non-exempt activity that causes you to hold an increased numeric amount of your native currency. Increased purchasing power isn't taxed because it doesn't entail any numeric increase in the money.
The purchasing power of all my dollars seems to go down the longer I hold onto them.
It's not possible for your USD to be an appreciating asset relative to the USD and that's how capital gains are defined. However, if you go to a store in America (and hypothetically) they give you change in Euros, then you take that to another store, and redeem the Euros there, you do in fact owe taxes on the increase in value of the Euro relative to the US dollar over that time period spanning those two transactions.
Sure you can, you just have to convince someone it's worth the hassle. That it is atypical doesn't mean you can't.
I mean, if I use BTC as a currency to buy things, I don't understand how I would evaluate every purchase at the end of the year to figure out whether I owe capital gains.
10 to 30 minutes seems a lot closer to how long it takes for a stock sale to go through on E-Trade so I can see why the IRS would classify it more like a stock than currency.
Of course I have to mention that Bitcoin has unreliable and sometimes very high fees. This is a problem with Bitcoin specifically not with cryptocurrencies in general.
As a practical example I bought computer parts recently and I paid with Bitcoin Cash. When I was prompted to pay I scanned a QR code with my phone and I was done. It was even smoother than having to input my credit card numbers into the site. Of course the experience is the same if you pay in person, which I did at a restaurant when I visited Japan. Extremely easy.
It is, but there are additional technologies being built on top of it that get transaction times down to < 1 second (lightning network). It's definitely still rough around the edges, but it's at the point where it's usable for day to day use.
Also keep in mind, there are other cryptos that exist where the transaction fee is basically free and the transaction confirms in under 2 seconds. Nano is one that comes to mind.
Bitcoin is definitely falling into the "e-gold" category if you ask me.
Its not very practical but this is mostly related to the merchant software and not the underlying technology any longer.
A) Merchants do not have to wait for a transaction to "go through", just like many credit card accepting merchants don't actually connect to the network when they swipe your card. They broadcast the transaction to the payment processor later. The same is possible with bitcoin, resulting in instant transactions for the user experience. It is an option with compromises, just like accepting credit cards is an option with compromises.
B) Consumers can broadcast the transaction to the merchant at the point of sale, but merchants do not have to wait for it to be added to the blockchain. This also results in near instantaneous transactions. It is an option, with compromises, just like accepting credit cards is an option with compromises.
C) Consumers can transmit a signed transaction to the merchant, without needing internet connectivity (nfc, qr codes, sound, bluetooth can work). Merchants can be the internet connected ones and check a balance. This would also be an instanteous user experience.
D) Consumers can transmit unsigned transactions to the merchant without needing internet connectivity, this is the same as C) but also allows for paper notes like national currency with denominations, without exposing the private key of the consumer's treasury.
so there is a lot to build.
weird analogy. stock sales take 3 business days to go through, and the proceeds take another 3 business days to be spendable in a different checking account at a different institution. the securities regulator is trying to get stock sales to get down to 2 and 1 business day.
brokers like e-trade hide most of this behind the scenes, and you can certainly "sell a stock" in a few seconds on etrade. So not sure why it takes you 10-30 minutes?
Pretty much the only thing that all branches of government agree on is that cryptocurrencies are not currency. It's hard to see how they could declare otherwise, given that the U.S. Constitution grants the government the sole power to coin money, but there's a growing international economy that exists outside the nation-state framework and disagrees.
[1] https://www.congress.gov/bill/116th-congress/house-bill/2144...
https://www.investopedia.com/articles/forex/09/forex-taxatio...
They even treat foreign currency that way now. If you buy a bunch of Euros and then convert back to dollars later, you're supposed to pay tax on the gain.
1. Buy Euros with dollars 2. Value of dollar drops 3. Buy back more dollars than you started with 4. Pay taxes on your gains
Is it like a dividend? A stock split? A spin-off?
What about all of these airdropped tokens? Are they dividends, with tax payable even if you didn’t “collect” them in some way? Or splits?
Can you deduct the Day1 value of the new token from the capital gain on the first token? Or do you assume the cost of the new token was $0 and any sale is a total capital gain?
Bitcoin cash, if you acknowledged receipt of it, is exactly like earning $266 and must be reported, at least that's what tax experts noted at the time: https://www.forbes.com/sites/greatspeculations/2017/08/04/ho...
But if something that you owned mailed you $100 because you owned them, that sounds taxable in some way.
A cost basis of 0 on a sale is the most "fair" way to account for forks/drops/etc. imo. Otherwise there's too much burden on the individual to keep track of all the many forks that occur.
Companies pay stock dividends, in themselves or in a subsidiary they're spinning out to shareholders, all the time. Using a reasonable materiality threshold (which would allow for ignoring novelty forks) this isn't a challenging accounting problem.
Source: warning from an accountant on self-owned corporations
The right tax treatment would be the same as stock splits but unfortunately when I looked at the rules for stock splits they were narrowly written to apply only to stock.
IANAL, this is not tax advice, etc.
As to the cost you would probably assume the Day-1 value after the split for the new coins. The price of the split of the old coins should have been reflected in the price.
Like HP becoming 2 separate companies.
With coins, there’s no central issuing authority filing this kind of paperwork, so I always wondered if these spinoffs were taxable distributions.
Essentially, it's like you found X dollars and used all of it to purchase the newly forked coin. You have to pay income tax on the found money.
You could be conservative and be either paying the right amount or overpaying.
Or you could be aggressive, and be either paying the right amount or underpaying.
Nobody seems to know what the right way to treat these common situations, but the IRS wants you to figure it out and they’ll decide if you were right or wrong.
I did like the story’s example of buying a pregnant cow though.
Now, I simply recommend that everyone only trades USD-to-crypto and back, never crypto-to-crypto if you want to comply with tax law - it gets very complicated fast.
Trading one crytocurrency for another is a taxable event. Just like how trading one real currency for another is a taxable event. It's not unclear and trading platforms provide tax tools that solves this problem
I traded crypto and paid my taxes
They merely did a search string for 2015 for "bitcoin" in tax filings and found 800 people filed that way. So I checked my 2015 tax filings and saw I had manually entered "LTC" for closing a litecoin trade to US dollars. Hm okay, so one of the most compliant US citizens isn't counted as one of the 800 people, got it.
So then Coinbase's compliance with the subpoena now has them automatically sending Schedule D information to the IRS and to users based on a net value of any holdings in their account. But Coinbase doesn't know what any of the holdings or transactions represent, just like your bank doesn't know what your deposits and transfers represent. A third party is now assuming that its users are on the hook for capital gains, causing a filed accounting discrepancy for everyone.
Fascinatingly incompetent.
I had a KYC interview with Coinbase wondering where my coins came from. (I mined them in the 2009 to 2010 era when they were worthless, mined before the famous 10000 bitcoin pizza delivery, LOL). So they have a statement from me, which is probably now on file with the IRS.
Now here's a puzzler... I got my 6174-A and so I verified my coinbase register and old tax form reported cap gains from sales match to the penny. Which they do. So now what do I do, just sweat I guess.
The IRS enforcement division is a disproportionately large but small part of what the IRS does.
The other parts basically extend privileges to you. like when you do 475 elections, or 83(b) elections, or 501(c)3 elections etc etc. Basically all the cool stuff that makes you not have to pay taxes and only comes up if you run for office.
The enforcement division can be overzealous and ruin their own cases just from always thinking they have a smoking gun. If you reported and paid them you'll be fine.
Wonderfully said, haha! ️
I still think they lack the technical knowledge to understand crypto and as a result, you'll start to see an increase in information being requested.
In any case, I willing to bet that you'll have a couple of court cases that will really bring crypto into compliance in a way that makes sense for 80% of the people.
On the contrary, I think that the IRS knows cryptocurrency very well. The reason why the IRS requests information is that they want to prove to a court that they went out of their way to give taxpayers the benefit of the doubt. They want to be able to tell a judge "we gave this person ample opportunity to explain the situation and correct any misunderstandings before taking enforcement action". The IRS will go through the motions of requesting information even if—especially if—they know full well that fraud has occurred, just to strengthen their case.
Is that in today's value or at the time?
The IRS treats bitcoin as an investment property. What happens when one trades investment property for a car, or a boat, say?
What's not clear if you have to report the value of the gain when you did your transaction, or the current value. Crypto prices change a lot
Its intended purpose is debatable. Certainly this is an impediment to using it as a currency, or day to day spending money vs long term store of value, like gold, which also requires paying capital gains taxes.
Me watching too much fight club and partying with too much tea..
That doesn't make them incompatible, but it does perhaps provide some lessons for everyone on why financial systems are the way they are as it is, and how you can't just jump on a technology and escape.
At the very least it has all been an interesting thing to learn from.
27kWh of energy burned per transaction, with a maximum scaling limit on the order of 5 or 6 transactions per second. If everybody in the world used Bitcoin, then you'd be entitled to your one transaction every few decades.
That technolibertarianism is rampant throughout the tech industry and not just in the crypto space. Ignoring laws is viewed as being perfectly fine as long as you label it "disruption". I don't see much difference in peole running unlicensed hotels out of their condo with the help of Airbnb compared with a crypto trader dodging taxes.
If you pay someone for cryptocurrency in cash and they send to a wallet you have set up by yourself there is not really any way to prove that it's yours.
because asking everyone how much they have in offshore tax havens is working so well.
heck, not even when the information is given to the IRS anything happens: https://en.wikipedia.org/wiki/Panama_Papers#United_States
US based coin exchanges like Coinbase do
Not legally, but the math always gives you a stronger presumption of innocence than you'd otherwise have.
The economics are the same as gold mining, where what gives gold value is the fact that the expected returns from mining it are always negative. With gold, the concept is basically just that different types of sand have different weights, so due to a quirk in physics if you shake up sand the the heavier types of grains go to the bottom of your bucket. The fact that you can't ever reverse entropy like this (predictably) profitably is what secures its value. Similarly, with crypto what secures its value is that electricity cost of mining always outweighs the expected value of the crypto mined.
Anyway because the expected returns are always negative, it's much harder than it would otherwise be to identify people who have actually beat the odds to make money. Maybe not with Bitcoin due to the design of the ledger, but certainly with other cryptocurrencies.
If you Google for people who have made the money money mining gold, there are literally zero results. Why? Because the expected negative value makes it exceedingly difficult for the IRS to convict folks who are cheating on their taxes.
The typical MO for tax evasion is to just not report your side gig (crypto or otherwise), hope you don't get caught and play dumb and pay up if you do get caught. This doesn't change whether it's crypto or doing under the table work which is the point I'm trying to make here. You either pay up front the right way or have a chance of not paying at all (tax evasion) but if you get caught doing that you pay slightly more for not paying up front. Anyone who is being charged with tax evasion is doing something very stupid.
It should be obvious but the people who've revived these letter should play dumb (if applicable) and pay up at this point since clearly the IRS knows that they owe more than they've paid.
I believe Canada has something like 20% tax on the profits you get out of cryptocurrencies for the year, which I think is a much simpler system that makes much more sense.
Source: http://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/in...
That some people insist on trying to use crypto currencies as an expensive environmentally horrific currency is kind of irrelevant when the majority of users recognize that at best it’s a long term hodl investment
This is wrong. Canada is taxed very similarly to USA meaning if it's an investment it may be capital gains and if it's a business then it's income.
But aren't there bigger fish to fry, richer people more flagrantly evading taxes? Let's sort that out first, k
It is true that acts of extreme violence are less common than they were in the 19th century South, but that alone does not make the system "not slavery" given that a threat of overwhelming force still underpins it.
But you can move stuff out of government reach. If you're wealthy enough to afford good counsel, you can do it ~legally. As Apple, for example, does. Or you can do it illegally. Just don't count on Switzerland or Panama anymore.
And even little people like me can manage it. Using anonymous personas and well-mixed Bitcoin (or whatever). You just can't bring it back to meatspace, without risking deanonymization.