This is no different from any other profit or gain. The Government isn't specifically targeting these people; it just wants them to make sure they realize it's like any other investment.
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).
(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.
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.
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.
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.
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.
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.
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.
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.
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.
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.)
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
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.
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.
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.