Hacker News Reader

Comment by dawhizkid | Hacker News Reader

So long as this is the case how can it possibly make sense to use bitcoin to actually transact e.g. fulfill the vision of bitcoin as "digital money" if every time you buy a cup of coffee with bitcoin the expectation is that you'd have to calculate capital gains and report every year?

View on HN

There is a bill that has been introduced which would make it so that you don't have to report BTC transactions less than $600:

https://www.ccn.com/u-s-bill-would-ease-bitcoin-tax-regulati...

That story is from 2017. I don't think it passed.

This applies to any forex. If you're in the US, but you buy a coffee using CAD somewhere near the border, you have to keep track of that transaction and report it as a cap gain (or loss if you want).

Things get weird when you use a strange currency for any transaction.

Surely this is not true? It doesn't seem consistent with the IRS's guidance [1], anyway. You would simply value the expense in USD at the time of the transaction. There is no capital gain or loss.

[1]: https://www.irs.gov/individuals/international-taxpayers/fore...

Any time you "realize" a currency or commodity (that is, sell it or trade it for something else) you need to pay tax on the capital gain, if there is one. At some point, you purchased those CAD. If the value of CAD is higher when you use it to pay for your coffee, there was a capital gain, and you just realized it.

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.

I did not realise you were assuming that the taxpayer already held the CAD for some period of time before the coffee purchase. So US tax law provides no exception for trivial capital gains on personal use assets? Clearly it makes sense to bring forex gains and losses to account when dealing with large transactions and investments expected to produce a return (eg. cryptocurrency). But in my country, a small balance in a foreign bank account held for the purpose of personal expenditure while in that country would not be regarded as a capital asset where every transaction is taxable.

From what I read elsewhere the threshold for reporting is $200 of gains.

This is true for any foreign currency, and it's exactly why a country tends to converge on exactly one currency, even when it's illegal. Dealing with multiple currencies on a daily basis is a giant pain in the ass.

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...

[2] https://en.wikipedia.org/wiki/Currency_of_Ecuador

[3] https://en.wikipedia.org/wiki/M-Pesa

No, this is not the case. For foreign currency there is a low-value transaction exemption. If you go on vacation in Italy you don’t have to report forex income/loss for every meal. But if you came back with an Italian sports car, you would.

Not so with bitcoin, which the IRS taxes every transaction, no matter how small.

I think the reasonable justification for the low-value exemption for foreign currencies is that it's a) a common consumer use case, and b) hard to account for. Neither applies to Bitcoin. Not only is Bitcoin a failure for typical consumer use [1], but its digital-from-the-start nature means that the accounting burden is much lower.

[1] https://avc.com/2017/08/store-of-value-vs-payment-system/

Lightning transactions are both low friction enough for consumers to use, and inherently ephemeral.

If somebody has designed a digital system to throw away data instead of recording it, that doesn't excuse them from recording it when needed for tax reasons.

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.

I think it shouldn't be hard to do that automatically in software - you only need to know exchange rates at time of every transaction.

That software did not exist in 2013!!

It's not buying a cup of coffee that's the issue. The issue is in converting between currencies, which is no different than investing in foreign currencies. If you exchange USD for EUR, wait a while, then exchange back to USD and you've made a profit, it's taxable.

It is, though. Transacting with bitcoin is a taxable event just like converting between bitcoin and fiat. It's no different from the IRS's perspective.

Every taxable event is something you have to keep track of.

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.

Reply on news.ycombinator.com