The IRS Sets a Trap for Cryptocurrency Tax Cheats
wsj.com
wsj.com
Friendly reminder that IRS enforcement is one of the most cost-effective activities that the federal government can engage in, and that Congress has consistently cut funding for the IRS for years and years [0][1][2][3][4]:
Cutting the IRS budget didn’t make sense to [John Koskinen]. It was one of the few areas of government that had a positive return on investment. Koskinen told the Senate, “I don’t know any organization in my 20 years of experience in the private sector that has said, ‘I think I’ll take my revenue operation and starve it for funds.’”
It should be obvious that a politician who votes to cut IRS funding, especially when that funding can go toward enforcement, does not represent the interests of the common people they represent.
If you are a white-collar employee making $100k, $200k, or even higher, you should be especially concerned, since you bear a large portion of the nation's tax burden and expect that your tax money be spent well. 25% marginal tax rate is a bitter pill to swallow when you know that others are not paying their fair share.
[0]: https://www.cbpp.org/federal-tax/depletion-of-irs-enforcemen...
[1]: https://www.propublica.org/article/has-the-irs-hit-bottom
[2]: https://www.cnbc.com/2018/05/11/budget-cuts-shrink-the-irs-a...
[3]: https://www.theatlantic.com/politics/archive/2018/12/rich-pe...
[4]: https://www.propublica.org/article/how-the-irs-was-gutted
The IRS needs to prioritize its resources by going after the big fish, not obsess over kids waiting tables. A bigger IRS doesn't change the fact that it's apparently toothless against the rich and has nfi how to allocate its resources.
My attempt at optimism: going through a downsize cycle is perhaps good to compel healthy internal reorganization inside systems (biological, business, etc) that can prepare it better for a future expansion cycle.
Audit rates of people making $1m or more are down by 80% since 2011. Now "the top 1% of taxpayers by income were audited at a rate of 1.56%. EITC recipients, who typically have annual income under $20,000, were audited at 1.41%."
Source: https://www.propublica.org/article/irs-now-audits-poor-ameri...
Seems like institutional failure if I have to vote for IRS expansion, the same people going after my tiny coffer, for the IRS to go after anyone else. That's a dumb conflict of forces.
That's deft political engineering. Congress is to blame. They tweak the budget to protect themselves and their true constituents (megadonors and lobbyists).
We're in a peculiar situation where democrats and republicans are both on the "right" in their fiscal policies. Any blush of "left" policy is shouted down by bipartisan echoes of McCarthyism. The politicians of both parties are, by and large, upper class, and they collectively pit the middle class against the lower class.
We don't need a new IRS, we need a new breed of politician. And enough funding for the IRS that it can audit those politicians and their donors fearlessly.
The kinds of rich people being discussed in this thread are still a very small percentage of six-figure+ earners. I would venture to say (no pun intended) that most HN readers are not accredited investors.
So I continue to think that the six-figure norm people talk about is within a "reality distortion field".
To sociologists, economists, and academia, those who rely on a salary or wage to live are considered working class compared to those who don't.
That's a perversion of the definition.
I don't think your handsome graphic there is offering much insight into the topic at hand. The richer someone is, the less likely they are to cheat on their taxes.
EITC not withstanding you need to have income to hide it.
According to Brookings, the bottom 50% pay 14% of the taxes but are responsible for only 12% of evasion.
The better distinction is the source of income. Farms, landlords and sole proprietorships are the leaders in misreporting income. W-2 salary reporters account for <1% of evasion. Between those two groups are misreported tips (typically lower end) and capital gains (typically higher end)
Hell no. If you're in the top 1% of income (~$400k per year) you are wealthy.
If you're making $400k per year, how long before you start to accumulate substantial wealth? Pretty quickly I'd say. Sure it might not be millions, but if you sock away $200k at age 25 after 3 years, you have more wealth than 99% of people your age.
"Wealthy" is not limited to wealth alone. If you're making $2M a year and have no savings, you're still "wealthy".
And people with large amount of wealth (your definition) can still become destitute. There are plenty of examples.
That $400k post tax is mostly going into housing.
And yes, I believe that if you sell your labor for a living, whether it be for $400k at Apple or otherwise, you have more in common with someone making $24k bussing tables than you do with the person who owns property for a living.
Both could survive on far less.
Some might say that with that luxury comes the responsibility to improve the situation.
Another thing, many countries expect rich people and rich companies to hire government-certified accountants to verify your fillings (known as a Statutory auditor https://en.wikipedia.org/wiki/Statutory_auditor ). This makes it harder for these companies to do stuff the non-audited guy can easily do.
Assuming the IRS is underfunded, saying they focus on low income people as a consequence, when it would be more lucrative to target high earners, makes no sense. The claims could all be true, but they don't appear to be connected.
Why would the total amount of funding force the IRS to spend less on individual cases? An alternative hypothesis might be that it actually is more cost effective to target people with less money, for instance, people paid mainly in cash tips, but I don't have any idea if that is plausible, I'm just saying the narrative doesn't make sense to me.
In general, targeting rich people seems obvious because rich people "have the money", but mathematically, it depends on how many there are when you multiply it out.
Anyway, I am very open to the idea that the IRS is being stupid and counterproductive, or politically avoiding prosecuting the rich, but I think it raises the question of "why" that is not answered by saying "underfunding". They still have funding to go after one or more high earners, right, so the total amount is irrelevant if it's taken as a given.
I don’t understand how Republicans can argue cutting funding to the IRS will save the government’s spending. Instead their goal is to make the tax base richer by cutting taxes of the rich. Many of them are all about cutting taxes to the rich and corporations, doubling down on the trickle down. They even blocked payroll tax cuts to the lower and middle class:
http://www.washingtonpost.com/politics/house-republicans-def...
The IRS also sends the letters to people that they owe money. This year my accountant didn’t realize I was owed a credit. The IRS mailed me a check and a letter explaining why they adjusted my return and issued the credit.
It's hard to know where to draw the line but you could reasonably argue that chasing low income people for small amounts is net negative societal utility, even when you get them to pay up.
The thing that is often ignored, unknown, or forgotten, is that it doesn’t have to work this way. Some countries send you an end of year report on how much they collected from you and you can audit them as well. It’s less laborious than our system. I am blissfully unaware of the complications of such a system but I’d like to think that it works better. I’d like to think the people of the IRS would prefer that too.
So yes, you're correct. Analyzing whether or not someone is eligible for EITC (those making less than ~$50,000) can be automated and if flagged, a letter sent telling them they aren't eligible or asking for more information.
[1]https://www.taxpolicycenter.org/briefing-book/how-do-irs-aud...
They can't choose to spend more, knowing they will make it back.... they don't have the money to invest in going after rich tax payers. They can only spend the budget they are given, and that isn't enough to go after rich people, even if it would bring more money in.
I expected this was a big reason for the seemingly illogical behavior, but am curious how it shakes out. Where does money they recover go?
It would seem to make sense to seed a high income investigative unit, checked by the courts, and then allow them to retain a substantial portion of their recoveries to self-fund.
"Make your check or money order payable to “United States Treasury.” "
That's, you know, the federal government. Not the department called the IRS. The IRS gets a budgeted amount of funds.
> It would seem to make sense to seed a high income investigative unit, checked by the courts, and then allow them to retain a substantial portion of their recoveries to self-fund.
For an example of how this could go horribly, horribly wrong, look at police use of civil forfeiture. https://www.nbcnews.com/think/opinion/police-abused-civil-fo...
If you limited their targets to high net worth individuals, I daresay they'd be able to afford a robust (and as fair as we can make it) defense.
Unlike the abuses in civil forfeiture, where the primary targets tend to be without legal recourse.
And a fast resolution doesn't seem required in this case. High net worth individuals don't seem like they'd be impacted by {potential tax bill and penalties} of their assets being frozen for multiple years while a case plays out. Relative to their total assets, any tax bill is going to be manageable.
The only problems actually preventing the IRS from conducting this enforcement are (1) political cover from direct Congressional interference & (2) lack of resources due to general defunding by Congress.
Given a choice between the dangers of establishing a self-funding high net worth tax prosecution arm and not prosecuting those individuals, I feel the greater risk to democracy is the later.
This also plays out in other ways: Intuit spreads a ton of money around trying to prevent the kind of automatic tax and online filing which happens in most of the world because thinking of taxes as hard provides them with a steady stream of customers.
Did you owe it?
IIRC, the IRS assumes some amount of tips per time worked and expects taxes for that.
The flip side of this is that many servers don't document because, well, they make above the standard assumption.
There are some super rich tax evaders who can hide many millions from the IRS, but they are few in number and it will cost millions to recover that money after going through all the obstacles such rich people can afford to put in place.
On the other hand, imagine 100 million people all under-reporting $1200 - that's $120 Billion Dollars, or about 6 NASAs. If you actually had to go after everyone, that would be extremely expensive, but if you go after just a small percentage of people, the rest will be scared into properly reporting their income. We all know one or two people who have run into serious trouble with the IRS: enough that we are familiar with the consequences but not enough that it seems like a common and socially acceptable strategy. This is by design.
With the very wealthy, this strategy doesn't really work. Just because you manage to get one bank in switzerland to hand over some data doesn't mean my bank in the caimans is going to do the same. Even if the IRS were to catch up to me, I can afford to wait to cross that bridge when I come to it. You can take billions from certain people and they will still have net worths greater than some nation states - those who can afford to lose can afford to play the game.
It's also worth noting that the tax code has plenty of loopholes that wealthy people and corporations can use to legitimately reduce their tax burden. IRS recovery isn't going to be able to do anything about that. If you have billions of dollars, you can afford an accountant who will make sure there's nothing for the IRS to go after.
Really changing the funding of the IRS is irrelevant - were we to simplify the tax code to eliminate loopholes and make it easier for people who can't afford armies of accountants to properly pay their taxes we could both collect more money and spend less on recovery. It may be impossible to get congress to actually do that, but anyone talking about playing around with the IRS's funding is just trying to look like they're addressing a problem they really have no intention of solving.
That's not correct. 4.5% of returns account for almost 60% of taxes. 17% of returns account for almost 80% of taxes. And that was before the Trump tax cuts.
https://www.pewresearch.org/fact-tank/2017/10/06/a-closer-lo...
The only reason the IRS is involved is because the payment is a tax credit, rather than just a payment from some govt body.
22M Americans receive EITCs and the average payout was $3200, for a total of $70B per year.[1]
[1]https://www.cbpp.org/research/federal-tax/policy-basics-the-...
https://taxfoundation.org/summary-of-the-latest-federal-inco...
> In 2017, the bottom 50 percent of taxpayers (those with AGI below $41,740) earned 11.3 percent of total AGI. This group of taxpayers paid $49.8 billion in taxes, or roughly 3 percent of all federal individual income taxes in 2017.
> In contrast, the top 1 percent of all taxpayers (taxpayers with AGI of $515,371 and above) earned 21.0 percent of all AGI in 2017 and paid 38.5 percent of all federal income taxes.
> In 2017, the top 1 percent of taxpayers accounted for more income taxes paid than the bottom 90 percent combined. The top 1 percent of taxpayers paid roughly $616 billion, or 38.5 percent of all income taxes, while the bottom 90 percent paid about $479 billion, or 29.9 percent of all income taxes.
Grouping together wages, capital gains, and misc under the label "income" rhetorically hides the unfairness of our regressive tax regime.
GP's point is the IRS is unfairly focusing on the weakest while ignoring the worst offenders. No reasonable person disputes IRS's own repeated statements to that effect.
We can only guess the motives of any one still in denial.
This is Vox's explainer of the same topic.
Who pays the lowest taxes in the US? https://www.youtube.com/watch?v=kXCGbAv8YPw
Just from skim reading, theintercept's article is based on a study from ITEP and Vox's data comes from taxjusticenow.org. I'd have to dig deeper to see if they're referencing the same data of if these are just complimentary studies.
> The income tax is not the only tax collected by the federal government — far from it. Just half of the taxes collected by the federal government come from the income tax. About a third come from payroll taxes — which fall much more heavily on working people, since they’re largely levied only on the first $130,000 or so of earned income.
..
> Second, the wealthy naturally pay a disproportionate share of federal income taxes because they make a disproportionate share of the country’s income. In other words, these numbers to some degree demonstrate exactly the opposite of what those who use them claim: They’re not an indication that the superrich are beleaguered, but are in part a sign of America’s staggering wealth inequality.
..
> the top 1 percent — with an average income of about $2 million — made 20.9 percent of America’s income, but paid 24.1 percent of America’s taxes. Few people will perceive this as a monstrous injustice.
> Meanwhile, the middle 20 percent of Americans— with incomes between $41,000 and $66,000 per year — make 10.9 percent of America’s income and pay 9.4 percent of America’s taxes. The bottom 20 percent, making less than $23,000, make just 2.8 percent of America’s income and pay 2 percent of America’s taxes.
https://theintercept.com/2019/04/13/tax-day-taxes-statistics...
The rich pay taxes roughly in proportion of what they earn.
https://theintercept.imgix.net/wp-uploads/sites/1/2019/04/ch...
Other big issue is the super rich typically have full control over when, where, and how, a taxable event happens. For the wealthy most wealth building doesn't involve taxable events. One of my beliefs is the mortgage interest deduction is a sop to the middle class. Because otherwise the wealthy would out compete middle class families for single family homes.
If the IRS doesn't go after any kids waiting tables, no kids waiting tables will bother paying tax. And that's, in aggregate, a lot of money.
This is a similar fallacy to the idea that cops should not investigate minor crimes - say, burglaries - until it's solved all murder. If they actually do that, burglaries will effectively be legalized, and anarchy ensues.
The bigger mental trap here is I guess a failure to consider second order effects.
Innumeracy among even educated people is why our policies are the mess they are.
You may be right.
Maybe my point is better made by saying that minor spending enforcing these taxes bring in a lot of money.
> Innumeracy among even educated people is why our policies are the mess they are.
I'd say it mostly just reflects the relative power of various interests.
Look at the various reported tax games with Donald Trump, though--many involve situations where the other side of the transaction is cooperating. If both sides are dirty the IRSs job becomes much harder. Also, the more complex financial transactions can't be distilled down to standardized reporting so well, it's much harder to match both sides.
laughs in European
Top tax bracket for the income tax portion is 45%.
Not everything is about Silicon Valley. You can move away to afford better housing. That's what I did.
Luckily with a salary in the top 2% nationally you can afford insurance. The same can not be said of people who are not rich.
This was also an individual plan bought on a healthcare exchange. Large employers have a stronger negotiating position and can get somewhat better rates, but in the end you're still basically paying a tax and it is disingenuous to compare tax rates with countries that provide socialized healthcare with their taxes and not include the cost of healthcare coverage in the States.
Generally in CA, and most of the US, you would receive health insurance through your employer, and the bulk of your medical insurance premiums are non-taxable subsidies by the employer.
With a lower income, the percentage would increase -- but only up to a point since a family of 5 starts qualifying for ACA subsidies if their income is less than $120K.
The subsidies make a big difference -- 84% of people who purchase insurance through the exchanges receive a subsidy and the average monthly cost of a plan after taking subsidies into account is $145 (vs $595 without) [1].
[1] https://www.healthinsurance.org/obamacare/will-you-receive-a...
At $220,000 CAD, the tax rate in BC (one of the lowest in Canada other than Alberta) would be 35.8%. In Quebec, it would be 42%.
Which, for an income of $231,600/year ($11,600 of which get taken off your paycheque before you even see it), adds up to a total of $71,143.
Meanwhile in Ontario, your total tax burden, for an income of $223,750 ($3,754 of which gets taken off your paycheque before you even see it), adds up to... $88,663.
Of course, in California, your employer is also spending ~$20,000/year on your health insurance plan (And is asking you to pitch in ~$6,000).
In Ontario, at that income level the province will bill you... $900/year for a health premium. The rest of your health care costs[1] come out of the regular taxes you pay.
...And if we add all that to the math, you'll discover that the Canadian takes home a bigger portion of their paycheque then their American equivalent.
[1] Okay, I'm also missing vision and dental, which are part of the $20,000/year employer part of your health plan, but are not covered by the province of Ontario. The Canadian would have to pitch in a bit of cash for that.
Just as an example, my salary in the US would be 30-40% higher and denominated in a currency that is worth 34% dollar for dollar.
[1] Assuming you're one of those suckers that isn't laughing all the way to the bank, thanks to the mindboggling piece of legislature called 'Proposition 13'.
As for healthcare, vision, and dental for a single person with no kids my employer paid $8,800 for the year, I paid 150, I get to put $3,500 pretax income into a HSA for healthcare spending, and my max out of pocket spending is $2,600 so that's not really a concern for me.
This does, however, mean that it has one of the most regressive tax regimes in the country.
in order to also be paying the 3% pharmacare deductible, you'd also need to be spending at least $7k per year on medical expenses, as well as making less than $316k before taxes. on the whole, I would say that paying that much medical expenses would make someone disinclined to have (more) children.
in conclusion, while I was wrong to say that it's impossible to pay all those taxes simultaneously and marginally, it seems highly unlikely and I doubt that anybody in BC actually pays that marginal rate.
https://www.canada.ca/en/revenue-agency/programs/about-canad...
The laughing in European is not to be derisive, but to keep from bursting into tears
Also it doesn't include state income tax.
I've seen those return-on-investment studies saying "for every $1 allocated to the IRS, they collect $10 in unpaid taxes," but how much of that comes from harassing people who end up paying because they can't afford to spend years litigating in tax court, versus people who were actually hiding income?
Enforcement involves substantial interpretations that reasonable people in and out of the IRS can disagree on.
This is not an argument for more or less enforcement, but I've found people usually neglect this aspect.
This should be a bipartisan issue, but neither party seems interested in tackling it. A cynic might argue that this is because both parties are interested in maintaining the status quo, their leadership being full of people who benefit from it (or friends of such people). It also helps ensure that running the country is expensive and inefficient, making progressive policy harder to implement.
That's because the hiring manager doesn't need to understand tax rates to do his job. He plugs the numbers into the black-box HR system, and the system spits out dollars, that he pays employees with.
The reason for why you have no idea how much the government will take in taxes, is because income taxes are progressive, and are charged based on total income earned per year.
So, someone working at a $200,000/year job for a year, will have a tax rate of ~26.5% (I'm ignoring Social Security).
But if they were unemployed for 9 months, and started working that job on October 1st, they will have a tax rate of ~16.5%.
What this means is that when you start a job, you have to guess what your likely annual tax rate is going to be, and set up withholding for that amount.
If you underpay by a large enough sum, the IRS will send you a bill, with an extra penalty next April. If you overpay, the IRS will send you a tax return.
Expecting the hiring manager to know the tax stuff would be like expecting the dev team to know how much income tax the business is going to pay.
It only gets complicated if you want it to be complicated, such as if you're trying to maximize potential deductions or minimize taxable income by exploiting loopholes or special provisions.
That's not true. I wanted to claim some cash income this past tax year and it was a pain in my ass. It's very relevant how you made the money: for instance, if you made it gambling vs a woodworking hobby vs a small ebay reselling business, all are handled differently.
I just want to clarify that de-funding the IRS doesn't have universal support in congress and is actually a partisan policy. I'm guessing you know that and are just toning it down to be less politically offensive on HN.
However, this is an important distinction and not for the sake of finger pointing. It's important because it means that we have the power to change our government. We have the power to demand better of our politicians and to refuse to vote for them if they support policies that make it easier for tax cheats to walk while increasing the tax burden on everyday people.
I understand why you might want to tone it down and just blame congress and all politicians for this type of policy (because, yes politicians are gross and should be kept at an arm's length), but that breeds the idea that we are just stuck with a broken government that can't be changed. You really can have an effect on government if you are willing to look at who historically votes for policies like this and make the choice that is best for you. If you didn't have power in the process, then our politicians wouldn't be spending so much money on campaigns to get you to their side.
From the articles you linked:
> The IRS has never been a popular cause on Capitol Hill. But Democrats and Republicans long shared a grudging consensus that the agency’s basic work of tax collection deserved protection. That changed when the Republican Party came into power in 1994 and Newt Gingrich became the speaker of the House. The new majority’s main priority was tax cuts, and vilifying the IRS helped its case.
> The notion wasn’t a fringe position within the party. Former Sen. Richard Lugar of Indiana, a respected mainstream Republican, ran for president in 1996 on a platform of abolishing the IRS. A Republican congressman in 1998 introduced a bill to repeal the Internal Revenue Code by 2002. “Abolish the IRS” remains a potent talking point. Ted Cruz, the Republican senator from Texas, campaigned on the slogan when he ran for president in 2016.
> Republicans, riding the Tea Party wave, took control of the House of Representatives and started hacking at the IRS’ enforcement budget
> Down it went, some years the cuts were steep, some not, as Republican lawmakers laughed off dire warnings about the consequences of letting tax cheats run free.
Graph of Federal Government receipts as percentage of GDP.
Does this show that gutting the IRS has resulted in lower tax revenue?
I noticed that you did not provide any sources for this statement, which is fitting given it is not true.
> It was one of the few areas of government that had a positive return on investment
Scoping any type of Law Enforcement in terms of "Return on Investment" rubs me the wrong way.
He wanted to fund the government with excise taxes and tariffs like it was funded for many years.
Thing is, people who are accustomed to the IRS, thought he was a little "out there" because of it.
Payroll taxes are a tariff on labor, income taxes include non-labor (but “long-term” capital only at a favored rate) income, so aren't exactly a tariff on labor, though they also aren't neutral between sources of income.
They are simply taxes on labor.
Instead with the IRS, the taxes keep on going up and up and the little guy can't do anything meaningful to fight the trend.
(hmmm... looking at where we are now, maybe the businesses won in their battle to lower tariffs - shifting them to individuals)
1) The federal government is not a business, it's a federal government. It shouldn't be looking at taxes as a "cost-effective activity with a positive return on investment".
2) The entire concept of increasing the IRS's budget so they can collect more money is circular reasoning that leads us down a race-to-the-bottom scenario, but the "bottom" in this case is maximizing tax revenue to the point where everyone is squeezed dry....because the government apparently knows how to spend their money better. I.E. Increase the IRS budget so we can collect more taxes, so we can increase the IRS budget so we can collect more taxes, so we can...
3) For your final selfish argument, it's debatable to say it's better for you that others spend their money on taxes rather than less on taxes and spending it however they please. Any standard macroeconomics course will show you that people spend most of the money they have access to. In other words, they're injecting that money directly back into the economy, which typically adds ~10x in value to the economy as a whole, as it trickles through the supply chain. e.g. they buy a new couch: delivery guys get paid to deliver it, delivery company profits off the delivery, furniture store salesperson makes a commission, furniture store makes a profit, couch manufacturer makes a profit, company who produces couch cushions gets another order to replace the sold couch, couch cushion company orders more fabric and couch cushion stuffing.....
For your final selfish argument, it's debatable to say it's better for you that others spend their money on taxes rather than less on taxes and spending it however they please.
The IRS doesn't determine tax rates or tax laws, it just enforces them. And to note, all of the infrastructure that pays for the road the delivery company used the deliver the couch, and the forests which provided the lumber for the couch's frame, and the ease of contract which made all of these transactions...were all made possible by the taxes collected and paid by all of these people.
Tax is a vital part of the economy. It's the price (fee) you pay for the government services that underpin everything else.
And in my example I'd think that the lumber would come from privately owned land/lumber operations. Not sure what you mean by ease of contract.
See my other comment in regards to taxes in general.
These numbers on budget shortfalls, deficits, and CBO estimates that are thrown around every time a tax credit or additional tax is considered are very much affected by revenue collection. In SF where there's quite a bit of direct democracy, they were also thrown around to the public when considering several tax or tax-adjacent referenda such as the recent tax on high-revenue businesses or a few on the upcoming ballot, all of which come with their own budget estimates. I'm doubtful that all of this would have no effect the next time balancing the budgets is considered.
The IRS isn't collecting more taxes. Even a kid would know they aren't even allowed to do that. They're just collecting taxes that are already owed. If the government wanted to increase taxes then they could already do that right now but they aren't because no one would vote for them. Increasing IRS funding would help the government collect taxes from the people who owe them which would lower the overall tax burden of the average tax payer (assuming they actually pay taxes).
If it costs the IRS $100 to collect $1000 then that means that's $900 less that everyone else needs to pay.
The low vs high tax debate is kind of a moot argument anyways since the US govt can pretty much print money as needed...which ends up being an indirect tax on the general public via inflation.
This seems to indicate that it is a net positive for everyone else. If they don't collect tax money from those owners, all of the benefits of that money goes to those owners and none of it goes to anyone else.
> The low vs high tax debate is kind of a moot argument anyways since the US govt can pretty much print money as needed...which ends up being an indirect tax on the general public via inflation.
So... it's not a moot point? One group, through taxation policies, is asked to pay a larger share of what would have been an indirect tax on the general public.
With a sufficiently complex tax code, bureaucrats can selectively enforce or interpret it as they choose. It wouldn't be unreasonable to expect abuse if there is an incentive for agents to collect more.
It hardly matters whether it makes money. Two things come to mind:
* Civil asset forfeiture is one of the most profitable acts for police departments. California outlawed this for money below some large sum.
* Traffic tickets are one of the most profitable acts for some city departments. I would far prefer that they reduce that.
I don't care that the Federal Government makes money. It is not a good thing that it makes money. It is just a thing.
When North Carolina came after me for taxes they thought I owed, only for them to reduce the judgment from the many thousands to a few hundred dollars when I sent them a "yo, I think you're mistaken" letter, I didn't feel pleasure. The fact that they insisted any further appeal could only occur in person, knowing full well that a flight to that state cost more than paying the bill, I did not feel like the government was made better through the experience. If they had decided that they should collect the whole amount I would not feel like they would be doing a better job.
Can I deduct transaction fees? Maybe only business transaction fees?
There are a lot of unanswered questions.
I plan to on my 2020 tax filings next year.
I’ve never had an issue reporting crypto assets on my taxes since 2014. I wouldnt have been included in the “only 800 people that reported” according to the IRS’ flawed study which was just a search string for bitcoin or btc, as I was mining litecoin back then and receiving capital gains in litecoin back then. I looked and I literally had typed in LTC in a capital gain document.
These guys are so far behind reality.
The new question should be “are you yield farming and did you claim any liquidity mining airdrop?” but sure lets just wait till 2027 for them to catch up
Paying an invoice? Never considered that!
Tax deductible transaction? With crypto huh, never asked!
Receiving crypto for services rendered? What do you mean using crypto for what it was designed for I’m so confused!
The asset doesnt matter, only the nature of the transaction matters
Who would you need to hear it from?
If you got paid and liquidated immediately, the price change was not worth mentioning and the income tax is.
If you bought crypto to immediately pay for a server, the price change is not worth mentioning because it likely didn’t change more than a fraction of a percent and the expense is worth mentioning.
Current law factors that in, because current law doesn't factor in what asset was used for payment.
With rise of stablecoins like DAI and USDC where equally large volumes are being used, focusing exclusively on capital gain/loss is even more misguided.
But to your point, RSUs - unless you did an 83b election - have a bigger income tax component, especially in your sell immediately example. Which reinforces my point that the prioritization is wrong and that focusing exclusively on capital gain/loss is misguided. This time I’ll italicize exclusively, for emphasis, lest that somehow gets lost in the message.
So the assumption is flawed. The priorities in reporting are flawed.
Its the borrower that amplifies their risk.
But if a borrower collateralizes well enough it is much more tax efficient for them.
These are solved problems for 2 years.
And yes, that is an additional example about why assuming there is a capital gain or loss merely from seeing the flow of crypto through a Coinbase account is misguided.
Could be just a tax deductible interest payment to service a business debt in a sole proprietorship. Its simply not up to Coinbase to determine or the IRS to assume either.
Coinbase is getting better about it if you use their own products for staking and earning. (1099-Misc, 1099-K). But they are still doing it wrong for people that use crypto properly and keep personal off-exchange custody of assets.
Congress could easily delegate additional discretion to the IRS, they just haven't yet as they have been unprepared for this outcome.
When you look at the universe of assets, they either exist in walled gardens (brokerage accounts that there is no expectation to withdraw from, or that you simply can't withdraw from), are not easily divisible or have separate denominations if they were, or are impractical to transport (a barrel of oil, other spot commodities), or are not fungible (art, collectibles, barter assets).
All crypto assets transcend and overlap with the fungibility of every other asset class all at once, while being able to function as non-fungible assets if desired.
Congress has considered this matter already, and they have chosen not to treat cryptocurrency as a domestic currency by refusing to consider bills that would classify cryptocurrency as a domestic currency.
Non-domestic currency (i.e., foreign currency) is treated as an asset under US tax law, and as a currency not issued by the US government, cryptocurrency is a non-domestic currency and is thus subject to the same tax treatment.
All of that other stuff you said is irrelevant.
The nature of the transaction is irrelevant to (2).
If you pay an invoice with bitcoins that have experienced capital gains, you have to pay capital gains tax.
>Tax deductible transaction? With crypto huh, never asked!
What is a tax deductible transaction? If you donate bitcoins to a charity by sending the bitcoins to the charity's bitcoin address that is indeed fully tax deductible and you don't need to pay capital gains tax (and you get an income tax deduction of the entire value). But is coinbase really trying to get you to pay capital gains tax when you simply send bitcoins from one address to another? That doesn't make sense.
>Receiving crypto for services rendered?
How does receiving crypto have anything do do with capital gains? Capital gains come into play only when you get rid of the crypto.
>The asset doesnt matter, only the nature of the transaction matters
Yes, and any time you exchange cryptocurrencies for something else (dollars, goods, services) that is a capital gains relevant transaction.
Also could be true you were part of a data leak from one of the exchanges. The IRS actively pursues collecting this data, and I've had some very interesting conversations with one of the contractors they use to help scan the Internet for such things.
If you were included in the mtgox leak, you probably got such a letter too.
What if I received valuable content in exchange for identifying fire hydrants or traffic lights?
"For federal income tax purposes, gold is considered a collectible - just like art, stamps, or those baseball cards you've been hoarding. What that means is that instead of a maximum long-term capital gains rate of 15% for most taxpayers (20% for high-income taxpayers), you'll pay a maximum long-term capital gains rate of 28%."
Generally, the value of the content you receive (to you) is so immaterial that you would have to spend your entire year on it to receive enough of it to be subject to tax.
They should just remind everyone that cryptocurrency counts as income. No need for a question that has an ambiguous answer. This is going to confuse a lot of people.
You can argue the semantics all day, but nobody is buying up and trading millions of dollars in Starbucks gift cards. Arguing that these rules are for any purpose other than cryptocurrency is wild. The IRS doesn't create rules for things that aren't a material concern, and cryptocurrency is the only recent "virtual currency" that is a material concern.
Any tax lawyers here?
Has anyone tried to bring this to court?
and right #7 says: "Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary"
Whats the confusion? The IRS has a legitimate power to ask taxpayers about their income, in compliance with the law. Asking the question doesn't appear to be "more intrusive than necessary".
I was confused by this statement, as my understanding is that treating it as a currency would result in worse tax consequences.
The same is not true if you replace Euro with Bitcoin above.
And then you have an example that didn’t show how proper accepted legal designation as a currency, in the future, would lead to worse tax treatment, which is the supposition we were talking about. Let me know if you come up with something.
https://www.irs.gov/publications/p525#en_US_2019_publink1000...
So if you exchange $20 USD for foreign currency and then buy something a month later where it would have cost $25USD to get the same amount of currency, that's a capital gain.
The problem I have with treating cryptocurrencies as property instead of currency is that it creates a massive accounting burden, effectively killing its potential use as a transactional currency. Can you imagine what it would be like if you had to report all of your bank statements, credit card transactions, and cash transactions to the IRS and have it all reconciled?
I think the issue is that for tax purposes anytime something changes to dollars and gains or losses occur.
Whether crypto is currency or an asset won’t affect this much. I think you need a new tax rule altogether that let people “settle up” at the end the tax period or something.
I'm not sure about the US but this is definitely not the case in the rest of the developed world.
You are saying that every American citizen when they travel overseas, exchanging money and purchasing items on their card have to report that to the IRS?
Get the feeling this only applies to professional traders not people on holiday.
It actually is in the EU, and most of Asia.
You are saying that every American citizen when they travel overseas, exchanging money and purchasing items on their card have to report that to the IRS?
That is not forex investing.
For most American citizens, the only taxable forex transaction would be when they convert the foreign currency back to USD, because that is the point at which the change in exchange rates may have created conversion-related gain or loss. (I.e., very simplified example: you paid $100 USD for $100 AUD on arriving in Sydney Australia, and paid $100 AUD for $110 USD leaving Australia, resulting in forex gain because the AUD became worth more by the time you left.) However, if you are not a person who regularly trades currencies, generally you don't have to report forex gain unless it exceeds $200 for the year (in the US; the threshold differs for each country).
I have 4 different currencies sitting in a bank for years, they've moved far more than $200 in gain/losses over that time.
Accountants in both Sydney and Singapore have never wanted the details of me moving that cash around.
I pay my income tax (converted rate) on them and that's it.
I've also been paid in crypto before and that gets capital gains applied plus income tax. Not complaining though, often worked out ok.
Seems like that would be easier. They tell me how much they think I owe, and I either send it in or file an appeal.
That might be the point.
Ahhh, but this is heaven. If I'd be an US citizen doing crypto transactions I'd made sure after each of them to write them down already prepared. Then when tax declaration season comes hit IRS with a bag of 20 kilos of paper in declarations. No more than 1000 people to do this and trust me, IRS will change their tune so fast your head will spin.
"“Buying a sandwich with cryptocurrency shouldn’t be a taxable event,” says Sean Cover, a New York City cryptocurrency holder who works in finance for a nonprofit group. He says that in 2017 he had more than 500 transactions on several platforms, and it took him 10 hours to prepare his crypto tax forms even though he paid for special software. "
But generally if your return would exceed a certain length you now have to file electronically.
The IRS processes more tax returns every year than the entire EU combined. It switched to digital files a long time ago. If you file your return by paper, it gets scanned into a digital copy and the original gets carted off to a warehouse somewhere in the mid-West. If you get audited, the auditor is looking at a digital copy of your file. If they are looking at a paper copy, it is because they printed that copy out for personal convenience.
If you send the IRS 20 kilos of papers, the people who they hire seasonally will process your 20 kilos of papers and an automated system will scan and convert each and every page. Though generally, if your tax return would exceed a certain length, you are now required to file electronically and any supporting attachments are to be kept on file so they can be requested by the IRS as necessary.
(On a somewhat bizarre note, the tax court requires paper copies of all filings and documents, though in some circuits the tax court now allows discovery to be satisfied through the provisioning of digital copies.)
That seems problematic. I would imagine the total reported crypto losses > crypto gains.
The problem here is.. how the heck can the IRS verify your claim that some gains were capital gains? What if you sell drugs for a living and invest poorly in the stock market. You just send your drug sales gains in as crypto gains, and so you have effectively washed your illegal gains, giving you the benefit of being able to not pay tax on that bc of your capital losses.
This system is ripe for abuse.
For more information: https://www.irs.gov/individuals/international-taxpayers/freq...
See, this is why you HODL:
Hodl (/ˈhɒdəl/ HOD-əl; often written HODL) is slang in the cryptocurrency community for holding the cryptocurrency rather than selling it. A person who does this is known as a Hodler. It originated in a December 2013 post on the Bitcoin Forum message board by an apparently inebriated user who posted with a typo in the subject, "I AM HODLING."
In 2017, Quartz listed it as one of the essential slang terms in Bitcoin culture, and described it as a stance, "to stay invested in bitcoin and not to capitulate in the face of plunging prices." TheStreet.com referred to it as the "favorite mantra" of Bitcoin holders. Though originally used in relation to holding Bitcoin, it is now also used to describe holding other cryptocurrencies and tokens.
Oh my god was that a pain. No help from the exchanges whatsoever. Had to compile a huge spreadsheet myself to make a big custom 1040/8949.
I hope it's easier now. I'm also glad they're trying to enforce this now. I know many people who made money speculating on crypto and not one of them reported it. The crypto community has a really nasty anti tax undercurrent (see: crypto communities moving to Puerto Rico)
I'm not even sure it worked out properly in the end, but after spending 5 days doing it, I decided what I got was probably close enough to the truth, and I called it day. If the IRS is ever unhappy about it, I wish them good luck figuring out the actual number. I'll happily pay the penalty if they make the calculation for me and save me the trouble!
I open a Coinbase account. I feed it $50 for some bitcoin, and use a small amount to pay for a web hosting package somewhere.
I then have to pay taxes on whatever bitcoin is left if the value of BTC goes up?
this sounds... way more complicated than I thought.
For example:
On 1/1/2020 you bought $50 worth of bitcoin.
On 6/1/2020, you converted your bitcoin to dollars to pay for hosting. By that point, let's say, the price of bitcoin had doubled, so you sold half of your bitcoin to pay your $50 hosting fee, thus getting $50 for bitcoin that you bought for $25. Your taxable capital gain would be $25 ($50 - $25). (I'm assuming that even if the hosting provider accepts bitcoin as payment, the price of their services is denominated in dollars.)
The bitcoin that's left in the account (now valued at $50) is not subject to any taxes until the year when you sell or exchange it.
In general, on your 2020 tax return, you'll be reporting income (including capital gains) that you received in the 2020 calendar year.
For more information: https://www.irs.gov/individuals/international-taxpayers/freq...
If I merely own coins do I need to say yes?
Because merely owning an asset does not create any federal tax obligations.
> If I merely own coins do I need to say yes?
The question on the form is: "At any time during 2020, did you sell, receive, send, exchange or otherwise acquire any financial interest in any virtual currency?"
So if you merely owned cryptocurrency that was acquired before 2020, the truthful answer would be "no".
"The crypto question first appeared on the 2019 tax form, but on a part of the return that not all filers had to answer. Now it’s moving to the 1040’s most prominent spot, just below the taxpayer’s name and address."