And if I'm moving between two wallets that I control (be it directly via some software/hardware wallet or indirectly via some exchange)? Does it work the same as it would if I was moving that much USD between two bank accounts under my name? What are the tax implications there?
This is arguably a problem I've been far from rich enough to encounter, so it's a genuine question should that someday change :)
The specific language in the 2020 US1040 instructions say otherwise:
"A transaction involving virtual currency does not include the holding of virtual currency in a wallet or account, or the transfer of virtual currency from one wallet or account you own or control to another that you own or control." (2020 1040 instructions, pg. 16)
So as long as you "own or control" both wallets, your described transfer would not be a reportable event under the current tax instructions.
It's difficult to guess how the IRS would treat it.
How are they going to know the difference? For one, you can tell them. I don't know what the proper form for this would be, but I am sure an accountant can help out.
Scaremongering aside, I've found dealing with the IRS rather sane.
I would think that the IRS would treat a transfer of coins from a wallet you own to a wallet you do not own as a taxable event. They would take difference in value of the coins between when you acquired them and transferred them away, and if it is positive, would call it a profit.
On the other hand, if you declared that you owned both the source and destination wallet, I would imagine that the IRS would not treat this as a taxable event, in the same was as transferring USD between your checking and savings account is not a taxable event.
The IRS relies in a huge part on you self-reporting things. They do get a lot of info from the source (bank transaction records, 1099's, W2's). In many cases, the onus is on the taxpayer to tell the IRS the information that they need.
By default, the IRS takes self-reported information at face value and believes you. However, sometimes, they may decide to investigate. This is called an audit, and then the onus is on you to prove that what you provided is true.
A bitcoin address is just a container for some amount of BTC. Holding an amount of currency isn't taxable, and exchanging currency often isn't taxable either. (I'm generalizing across jurisdictions, but I think what I'm saying is true for most of them.)
If you move money from one pocket to another, or one savings account to another (that you own), that's not taxable. Very many transfers between bitcoin addresses is just like that: the 'change' from a transfer goes to a new address owned by the same person.
Even when the addresses are owned by two different people, the transfer often isn't taxable. You don't pay a tax when you pay a bill, but that's a currency transfer between two parties. Even when you buy something it isn't necessarily taxable; in many jurisdictions many products are sold tax-free based on either the type of product or where the buyer and/or seller are based.
I don't think there's a way to enforce taxation on bitcoin that's not already being used to enforce cash sales taxes and cash income, despite the tracability of the coins, because the address owners may not be identifiable, and the nature of the transfer is definitely not identifiable from the blockchain.
Sure, you'd either have to convert part of it to fiat for taxes, or carry a currency risk and pay the taxes separately (as I do.)
In the future, you'll probably be able to pay your expenses in bitcoin and then the issue becomes moot (you use your bitcoin earnings for expenses and your fiat earnings for taxes.)
Yes. The same applies to when you trade bitcoin for other cryptocurrencies. Although it is technically one transaction, if you want to be safe you should treat it as two separate transactions:
This is super interesting to me. If you exchange your money from one currency to another (USD, Euro, etc.) and profit from doing this, do you need to pay taxes? If not, is BTC treated as a currency, or as a security (eg. FB, TSLA) where you would obviously have to pay capital gains taxes.
I assume that most mom and pop investors will use the same exchange to buy their bitcoin and then later sell them. In that case the IRS can see both transactions in their account and know the capital profit/loss they have not declared.
If you buy at one exchange and then transfer the coins to another to sell it would be harder for the IRS to match up and discover your profit/loss. Especially if you move the coins via several intermediaries and sell in a different country that is not under the IRS jurisdiction.
Yes. I mean, if you're a professional currency trader, that's how they make their money. IRS really just cares about "income" though, doesn't really matter where it comes from: job, yard sale, crypto, selling drugs, whatever.
I'm not an expert at this, so I'm fairly curious to some similar edge cases like, what if you open an EU bank account, convert 100k USD to Euros. The Euro/USD gains a few basis points and then you buy a car. Are you taxed on the delta between when you bought the Euros and when you "sold" them? Is that any different than the (former) situation where you could buy 100k worth of bitcoin, then use the bitcoin to buy Tesla? Both are assets that appreciated vs USD. Stocks seem pretty simple, because you always have to convert back to USD, but what if you don't have to convert?
It's wrong as other comments said, but there are related use cases. If you have much XMR, want to evade tax, and want your assets to be stable: you can't exchange it to real USD because it will be followed by tax office. However just exchange it to USDT (between your crypto wallet, not wallet on exchange) won't be followed by your local tax office. Finally you still need to wash the money or need to use them for virtual things like NFT, but it works as temporary solution.
This isn't entirely related but I'd be interested if anyone knows the tax implications of _spending_ bitcoins. What happens if you receive bitcoins when they're worth 10 USD and then spend them when they're worth 20 USD. What tax rules apply here?
Suppose I change a bunch of USD for EUR at an airport. Six months later, the Euro has appreciated significantly vs the US Dollar. I go on another trip, and buy some stuff with the Euros I changed several months ago. Do I technically owe capital gains tax?
Consider that I want to discreetly give someone $80K. If I withdraw $80K, the bank must report that. But if I withdraw 10x $8K, I'm arguably structuring to avoid reporting. So let's say that I want to buy $80K of Bitcoins. If I do that in one $80K transfer, the bank must report that. And with 10x $8K, I'm still structuring. And either way, in that year's tax return, I'll need to report capital gains and losses on the $80K of Bitcoins.
I understand this causality as: People must pay taxes in USD, so they need to eventually convert whatever currency they use in business into USD, in order to pay their taxes (or go to jail). And this gives USD the backing - having it keeps you away from jail.
But what happens if you do business entirely with an unofficial currency like BitCoin, do you have to pay taxes based on some arbitrarily converted USD value? Or can you escape taxes altogether?
I am fairly certain that is not correct. When you buy a virtual currency with another virtual currency, that is a taxable event, and you have to estimate the basis for tax using the currency gain in dollars. Or that is what I have understood from their guidance docs.
I do plan on talking to an accountant with specialty in this, obviously, just trying to figure out what others have experienced to see if my thoughts are off.
This is arguably a problem I've been far from rich enough to encounter, so it's a genuine question should that someday change :)
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