
Court Rules IRS Can Seek Information on Bitcoin Customers - siavosh
http://www.wsj.com/articles/court-rules-irs-can-seek-information-on-bitcoin-customers-1480569311
======
paulsutter
You can't omit Bitcoin transactions from your tax return just because they
seem anonymous. Concealment is the very definition of tax evasion, "Evasion...
involves deceit, subterfuge, camouflage, concealment, some attempt to color or
obscure events or to make things seem other than they are"

Quoting in full since its among the most misunderstood yet important
distinctions in tax:

[http://www.irs.gov/irm/part9/irm_09-001-003.html](http://www.irs.gov/irm/part9/irm_09-001-003.html)

9.1.3.3.2.1 (05-15-2008)

26 USC §7201 – Avoidance Distinguished from Evasion

1\. Avoidance of taxes is not a criminal offense. Any attempt to reduce,
avoid, minimize, or alleviate taxes by legitimate means is permissible. The
distinction between avoidance and evasion is fine, yet definite. One who
avoids tax does not conceal or misrepresent. He/she shapes events to reduce or
eliminate tax liability and, upon the happening of the events, makes a
complete disclosure. Evasion, on the other hand, involves deceit, subterfuge,
camouflage, concealment, some attempt to color or obscure events or to make
things seem other than they are.

~~~
Fluxenein
So, if an individual buys BitCoin with some capital to not pay taxes for said
amount of capital ,is he evading or avoiding?

~~~
paulsutter
IANAL but example taxable transactions might be to sell bitcoins for a gain,
or to use appreciated bitcoins in a barter transaction. Losses are also
taxable transactions, but in a good way.

Mining is awkward, since I believe mined coins are taxed as income on the day
they are mined, even if you don't transact.

Best to talk to an accountant, of course, and not rely on the advice of a
random HN commenter like me.

~~~
justin66
> Mining is awkward, since I believe mined coins are taxed as income on the
> day they are mined, even if you don't transact.

The IRS has indicated that bitcoins are property and taxed as such, so that
seems unlikely. Do you have a source for this?

~~~
paulsutter
[https://www.irs.gov/pub/irs-drop/n-14-21.pdf](https://www.irs.gov/pub/irs-
drop/n-14-21.pdf)

~~~
justin66
(Q-8 is the relevant FAQ on that doc)

Thanks.

------
nullc
So-- IRS seeks _all_ transaction records for all coinbase customers. Not just
buying and selling Bitcoin but also people using their wallet services, which
would mostly be users moving around their own funds (not a taxable event).

They're doing this on the basis that there might be evidence of tax evasion in
there somewhere. Which is plausible, I suppose.

Thing is: All this same data was also emailed to the customers (as coinbase
does email notification), likewise for their competitors.

Which means that the IRS could likely get the same data but more
comprehensively by simply demanding Google turn over every single email for
every user. I can guarantee this would include much more evidence of tax
evasion.

So why is a coinbase dragnet a viable demand where a Gmail one-- which would
include the same data plus even more tax evasion evidence-- not one? Or is it
simply the case that the Gmail demand will show up after this one clears the
courts? :)

~~~
JumpCrisscross
Material transactions are already, for the most part, reported. This action
isn't putting special attention on Bitcoin _ceteris paribus_. It is bringing
it into alignment with U.S. dollar custom and law.

~~~
throwawayqwer
So shouldn't they only require Coinbase hand over "material transactions"?

------
jrockway
Oh good, another list I'm on. I'm going to have to start making a list of the
lists.

Bitcoin seems obviously like money to me. But I wonder when the IRS is going
to start cracking down on other electronic money you can earn. Think about
computer games where you can buy credits, or earn them by playing. That sounds
like income tax evasion to me; you're getting paid in Green Rupees instead of
US Dollars, but you should still be paying income tax on that! And don't
forget about frequent flyer miles. (Which are not counted as income because
you "can't" sell them, but anyone who reads flyertalk knows that's not the
case.)

It's all very interesting. People have been using alternative currencies
outside of the IRS's radar for quite a while, and they've mostly ignored them.

~~~
ryanackley
In the linked article, the IRS is quoted as saying they are treating BitCoin
like property. Essentially, they are looking to tax people who made a profit
from selling Bitcoins using Coinbase.

They don't seem concerned with the currency aspect at all.

~~~
smokeyj
Say I buy two bitcoins, A and B, and combine them into a wallet C. Bitcoin A
was purchased for $100 and Bitcoin B was purchased for $1000. If I sell half
of wallet C for $500 - can I pick "which" bitcoin was sold? Because depending
on which coin was sold the tax implication may change.

~~~
vessenes
While I'm not a CPA, I have spent many dollars and hours since 2011 on Bitcoin
tax questions in the US, so here's my two cents:

In general the US requires consistent treatment of inventory for earnings
calculations. It's a little weird to have to worry about that as just a
consumer, but if the coins are property and being held then sold, you probably
should keep track of gains and losses.

Now, you discuss the question of combining up your two inventories. There are
basically four ways of accounting for inventory in US accounting:

FIFO -- First in First Out

LIFO -- Last in First Out

AVCO -- Average Cost

Specific Identification (I think that's the term) -- cost associated with a
given item.

It is generally fine with inventory to pick one of these methods and accrue
gains / losses appropriately.

So, FIFO: You show a gain of $400. (Note your next sale at $500 will net a
loss of $500).

LIFO: You show a loss of $500 (Note next sale will net a gain)

AVCO: You show a loss of $50.

Specific Identification: Depends on the coin.

If you want to _change_ your inventory accounting methods you definitely need
to calculate out a charge (or credit) for the switch.

In general, I have thought for some time choosing specific identification
rules and instrumenting a wallet to spend in the most tax efficient way
possible makes a lot of sense, but it's way down the stack of projects for me
at least.

~~~
dragonwriter
> If you want to change your inventory accounting methods you definitely need
> to calculate out a charge (or credit) for the switch.

I thought (and I could be wrong) that the normal thing to do with LIFO/FIFO as
to track it _as if_ specific lots were sold (even if those aren't the actual
items sold), so that if you switched between them you just changed the order
in which you were treating the remaining (accounting, rather than actual) lots
as being sold, without the charge/credit you would have if you refigured past
history of sales to meet the new accounting method.

~~~
briHass
That's how I do it with mutual fund shares, which would be a similar situation
to Bitcoins due to it all technically being one "pot".

If you use a tax-lot specific accounting method FIFO/LIFO/highest cost/other
specific, you just need to track which "lots" you've already sold out of
(fully or partially), and ensure that you don't sell something twice. Now, if
you used average cost at some point, you're kinda screwed if you want to
switch to specific lot.

------
digler999
I get that taxes are one of the few certainties of life, but this article
makes me think of yesterdays "how to hide $400m" article about tax sheltering
and offshore incorporation.

I wish there were a way to ruin tax sheltering for the wealthy by finding out
the exact formula for what they're doing (say register a business in the Cook
Islands ), then commoditizing that via an online service (like Wordpress does
for websites), and using bitcoin. Now the masses can pay $29.95 to have a VPS
on the Cook Islands, set up their bitcoin wallet on it, and have their own
little tax-exempt haven.

Try to structure the system the exact same way the rich people do it, so that
authorities necessarily have to shut down the rich at the same time.

~~~
PKop
Simplify the law, remove sheltering opportunities/loopholes, and lower rates?

Lower them to a point at which it isn't worth the cost to shield, and get more
out of them than what we are losing to the sheltering.

------
throwawayqwer
Say someone bought Bitcoins from Coinbase and transferred them to their own
wallet outside of Coinbase. They haven't sold them, so there's no taxes to pay
and nothing to report to the IRS, right?

How is the IRS going to know the difference between that situation, where they
have done nothing wrong, and someone who sold them outside of Coinbase and
didn't pay taxes on it?

Are they just going to audit everyone over some threshold, or are they going
to use this information in existing investigations (or in conjunction with
other red flags)

~~~
koliber
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.

------
transfire
Few people know that federal taxation is primarily a way to spy on people.
There are numerous alternative places to apply taxation within the economy
that are not remotely as intrusive, time consuming or costly. Tax preparation
is a $10 billion dollar industry and the IRS has a $12 dollar budget.

~~~
pc86
On its face ("the more money you make, the more taxes you pay") it's a good
system. However, like most things, it doesn't seem to work exactly the way
it's described.

------
throwawaydfsgs
So how would one go about settling up with the IRS on this?

~~~
patio11
The short and useful answer is talk to an accountant.

The longer and less useful answer is that it depends heavily on circumstances.
Two relevant ones are "What sort of income do you have here?" and "How much
are we talking about?"

If we assume the answers are "You have capital gains because you happened to
purchase some Bitcoin, they appreciated, and you sold them, but you weren't
conceivably operating a business while doing this" and "Enough money to matter
but not enough that your failure to get better advice was clearly negligent"
then your resolution is going to be fairly simple. Your CPA will calculate how
much money you owe, file a 1040-X (amended return) for the years at issue, and
say "On routine review of a prior year tax filing we found that we
inadvertently understated income. We're amending the return as appropriate,
and have remitted additional tax. We request an abatement for penalties for
tax underpayment on the grounds that IRS guidance at the time was unclear and
we're coming in voluntarily before you asked us to." You'd possibly get the
abatement of penalties; you're likely to pay very modestly more than you would
have if you had been more diligent about your obligations, because they don't
frequently waive interest.

This is the "middle class Americans screw up their taxes all the time; we like
to encourage voluntary compliance" answer. If you're talking about _mountains_
of money, on the other hand... expect rather less leniency. Other things that
increase your risk: any hint of other-than-tax illegality around the business
("I underpaid on the capital gains I inadvertently generated in my drug
smuggling business -- sorry about that, really didn't set up to be a currency
speculator, I'm simply an honest drug smuggler") or the Bitcoins being used in
a manner which was clearly straight-up tax fraud, like the prosecuted cases
where someone's company paid a Bitcoin exchange $X00,000 for "technology
services" and expensed it, took the Bitcoin over to Gox, cashed out, and then
repatriated the money. (The Bitcoin here are just a red herring; this is a
conspiracy to hide $X00,000 in income from the government. They take a dim
view of that.)

~~~
mschuster91
> If you're talking about mountains of money, on the other hand... expect
> rather less leniency

Well, according to Wikipedia, you can at least declare income from illegal
activities, so that the feds can't jail you for tax evasion in addition to the
crime itself.
[https://en.wikipedia.org/wiki/Taxation_of_illegal_income_in_...](https://en.wikipedia.org/wiki/Taxation_of_illegal_income_in_the_United_States)

~~~
h4nkoslo
However you cannot deduct most costs arising from illegal activity, which
typically causes taxes to exceed your profit margin.

------
god_bless_texas
I initially cringed when I saw this, so I went to go download my transactions
from coinbase. I realized after looking through them that some of my BTC
outbound transfers were to btc-e, and some of those were to cryptsy. So,
considering cryptsy kicked the bucket with much of my coin, and I can't get
their records...now what? Those outbound transfers are financial losses, and
in the grand scheme I lost money due to Cryptsy; but will the IRS settle for
that?

~~~
AtheistOfFail
You should have filed a loss with the IRS for the money so you could get the
tax write-off.

~~~
Declanomous
You can file amended tax returns for 3(?) years I think. I don't know how that
works for capital losses though, I've only had to file amended returns for
other types of deductions.

------
normandoorman
There is a huge flaw in this logic from the IRS. If it is a possession, then I
can give it away. Like a fudgable dollar I gift away, you cannot tax me on
every transaction that doller is engaged in.if I give away the wallet and the
dollar, nothing changes. The USA is just trying to stop bit coin with taxes.

~~~
FireBeyond
That's kinda close to "I'm not going to pay you for what I bought. But I am
going to transfer ownership of my wallet here which just happens to have cash
in it to cover what you were asking for. But be clear, I'm giving you the
wallet. Not paying you."

------
hnburnsy
What if I buy something with appreciated Bitcoin? Is this a taxable event? If
the IRS considers Bitcoin property, am I just bartering with Dell when I buy a
laptop with Bitcoin?

~~~
pc86
> Is [buy[ing] something with appreciated Bitcoin] a taxable event?

According to the IRS, yes.

> If the IRS considers Bitcoin property, am I just bartering with Dell when I
> buy a laptop with Bitcoin?

Yes, so if you buy 1 BTC for $750, the price increase dramatically and you buy
a top-end gaming system from Dell (lol) then you're bartering and the excess
value is taxable.

------
normandoorman
Their goal might be to harasss people into not using bit coin. This is a tax
nightmare well outside of most peoples understanding.

------
bunburying
As at least one person has already struggled with this (subthread now
deleted), hopefully the following will help others.

To read the article in full, please click the "web" link above, between "past"
and "[...] comments".

WSJ articles can be read in full, if you click through from Google search
results.

Note: simply copying the Google link and pasting it here won't work.
Presumably Google needs to be the referrer.

~~~
kybernetyk
Why do we allow WSJ submissions here if they don't want us to read their
content?

I mean sure, you can go the "click web, then the right Google result" route.
But that's like submitting a link to Adobe's most recent Photoshop update and
then tell people "you can download Photoshop for free by starting your
Bittorent client".

WSJ wants to hide behind a paywall. That's fine for them. But HN shouldn't be
sending them traffic and enable that behavior.

~~~
grzm
Some HN users subscribe to the WSJ, others find the content valuable enough to
use the web link. The submitter and those who up-vote the submission also
believe the article has value.

The paywall is part of the WSJ's business model. HN submissions include the
source of the article. If you choose not to support the WSJ or their business
practices, you have the choice of not reading their articles.

~~~
existencebox
I think the (fair) complaint that in situations like this where similar
articles are written by a slew of sites, better good could be done sourcing
from a site without a paywall; both in accessibility and in supporting non-
paywalled news.

Even with the web links, that often doesn't work with WSJ any more with how
they cookie; so I'm very supportive of non-paywalled links as a preference.

~~~
grzm
That's a good idea, especially for those that are essentially publishing the
wire stories. If people find them, they can provide them in the comments, or
perhaps submit them separately. Hard to tell sometimes if there's a better one
out there.

I've heard people describe problems they have with the WSJ web links. I don't
deny that they do, but I'm surprised I haven't seen them myself. I'm just
running Safari with Ghostery. Never had an issue with WSJ (and I don't have a
subscription).

------
donatj
I basically expected as much. Wish the article wasn't subscriber only.

~~~
wheelerwj
[https://www.google.com/amp/www.wsj.com/amp/articles/court-
ru...](https://www.google.com/amp/www.wsj.com/amp/articles/court-rules-irs-
can-seek-information-on-bitcoin-customers-1480569311)

~~~
bunburying
Following this link doesn't work. Presumably Google needs to be the referrer.

------
mindcrime
The solution to this is obvious: eliminate the IRS. And the income tax. And
most of the federal government. Spin off the actually useful bits as private
non-profit foundations (or possibly even for-profit companies depending on the
scenario) and let them earn their own keep based on the value they provide.

A sufficiently small government can be funded without an income tax, as
history shows us.

~~~
delegate
Of course. Taxes are the basis of state, which uses taxes to develop and
maintain its capability to threaten you with violence if you dont't pay taxes.

It's a recursion which has plagued the world for centuries.

The whole system can in theory be replaced with non-profit investments funds,
which crowdfund social projects.

You dont even have to elect 'leaders', because citizens will be involved full
time in running things (by guarding their investments) similarily to how they
now waste time on Facebook.

But good luck changing anything without a nuclear apocalypse :) There are a
lot of people who like the system the way it is and they won't give it up
because us idealists want a better world for their children..

~~~
oelmekki
I take it you live in a country where people are ok to see other people living
off the street because they presumably "failed"? That's the only reason I can
think of which would make it possible for charities to fit government action
scale. Also, I wonder how local non profit organize against a nation wide
invasion (not saying it's impossible, but you have to prepare for it, which
costs money).

I live in a country where we're not ok seeing people in the street and we're
not ok seeing sick people who can't pay for medecine. I'm ok with paying taxes
for those. What I'm not ok with is having people who use what we all pay for,
then try to not pay for their part by evading taxes. If taxes is a problem for
you, I'm pretty sure there are a lot of countries where you can move and that
you will find adequate.

~~~
delegate
>I take it you live in a country where people are ok to see other people
living off the street because they presumably "failed"?

I live in Spain, there's no such thing here.

What I propose is for people to have the ability to specify _what_ their taxes
are spent on. I dislike it when government wastes tax money on useless or
corrupt projects, military, police, surveillance and other such things, which
I personally would not support if I had the choice.

I would invest that money in more schools, hospitals, etc.

This would change what we now call 'government' from raw money spenders into
project managers who seek public funding.

Citizens can fund public projects from their phones and get involved in the
debates, votes, etc.

That's real-time democracy - no need for elections or politicians, just
technocrats who monitor the needs of society and ask people for funding.

Think about it for a while and you'll notice lots of positive consequences of
such a system.

~~~
ceejay
There appears to be some merit to what you're proposing. But what about long-
term issues, such as climate change, etc. How are a group of people going to
convince a large enough group to pay money for it, and who is going to enforce
it?

Also, things that don't affect majority of people will probably never get
enough funding. For example blindness. How many blind people do you know? And
do you think anyone is going to be convinced that a single kickstarter-type
campaign is going to solve it? I imagine even the most motivated donors will
start considering dropping out after 2 decades of spending money when they've
produced no measurable results to curing blindness (or paralysis, cancer,
etc).

EDIT: In fact, the more I think about it, the more it becomes obvious this
sort of system couldn't work on a massive scale (such as a scale necessary to
do what a government does). Each person is probably only going to be able to
comprehend the need to address perhaps hundreds of specific issues. But my
guess is that governments, in total, deal with probably 10's of thousands if
not more different types of issues on a daily basis. Not only that but those
issues that a citizen does comprehend, will he / she need to keep up with how
each issue is being addressed? After all, otherwise I'm potentially just
throwing money down a rat hole. Sounds like more than just a full-time job on
its own. How would one find enough time to do that and still make money to
bring home to their families, etc..

~~~
smokeyj
OP was making a principled stance for a more direct democracy. When you argue
against a more direct democracy, doesn't that make you scratch your chin and
wonder if you really support democracy at all? Do you really support your
fellow man and his pursuit of happiness, or do you know what's best for him
and wish to dictate how he lives. Based on what you wrote, you don't support
democracy at all - which may possibly be a valid view.

~~~
wav-part
Democracy is socially-accepted extortion from successful. So any proposed
Democracy 2.0 that reduce welfare spending, will be met with opposition from
_people_. This predicts quite many behaviours of people that supposedely
support Freedom/Independece/etc.

