IRS Slams Bitcoin With Retroactive Tax Rules... Is Gold Next?

Tyler Durden's picture

Submitted by Simon Black of Sovereign Man blog,

Bitcoin tax rules finally came to the Land of the Free yesterday. And I have to imagine there are some not-too-happy campers this morning, if they even know about it.

Bitcoin taxes were inevitable. I’ve written about this numerous times, and have even gone so far as to predict that the government will probably mandate special Bitcoin reporting on foreign disclosure forms.

A number of other countries, from Germany to Singapore, have already issued their own tax rules on Bitcoin and related virtual currency transactions. And yesterday the IRS finally issued their own.

Here’s the quick summary:

1) While a number of governments (including the United States to a degree) have officially pronounced Bitcoin to be a ‘currency alternative,’ the IRS disagrees.


2) According to the IRS, Bitcoin is -property- and should be taxed as such… similar to, for example, a piece of rental property or collection of fine wine.


3) This means that the sale of Bitcoins is taxable based on capital gains. If you bought Bitcoins at $1 and sold them at $501 several years later, you would have to pay long-term capital gains tax on the $500 difference, currently 23.8%.


4) If you hold Bitcoins for shorter periods of less than 1-year, you can be taxed at ordinary income tax rates on your gains.


5) To the extent that you mine Bitcoins as a trade or business, the Bitcoin income from mining activity is not only subject to income tax, but also self-employment tax.


6) If you trade your Bitcoins for some other property that exceeds your cost basis, you are subject to tax. This is a huge ruling that effects all the ‘Bitcoin millionaires’ out there– early adopters who purchased Bitcoins at a dollar or less.

So let’s say you were one of the first Bitcoin adopters and bought 5,000 bitcoins at $0.05. Last year when Bitcoin was valued at roughly $1,000 in paper currency, you traded 250 of them for a brand new Lamborghini.

The IRS would say that you had a cost basis of $12.50 for those 250 coins. But you traded them for other property with a fair market value of $250,000. This means you have a taxable gain of $249,987.50.

Naturally, the US government is happy to go back in time and thrust all sorts of interest and penalties upon you if you didn’t comply with the law.

According to their ruling, “failure to timely or correctly report virtual currency transactions when required to do so may be subject to information reporting penalties under section 6721 and 6722.”

What’s most interesting about this new set of rules is what they might mean for gold.

If you’ve ever read Currency Wars (a fantastic book by my colleague Jim Rickards), you may recall early in the book when Jim suggests a potential outcome for gold.

Imagine– paper currencies go into freefall. Gold soars. Anyone who bought gold early sees sizeable profits (in paper currency)… at which point the government steps in after the fact and sets up new tax rules to confiscate a substantial portion of those gains.

Think it can’t happen? These Bitcoin rules certainly establish a precedent.

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waterwitch's picture

out of my cold dead hands...

john39's picture

a lot harder to track physical PM's than digital bitcoins...

NemoDeNovo's picture

I can not wait to hear #PhoneyStars spin on this one


Getting popcorn ready!

zaphod's picture

These are basically the rules most were already following and largely expected. 

It should be pointed out that the tax rate for bitcoins is LOWER than that of gold which is deamed a "collectible" to the IRS and subject to 28%.

Bunga Bunga's picture

Expected and taxable from the beginning, no doubt. Although taxes are never nice, the IRS provides clarification, which is good for business and investors.

Long term capital gains tax rates are between 0% and 20%, depending on income, much better than the "collector's" rate.

Rubbish's picture

Same goes for boating accidents, gold is lost at sea, casualty loss on income taxes....



fonestar's picture

Please!  Please give us Bitcoiners more unenforcable laws!  We care so much about them!

DaddyO's picture

So Canadians worry about US tax law?


Pladizow's picture

Do some research - this was already done to silver dealers in the 1970's.

fonestar's picture

Canadian Bitcoiners wouldn't care about Canadian Bitcoin laws either.  We would just ignore them.

philipat's picture

If it so easy for the IRS (Or anyone else, if you get my drift) to trace Bitcoin and Bitcoin transactions, why is it then that MtGox can "Lose" a Million of them without trace?

frenzic's picture

I don't. "Lose".. or hide? There is a big difference. Why you ask? Well to make out like a bandit that's why.

The hiding of the "funds" is only temporarily (the blockchain does not lie) but long enough for Karpeles to get away with the crime, while quietly selling enough to become filthy rich and with that untouchable.

A Nanny Moose's picture

This article lost me a "Land of the Free"


Dr. Sandi's picture

Just for the record, I always follow all applicable tax laws. I make a point of reporting any and all gains from my meager PM transactions, even when there is no paper trail for whatever reason.

I'm sure I speak for most of my fellow ZH'ers on this. We are a nation of laws or we are nothing.

Barry Freed's picture

I'm sure I speak for most of my fellow ZH'ers on this. We are a nation of laws or we are nothing.

I agree that we are a nation of laws or we are nothing, and we clearly aren't a nation of laws.

fonestar's picture

There were originally 12 good laws that made sense.  Then a bunch of self-serving assholes showed up trying to enrich and empower themselves at everyone else's expense.

Arrowshot's picture

Yep, that whole law paradigm thing went out the door after 9/11 and especially after Obaomao. That said I still live by a good moral code and that splash you heard was simply me jumping out of the boat to take a bath. Ceasar has already got everything he will get out of me.

Slave's picture

So aren't gold and silver coins different from this because it is actual US currency?

That is until the IRS comes up with the next line of BS regarding how to tax it...

Silver Shield's picture

Already covered it in the Ultimate Exit Strategy.

Slave's picture

I don't know what that is. Do you have a link?

stacking12321's picture

you can google Ultimate Exit Strategy, chris duane, silver shield, etc.

here's a link:

i don't especially care for chris duane as he is an arrogant, pompous ass, a wild-eyed fanatic, irrationally exuberant, kinda a jerk...basically an attitude of "if you don't believe exactly as i do, then you are the enemy!"

and i say that even though i beileve in putting a large % of net worth into physical silver just like he does.

i agree with much of what he has to say, but i find him hard to listen to.

Citxmech's picture

I don't think my Maples count as currancy - at least in the US. . . 

Stackers's picture

Anyone who didnt see everything in this article 10 miles off was asleep or dead

aminorex's picture

The rules are a big win for bitcoin.  Much needed clarity.  The mining opinion is bogus, however, and will be overturned by tax court if they don't revise it.  Bitcoin is software.  Making software (or any property) does not create income.  Only selling the product creates a taxable event.


fonestar's picture

It's not a win or a loss.  It's just nothing at all.  America and its "laws" do not matter.  The proof as they say, is in the pudding...


Stackers's picture

I think the thugs in customs with guns may disagree with you.


Do NOT fuck with the IRS. It is not worth it. Been there, done that. Nothing worse than little people with a little power that can make your life a living nightmare with nothing but a rubber stamp

fonestar's picture

The thugs in customs are about as dumb as some of the posters here.  How would they find a Bitcoin client?  And if it were a real concern why would it matter for a tech-savvy Bitcoiner?

Citxmech's picture

How will they find you?  Well, if you are driving a new Tesla on your grocery clerk salary and you get audited - you will have to show how you came up with the scratch for the car to get out of the penalty they already have warmed-up just for you.   

fonestar's picture

So in other words, fonestar would have to be an idiot, flaunting his wealth, get caught chreating and have an auditor work backwards to establish where his gains came from?

frenzic's picture

Nah they just pick a number and make you prove it isn't the right one. If you can't you are completely fucked, if you can you are fucked as well.

swmnguy's picture

Exactly.  They don't have to prove anything.  They don't even have to have the right person.  They seize every single thing they can find first; your house, car, any fiat, wages, even your precious computer without which it's mighty hard to access your Bitcoin stash.  Then the vaunted security of Bitcoin is used against you as proof of guilt.  Then they put you in a cage for tax evasion.  You have to prove, without access to any assets, that you are innocent.  Sure, they're dumb.  They know it too.  That's why they have such immense power to smash you.  Sets an example to the others, and tips the balance of power to them, despite their stupidity.  Seriously, I had a tax attorney tell me that I'd be better off owing a lot of money to the Mob than to the IRS, because the Mob has an interest in keeping you on the string while the IRS would just as soon crush you; it's all the same to them.

Citxmech's picture

Precisely - you could just never convert any of your BC millions into any of the trappings of a higher standard of living and you would probably be safe.

MayIMommaDogFace2theBananaPatch's picture

Ever seen Breaking Bad?  Sure it's just a show -- but...

Walter had a whole lot of fucking money -- but that money was particularly hard-to-use.  At times it seemed as if all of that 'jack' was nearly useless to the protagonist.  This was an important part of the drama.

Dr. Sandi's picture

Dr. Sandi's Tax Tip #1

When hosting an IRS audit, park your Tesla at your neighbor's place.

Overfed's picture

Some people are only alive because it is illegal to kill them. Most of that group either work for government, or receive benefits from government.

malek's picture

It should be pointed out that the tax rate for bitcoins is LOWER than that of gold which is deamed a "collectible" to the IRS and subject to 28%.

Plus there is no lower tax rate for long term holders.

This is why I call BS on the main thrust of the article.

fonestar's picture

I can not wait to hear #PhoneyStars spin on this one

fonestar doesn't give a shit about laws!  Neither do any other coiners.

stacking12321's picture

+1 seconded!

as the brilliant doug casey says, there is only 1 law, and it has 2 parts.

part 1: "do what thou wilt" (quoting aleister crowley)

part 2: be prepared to accept the consequences

swmnguy's picture

It's Part 2 that people have a problem with.

wee-weed up's picture



fonestar doesn't give a shit about laws!


So... That explains it... all your idiotic rants!

Of course, I hope you know... with a dumb statement like that...

(don't ever give them an excuse!)

Obozo and Holder will now destroy you...


JuliaS's picture

The point where anything is tracked is when it is converted from or into bank notes. If you buy gold using cash without having to produce ID, you're pretty much safe. Some dealers require ID's, some don't, some are required to record ID's depending on transaction volume.

I talked to my bullion deler and asked how they tracked daily transaction volume with individual customers, curious what happened if the same person walked in few times throughout the day to buy/sell. He pointed at the security cameras and said they ran facial recognition software. He didn't say whether he had to share that data with the government, but I bet he did.

Buying and selling privately offers greater anonymity in exchange for greater risk - risk of getting mugged, or receiving fake metal or money.

There's risk in any transaction. There's risk in gold, there is risk in bitcoin.

You are tracked when you exchange one thing for another, especially if one of the things is an official government currency. If you can get pass the exchange barrier, then storing and hiding what you already own is almost a non-issue.

Kreditanstalt's picture

The governments will get more and more desperate.

They already tax anything that is produced.

They tax anything that changes hands.

They tax anything that moves.

That's basically it.

CuriousPasserby's picture

Go to a coin show and buy/sell a little with each dealer.

angel_of_joy's picture

You can't smuggle bitcoins...

Kirk2NCC1701's picture

No need to. Like "god", they're omnipresent.

aminorex's picture

More accurately, you don't need to, because they are always available, everywhere there is a network connection.

angel_of_joy's picture

No shit, Sherlock ! You don't seem to get it...

Unlike "God", EVERY bitcoin transaction if forever recorded and available. You can't hide it. IRS can track down every move you make in the virtual currency "realm".

Then, they'll send you the bill...

fonestar's picture

How the fuck do you think the IRS (or anyone else) would tie a Bitcoin address to a real person?  You'd have to be a fuck up to the point of wanting to be caught.