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Comment by MWil | Hacker News Reader

it may be lost to spend but can't you spread the loss out over some years and never pay taxes for that period?

Losses can only be taken on your initial investment amount if you have Bitcoins in MtGox. This means that if you invested $10k a year back, and your Bitcoins are now worth $1000k, you can only take $10k in losses.

Luckily I have realized my gains which means I can deduct $3k every year in losses with infinite rollover.

I believe your understanding if the situation is flawed, if you are a US citizen. The $3000 per year applies to capital losses. You did not suffer a capital loss. You suffered a loss due to bank insolvency.

If you realized your gains in 2013, you actually owe taxes on $500,000 for your 2013 taxes, which is roughly $250k.

I believe your losses due to bank insolvency will apply to your income for 2014. But you may be on the hook for $250,000 in income taxes this year. But it probably won't offset your tax liability from 2013.

And the state of NYC subpoenaed MtGox's records so they may share this with the IRS.

I would consult a CPA if I were you, you could have a huge tax liability with no adequate way to offset it.

Yep, talk to a CPA. One key issue is you may not have a capital loss, but rather a casualty, which by my read of the flowchart becomes a miscellaneous itemized deduction. Those are limited to 2% of MAGI and I don't believe they carry over. Also, there is a hard cap at $20k for lost deposits. See publication 547. It may be to your advantage to file it under a loss to personal property (form 4648) - the math isn't straightforward for me to work out.

Talk to a CPA. This is the sort of thing they live for.

It may depend on why the exchange went insolvent.

If it is not a technical problem, and is rather a Ponzi Scheme, the tax implications may be much different since there are IRS rules that handle Ponzi Schemes. Additionally, those that gained profits in the exchange may be required to pay back those profits to victims through clawback lawsuits+.

This IRS link below is a brief overview of how victims of Ponzi Schemes are treated. The most important piece of information is that there is a real chance of a clawback for the people who withdrew and currently think they made money.

http://www.irs.gov/uac/Help-for-Victims-of-Ponzi-Investment-...

I don't have time to read these documents this morning, but I do know that the people who received returns from Madoff are now the focus of lawsuits.

Here is a Forbes article on the subject, there are plenty more you can read out there as well: http://www.forbes.com/sites/jordanmaglich/2012/10/23/ponzi-s...

Here is one example of a hospital having to pay a Clawback. http://www.jewishpress.com/news/breaking-news/hadassah-docto...

+My guess is that the clawback lawsuits would yield very little real money since much of the value of Bitcoined gained was due to price appreciation which may keep lawsuits against those who gained fairly minimal since there isn't much money for lawyers to sue for in complex litigation.

Noone was promising any returns, so how could this possibly be a ponzi scheme?

A Ponzi Scheme is legally defined as a fraudulent investment operation that pays earlier investors returns out of the investments of subsequent investors. A promise of returns is not necessary.

Well, and how is "give us your money and you'll later get it back, just minus some fees" possibly an investment operation, be it fraudulent or not? I mean, where did MtGox ever suggest they would pay any returns, let alone where did they ever pay returns?

You bring up an interesting point. I reviewed a wiki list of Ponzi schemes and assuming that is an exhaustive list I have to agree with you that the generally accepted definition is that you must say you are doing something with the money to benefit the investors for it to be a 'Ponzi Scheme'.

http://en.wikipedia.org/wiki/List_of_Ponzi_schemes

The fact that it doesn't fit the wiki or generally accepted definition of a Ponzi Scheme does not rule out the possibility that it still may be considered one but after spending some more time considering it, it does not look like a true Ponzi Scheme, even if the CEO did directly steal the money and use new money to pay old BTC buyers.

Well, what pretty much rules out that MtGox will be considered a ponzi scheme is that if it were, "ponzi scheme" would essentially be a synonym for "fraud".

Suppose MtGox wasn't a bitcoin exchange, but rather sold cars, which had to be ordered and paid for in advance. Now, suppose further that the CEO "stole" cars from the company and then bought new ones using the money from new customers when he needed to deliver a car to one of the earlier customers. That's just plain old fraud, not a ponzi scheme, and it doesn't become a ponzi scheme just because it's money instead of cars - and in particular, you as an earlier customer certainly are not liable for the losses of later customers.

edit: I mean, MtGox under the assumption that the loss was not due to a technical problem, if it way due to a technical problem, it's obviously not a ponzi scheme anyway.

Must Ponzi schemes guarantee returns? Madoff, for example, pretended to be a normal financial trading operation, just one with unusually good returns.

Well, I guess I phrased it badly, but I didn't mean a guarantee of returns, but rather just anything even suggesting it being an investment - that is to say, suggesting that it might possibly produce returns.

Madoff did not say "give me your money and you'll later get back the exact same amount, just minus some fees", I suppose? But that's what MtGox did - there was just no investment aspect to it.

Plenty of people were buying Bitcoins because they thought they would increase in value, which sounds like an investment to me.

You are confusing the thing sold through MtGox with the thing sold by MtGox. MtGox sold the service of storing your money and of connecting you to trading partners and settling trades with those trading partners, that is what exchanges do - they didn't sell bitcoins.

It's like confusing eBay and paypal with some eBay seller: eBay and paypal don't sell clothes, say, they only help you find someone selling clothes and then (optionally) help with the settlement, the payment in particular.

And that's not just a formal distinction: On an exchange (like MtGox or any foreign currency exchange or stock exchange ...), the price for the traded commodity is not set by the exchange, but by the traders using the exchange. The exchange only sets the price for its service of connecting you with a counterparty, but the price for the stocks or bitcoins or whatever sold through the exchange is set by the trading partners, and the exchange also never takes on any of the investment risk, when you sell stocks, the counterparty gets the stocks, you get the money they paid, the exchange only does the bookkeeping.

I am not clear with taxes, but I will go and consult with a CPA.

Fortunately I did not keep everything in MtGox. If it turns out that I do owe $250k in taxes, I won't be in trouble.

Thanks.

> If it turns out that I do owe $250k in taxes, I won't be in trouble.

It sounds like you have little to complain about really. it sucks you lost half a million dollars, but if you're not upset about the possibility of losing a quarter more I imagine you're probably set for life as it is.

He initially posted a comment including

> [...] I really do feel sorry for Mark Karpeles.

So, it didn't seem that complaining was the main point.

Please, tell us more about how wealthy you are.

Lets see if I understand this (I am not in the US) - the bitcoins count as an asset, you sell these bitcoins for dollars at MtGox and at this point the tax is due regardless of whether you actually get the dollars out of MtGox?

So any time between you selling bitcoins and actually getting the cleared funds out of an exchange leaves you with the risk of a fairly serious tax liability if the exchange can't actually give you the kind of currency you can pay tax bills with...

[I've had very close calls with seemingly small matters introducing potentially horrific tax liabilities so I am a bit oversensitive to these things!]

Bingo. Works the same way for shares. Unless you're investing in a tax-advantaged account, if you have a $10k basis in a stock/fund and liquidate it for $20k, you just realized a $10k gain regardless of what subsequently happens to that $20k. Park it at your brokerage, plow it into a new stock, withdraw it and buy a vat of chocolate to go skinny dipping in, the IRS doesn't care, but it will have its cut.

Poorly timed realizations of capital gains used to routinely bankrupt people in the startup community, which is why that 83(b) election paperwork is actually really important.

> 83(b) election

Just a friendly reminder if someone is reading this - you have 30 days to claim 83(b) after you offer yourself shares in your business, otherwise you'll be in a heap of legal/tax issues that can be quite painful (i.e. cost a lot). Make sure you bring this up with your accountant/lawyer.

That's more or less the rule: the gain is taxed when it is "realized" which is roughly when it becomes "yours." It doesn't actually have to be cash in your hand (otherwise it would be quite easy to get around tax laws simply by trading assets on accounts without taking cash out). See: http://en.wikipedia.org/wiki/Realization_%28tax%29.

That's pretty much the same as the UK (and presumably everywhere else).

Pretty ghastly situation to be in if you do end up with a tax liability because of something like this.

It's not just that.

During the dotcom boom, many, many people faced tremendous tax liabilities because of ill-timed tax strategies. For example, they had stock options that were worth millions, but instead of selling them, they exercised them in order to hold them to get long term capital gains. So for example, they had options worth $10M, and they exercised them. They faced an immediate tax liability for $10M, but then the dotcom bust hit, and they lost all $10M, leaving them with $10M in taxes but nothing to pay it back with. I personally knew several coworkers that suffered this.

I believe it was only recently, over 10 years after the fact, that the IRS changed how they treated this so that people didn't go bankrupt from this.

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