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Comment by slg | Hacker News Reader

How so? These aren't new rules, just old rules that are newly applied to Bitcoin. As others have noted, this is how things work for employer issued stock. You only put yourself in danger if you are ignorant of the rules and don't take necessary precautions. If you are investing enough to open yourself up to a capital gains loss of more than $3000, you have no excuse to be ignorant.

Tax tip from a non-lawyer/non-accountant - Immediately sell a percentage of your newly mined bitcoin equal to your marginal tax rate. If your tax rate is 25%, sell 25% of your bitcoin as soon as it is mined. Those coins already belong to the US government. If you don't convert to cash immediately, you are basically leveraging the government's money to invest in Bitcoin speculation.

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> If you are investing enough to open yourself up to a capital gains loss of more than $3000, you have no excuse to be ignorant.

I disagree wholeheartedly. The tax code is needlessly complex. These are not laws of nature, they are arbitrary rules that have accumulated over time. Large capital gains happen naturally and it's silly for there to be gotchas like this.

When it comes to the IRS the prudent thing is to treat them as a force of nature.

...so avoid them and move as far away as possible?

The fact that "it's always been that way" is no refutation of the fact that "it's a problem" that you could lose money and yet still owe taxes as if you had gains because capital losses (hysteretically) saturate at $3000.

Capital gains (the losses) don't saturate at $3,000.

If I have accumulated $100,000 in capital losses over the prior ten years, I can wipe all of that out in one shot by producing a large enough capital gain in one year.

Capital losses saturate when applied to ordinary income.

It's not a problem if you immediately sell a portion of the coin to cover your tax liability. This is how employer stock programs work; when shares vest, some are immediately sold to cover the income tax. Then, if the shares decrease in value and are sold, you have a normal capital loss to deduct. If they increase in value and are sold, you have normal capital gains.

This is money, not "do whatever you want".

It doesn't seem fair or correct to compare Bitcoin to employer stock programs. The IRS seems to be doing this as well. Stock and stock options are generally granted in exchange for work performed for an employer so you have earned those amounts but Bitcoins are created through mining not given by an employer.

I agree with you completely.

That said, it doesn't matter what is and is not "fair" when dealing with the IRS. Choice A is to do what they tell you to do. Choice B is to fight them in court.

This thread assumes you want to go with Choice A and that you want to limit your liability if something goes wrong. Like most risk-management techniques, it does decrease your returns.

(Tax lawyers might have some better advice. Perhaps you can mine into a blind trust, and pay income taxes in 5 years on the current value of the coins? Dunno, not a tax expert or a laywer. I would consult with one if I was mining a lot of Bitcoin.)

So here's a question for everyone -- if I take a few hunks of wood, say worth 10 bucks, and use it to craft a musical instrument that can be sold for $100, does that count as $90 in income, even if I just leave it on a shelf?

Not at all. That is the way I was seeing it but gamblor956 explained the reasoning behind the IRS guidance in a response to one of my comments below:

"Bitcoins earned through mining are considered compensation for providing resources to the Bitcoin network to compute hashes verifying transactions."

When viewed as compensation then the treatment seems consistent with NSOs or barter transactions.

This would be a problem if bitcoins were illiquid. They are not, so it's easily solved. The IRS simple rule is to treat all income as incurring tax on the moment it is received.

They make allowances for things that are not liquid.

Is this a problem for anyone with money in MTGox?

i.e. would sales inside MTGox have counted towards this tax or isn't only with withdrawl/deposit into their ecosystem. I can imagine that if internal to MTGox interactions are treated this way then there are a lot of people who sustained a capital loss higher than that and had no option to withdrawl the money to pay taxes.

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