Tom Lee Predicts Cyrptocurrency Market Outflow to Fiat Currency Before Tax Day • Hacker News Board

Re: Tom Lee Predicts Cyrptocurrency Market Outflow to Fiat Currency Before Tax Day

#41

Post by [deleted] » Fri, Apr 06, 2018, 5:15 PM UTC

dustingetz wrote: post #39

antisthenes wrote: post #22

Earlier quoted context omitted.

That makes NO sense at all and I continue to be surprised at the fundamental misunderstanding of the US tax system by techies (it's really not that complicated for individuals). You pay tax on the GAINS, not on the value of the trade. If he owes the IRS $50k, it means he has a realized gain of ~$333,000. Where did that money go? The only possibility here is that he took $330,000 and reinvested ALL of it into 'altcoin…

1/ Short term, so 50k tax is 150k gains 2/ Your possibility is correct - the IRS computes tax on USD-equivalent as of trades completed Dec 31; but the USD price crashed in 2018'Q1, and he can't pay his tax bill in crypto. He can deduct the USD-equivalent losses next year but only against capital gains, not his W2 income, and the tax is due now in USD.

[deleted]

Re: Tom Lee Predicts Cyrptocurrency Market Outflow to Fiat Currency Before Tax Day

#42

Post by jaycroft » Fri, Apr 06, 2018, 5:15 PM UTC

antisthenes wrote: post #22

personlurking wrote: post #13

Someone used a throwaway account to share their recent personal experience on this matter at /personalfinance, titled "I just discovered that I owe the IRS $50k that I don't have, because I traded in cryptos." Original: https://www.reddit.com/r/personalfinance/comments/84huks/i_j... Update: https://www.reddit.com/r/personalfinance/comments/89ipyu/upd... They removed the story inside their update, but Google cached it…

That makes NO sense at all and I continue to be surprised at the fundamental misunderstanding of the US tax system by techies (it's really not that complicated for individuals). You pay tax on the GAINS, not on the value of the trade. If he owes the IRS $50k, it means he has a realized gain of ~$333,000. Where did that money go? The only possibility here is that he took $330,000 and reinvested ALL of it into 'altcoin…

How do you get a $50k tax bill implies realized gain of 330k? OP states $120k gain on top of 47k salary. To be generous, i'll first assume that he has had his salary withheld at the correct rates. Federally he will owe 32253 in additional tax (short term so treated as income, and marginally falls into a mix of 25 and 28% brackets). Must be that he also is in a high tax state. I understand California the best (which also might be the highest tax state). There, the gain would also be treated as regular income, and taxpayer would owe an additional 10458. So, 42700 in taxes. Running the numbers backward to find out income from tax liability is a little trickier, but it comes out to nowhere near 33000.

So perhaps the tax bill was not quite 50k, but it's certainly the right ballpark from what I can see. Very possible that he also under-withheld during the year, or had a higher gain, or his tax bill was a little lower, or had other issues that we don't know about. In any case, not what I'd call "makes NO sense at all" or indicative of a current fundamental misunderstanding of the tax system (saying nothing about his misunderstanding prior to the events).

Now, the bigger question I have is did this happen on a foreign exchange? Binance, bitfinex, etc? And if it did, has OP let the treasury know about his foreign accounts? FBAR is a real thing with huge penalties for non reporting and lying.

https://www.irs.gov/businesses/small-businesses-self-employe...

Re: Tom Lee Predicts Cyrptocurrency Market Outflow to Fiat Currency Before Tax Day

#43

Post by smacktoward » Fri, Apr 06, 2018, 5:15 PM UTC

User23 wrote: post #8

abbieseide wrote: post #3

Earlier quoted context omitted.

A decrease of $20 for every $1 pulled from the market seems a little steep...

Or maybe it's not steep enough. A forced-sell situation doesn't leave much pricing power. The classical Roman fire-sale is the archetypical case. Also I'm sure many taxpayers will elect not to pay the capital gains before tax day, deciding instead to ride out interest and penalties in favor for being able to sell at a higher price. This could get interesting. I would love to see an after the fact analysis that deduce…

For those who don't get the reference to "the classical Roman fire-sale": https://en.wikipedia.org/wiki/History_of_firefighting#Rome

> The first ever Roman fire brigade of which we have any substantial history was created by Marcus Licinius Crassus... One of his most lucrative schemes took advantage of the fact that Rome had no fire department. Crassus filled this void by creating his own brigade—500 men strong—which rushed to burning buildings at the first cry of alarm. Upon arriving at the scene, however, the fire fighters did nothing while their employer bargained over the price of their services with the distressed property owner. If Crassus could not negotiate a satisfactory price, his men simply let the structure burn to the ground, after which he offered to purchase it for a fraction of its value.

Through this and other schemes, Crassus became one of the richest men in Rome. He used this fortune to amass substantial political power, eventually rising to the peak of power in the Roman system by joining the First Triumvirate (https://en.wikipedia.org/wiki/First_Triumvirate) with Pompey the Great and and ambitious young go-getter named Julius Caesar.

Re: Tom Lee Predicts Cyrptocurrency Market Outflow to Fiat Currency Before Tax Day

#44

Post by jaycroft » Fri, Apr 06, 2018, 5:17 PM UTC

daxorid wrote: post #34

antisthenes wrote: post #22

Earlier quoted context omitted.

That makes NO sense at all and I continue to be surprised at the fundamental misunderstanding of the US tax system by techies (it's really not that complicated for individuals). You pay tax on the GAINS, not on the value of the trade. If he owes the IRS $50k, it means he has a realized gain of ~$333,000. Where did that money go? The only possibility here is that he took $330,000 and reinvested ALL of it into 'altcoin…

> it means he has a realized gain of ~$333,000. Where did that money go? Generally, the way this works is this: 1. You realize your gain in 2017 by exchanging for, say, ETH, at BTC $19k. 2. BTC falls to $7k, and ETH falls in accordance due to arbitrage desks. 3. You owe taxes on the 2017 gain. You could liquidate your much smaller ETH position in 2018, but you could only deduct $10k per year for 10 years on the large…

Your point 3 is actually a little worse - the carry forward loss deduction from regular income is capped at $3k per year (but unlimited against both future short term and long term capital gains).

Re: Tom Lee Predicts Cyrptocurrency Market Outflow to Fiat Currency Before Tax Day

#45

Post by dustingetz » Fri, Apr 06, 2018, 5:18 PM UTC

dustingetz wrote: post #39

antisthenes wrote: post #22

Earlier quoted context omitted.

That makes NO sense at all and I continue to be surprised at the fundamental misunderstanding of the US tax system by techies (it's really not that complicated for individuals). You pay tax on the GAINS, not on the value of the trade. If he owes the IRS $50k, it means he has a realized gain of ~$333,000. Where did that money go? The only possibility here is that he took $330,000 and reinvested ALL of it into 'altcoin…

1/ Short term, so 50k tax is 150k gains 2/ Your possibility is correct - the IRS computes tax on USD-equivalent as of trades completed Dec 31; but the USD price crashed in 2018'Q1, and he can't pay his tax bill in crypto. He can deduct the USD-equivalent losses next year but only against capital gains, not his W2 income, and the tax is due now in USD.

Continued: As a though experiment: lets say 100% of crypto traders owe 1/3 of their gains (obviously not real). There is nowhere close to enough USD liquidity to handle a sell like that and it would liquidate everyone and still leave them unable to pay their USD tax bill.

The apparent USD liquidity is mostly actually Tether liquidity. There is not actual USD liquidity – nobody is buying huge amounts of BTC who doesn't already have it – so we don't even have pricing data on what the USD price is, all that data has been corrupted by systemic exposure to Tether.

Obviously the thought experiment is totally absurd but it raises questions like, what exactly is the tipping point and how much liquidity is there actually?

Re: Tom Lee Predicts Cyrptocurrency Market Outflow to Fiat Currency Before Tax Day

#46

Post by thinkmassive » Fri, Apr 06, 2018, 5:18 PM UTC

_0ffh wrote: post #12

How come the wording? Cryptocurrencies are inherently no less fiat currencies than government mandated ones.

Most of us define “fiat” similar to this: 1 : a command or act of will that creates something without or as if without further effort According to the Bible, the world was created by fiat. 2 : an authoritative determination : dictate a fiat of conscience 3 : an authoritative or arbitrary order : decree government by fiat

https://www.merriam-webster.com/dictionary/fiat

Most cryptocurrencies have value because of a mutual belief that they have value, but the overwhelming majority have not been mandated for use by some authority yet.

Re: Tom Lee Predicts Cyrptocurrency Market Outflow to Fiat Currency Before Tax Day

#47

Post by dustingetz » Fri, Apr 06, 2018, 5:20 PM UTC

tom_ wrote: post #36

antisthenes wrote: post #22

Earlier quoted context omitted.

That makes NO sense at all and I continue to be surprised at the fundamental misunderstanding of the US tax system by techies (it's really not that complicated for individuals). You pay tax on the GAINS, not on the value of the trade. If he owes the IRS $50k, it means he has a realized gain of ~$333,000. Where did that money go? The only possibility here is that he took $330,000 and reinvested ALL of it into 'altcoin…

Short-term CGT in the US is around the 40-50% mark, something like that. Our hero bought 8 BTC for $7,200, or so goes their story, then sold it for $120,000-worth of altcoins, making a taxable gain of $113,800. 45% of that taxable gain = ~$50,000.

It is taxed as regular income so 10-40%

Re: Tom Lee Predicts Cyrptocurrency Market Outflow to Fiat Currency Before Tax Day

#48

Post by antisthenes » Fri, Apr 06, 2018, 5:20 PM UTC

jaycroft wrote: post #42

antisthenes wrote: post #22

Earlier quoted context omitted.

That makes NO sense at all and I continue to be surprised at the fundamental misunderstanding of the US tax system by techies (it's really not that complicated for individuals). You pay tax on the GAINS, not on the value of the trade. If he owes the IRS $50k, it means he has a realized gain of ~$333,000. Where did that money go? The only possibility here is that he took $330,000 and reinvested ALL of it into 'altcoin…

How do you get a $50k tax bill implies realized gain of 330k? OP states $120k gain on top of 47k salary. To be generous, i'll first assume that he has had his salary withheld at the correct rates. Federally he will owe 32253 in additional tax (short term so treated as income, and marginally falls into a mix of 25 and 28% brackets). Must be that he also is in a high tax state. I understand California the best (which a…

If it was all short term capital gains, then yes, but he would still have realized gains way over what the tax bill is. That wasn't specified in the post though. Usually capital gains refer to something that's taxed at a lower rate for assets held for more than 1 year, 15% (or 20% if you're in a higher bracket)

How tax/financial-illiterate do you have to be to pour ALL of your realized gains back into altcoins going into the next year?

Re: Tom Lee Predicts Cyrptocurrency Market Outflow to Fiat Currency Before Tax Day

#49

Post by thinkmassive » Fri, Apr 06, 2018, 5:21 PM UTC

SideburnsOfDoom wrote: post #40

twblalock wrote: post #38

Earlier quoted context omitted.

Fiat in the case of currency involves more than "someone says so". It generally means that a government makes a law or a regulation that says the money is legal tender, and also that the value of the currency is derived solely from that law and is not "backed" by any physical goods. No government or other monetary authority has said that cryptocurrencies are legal tender in their country, or has required that anythin…

I have already read the wikipedia page, and it says " often by government regulation." So not necessarily so then. See here for an example of non-governmental fiat monies: https://en.wikipedia.org/wiki/Company_scrip of course "because someone says so" is an oversimplification of fiat; they need to do so believably which is why the United States of America has the resources to do it but I would not be able to. Company…

> Proof of work is valuable in itself?

This is actually an interesting way to analyze it. The trust created by PoW apparently does create value to many people.

Re: Tom Lee Predicts Cyrptocurrency Market Outflow to Fiat Currency Before Tax Day

#50

Post by SideburnsOfDoom » Fri, Apr 06, 2018, 5:21 PM UTC

thinkmassive wrote: post #46

_0ffh wrote: post #12

How come the wording? Cryptocurrencies are inherently no less fiat currencies than government mandated ones.

Most of us define “fiat” similar to this: 1 : a command or act of will that creates something without or as if without further effort According to the Bible, the world was created by fiat. 2 : an authoritative determination : dictate a fiat of conscience 3 : an authoritative or arbitrary order : decree government by fiat https://www.merriam-webster.com/dictionary/fiat Most cryptocurrencies have value because of a mut…

> Most cryptocurrencies have value because of a mutual belief that they have value

So, "they have value because we agree that they have value. Because we say so".

That's exactly "Fiat".