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And how exactly can they know your bitcoin stash amount?
If your bitcoins are in an aggregated account like Coinbase (or the now-dead Mt. Gox), they'd probably put in bank-like reporting requirements that make the bank tell the IRS how much money you have if you have enough of it.
I'm not familiar with US tax, but isn't property tax in the US something like 200bp per year? If I understand this correctly this can be a huge blow for Bitcoin users in the US
The article talks about treating it as property vs currency. If the IRS chose currency, all realized[1] gains/losses on BTC get treated as ordinary income (lumped in with salary/wages) and get taxed at income rates. For most bitcoiners this would be around 15% if your salary is under $75,000/yr[2] and around 30% if more.
If the IRS chose property your tax rate depends on how long you held it (and some other things, it's subtle. But mostly how long you held it). If you bought and sold within a year it gets pushed into ordinary income as shown above. If you held it for over a year you pay 15%[3] on the gain.
Note that property transactions still kick into gear even if you didn't cash out into dollars. If you bought in at $10/BTC, get a new lambo[4] at $1000/BTC you pay the property tax (capital gains) on the bitcoin gain.
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[1] Gains from when you cash out (cash out price - buy in price)
[2] Upper middle class in most of the country, excepting the very big and trendy urban centers
[3] If you sold those collectible bit coins you'd probably pay 28% on the gain.
[4] So there's this guy, and he's got a brand new Lamborghini and he wants to put a mezuzah in it...
Earlier quoted context omitted.
My initial thought is that they'd be able to deduct the loss since the bitcoin is being treated as property and not currency. The trade of property for property is done at market value and any subsequent trade is as well, leading to a loss.
Wouldn't it be treated as depreciation, which typically has limits?
On one hand this makes sense. The IRS is trying to avoid early adopters from cashing out millions by purchasing goods to avoid paying capital gains tax. On the other hand, this is debilitating for people who want to use BTC for day to day transactions. Imagine the paperwork involved. <- opportunity for a wallet app which tracks gains/losses
You say it's debilitating, but you describe the precise solution. This is easy to code around if you don't care about preserving BTC anonymity.
It seems there are hypothetical scenarios where your taxes could exceed your net worth. If you mine a bitcoin worth $1000, and then it's value falls to $100, you could owe taxes on $1000, and the $900 capital loss would only carry forward to the next year.
So, the issue could be you have $1,000,000 of bitcoin, and you spend it. You now owe capital gains on the difference in price between when you bought and sold. Now, even if you have the $x00,000 in bitcoin to cover this, you better convert it fast (like simultaneously).
Or, never spend bitcoin directly -- convert enough to dollars to buy and pay tax, then spend the dollars.
It seems there are hypothetical scenarios where your taxes could exceed your net worth. If you mine a bitcoin worth $1000, and then it's value falls to $100, you could owe taxes on $1000, and the $900 capital loss would only carry forward to the next year.
This is pretty much what happened to a lot of people in the valley during the dot-com bubble pop - your stock losses could be carried forward until the heat death of the universe, but you paid on 100% of the (illusory) gains.
Maybe the rules are more thorough in reality than in this article, but how would the above statement apply to people who mine in a pool? Would only the person who hits the hash have to report the income? Would all of the miners?
Additionally, how does the IRS plan on enforcing any of this? It seems like an anonymous currency would be ripe with disregard for regulators.
Bitcoin owners say that IRS is an illusion.