I wasn't aware of that. I assume that only goes one level deep. In other words, if I have stolen coins (.5 BTC) and normal coins (.5 BTC)
and I send that to another address of mine, and then send you 1 BTC, you can't separate out the stolen coins from the normal coins.
that is true indeed.
You can separate them until the two are spent together, since they are separate outputs as explained in the last few posts. Once they are spent together, they can't be separated.
What I expect will likely happen in a system with widespread regulation and blacklist once they are mixed (spent) together is that you would then have to send the 1.0 to some government (or other third party service) address, along with your identifying information, and you would get the 0.5 clean back.
This is a pretty good thing to know especially if a thief tries to taint your bitcoins with small micro amounts. If you send it to an exchange where it combines the tainted coins with your bitcoins then now the coins are indistinguishable.
I can see a mechanism that payment processors may (with a grain of salt type of "may") just take the portion that is tainted and send it off to a government wallet and the rest would be "all clear" to use.
But there are so many levels of this topic that I'm unsure what the implications would be.
Too many unknowns