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.
That would be the end of bitcoin, since there's going to be some amount of taint going on almost all the time. Can't see it happening.