Quote from: realnowhereman on June 07, 2011, 08:31:10 AM

Let's say you are a tax paying citizen, and have no wish to hide your earnings. Let's also say that Bitcoins are not threatened by government, but are allowed to peacefully coexist.

Dealing with Bitcoins for tax purposes means that any profits you make from them are liable for capital gains tax. However, that tax is only due at the moment you convert them back into your native currency.

I have two questions for those who know more about tax than I do:

If I convert BTC to USD on Monday, then that same USD to BTC on Tuesday, is capital gains tax still due? If it is, then would it be better to wrap all one's BTC transactions in a holding company, so that profit becomes the element that is taxed?
If the answer to the first question is "no", then what stops me converting all my gross income to Bitcoins and declaring no net income? I can then drip my Bitcoins back to native currency (if I even have to) as I need to and in this way use Bitcoins to smooth my tax bill over the lean years and fat years.

These are hypothetical, and probably based on a flawed understanding of taxation. I have only the familiarity with taxation that your average non-investing citizen would (i.e. I've never paid capital gains tax because I've never made a capital gain).

1. If I convert BTC to USD on Monday, then that same USD to BTC on Tuesday, is capital gains tax still due? If it is, then would it be better to wrap all one's BTC transactions in a holding company, so that profit becomes the element that is taxed?

If you sell BTC and buy USD, then you have a capital gain. If you use those same USD to buy bitcoin the next day, it doesn't change the amount of capital gain for the previous transaction. The only thing that could decrease that gain would be a capital loss on another similar transaction. It does not matter if you have a holding company or not. At the end of the year, you sum your capital gains and losses, and only pay the tax on the net. (or take a deduction if you have a net loss)

2. If the answer to the first question is "no", then what stops me converting all my gross income to Bitcoins and declaring no net income? I can then drip my Bitcoins back to native currency (if I even have to) as I need to and in this way use Bitcoins to smooth my tax bill over the lean years and fat years.

You are misunderstanding capital gains and net income. Whenever you get paid, whether it is in USD, bitcoins, chickens, or gold; you have income. Regardless of whether you transfer that income to another form of money or spend it on hookers and blow. For example, if you earn $1000 at work, then come home and buy $1000 worth of bitcoins, you still have $1000 income. This is just the same as if you came home and spent the $1000 on stock shares or investment grade beeny-babies.

Now, assuming that you convert 100% of your income into bitcoins, there would be no capital gains until you sell the bitcoins, either for USD or another currency. However, you would still have net income.

I am an accountant in the US, but the principles are the same in the UK.