Quote from: DeathAndTaxes on March 26, 2014, 11:50:18 PM

Quote from: MinorError on March 26, 2014, 02:08:25 PM

Quote from: Foxpup on March 26, 2014, 01:28:33 PM

Quote from: MinorError on March 26, 2014, 09:56:55 AM

Also, as a consumer, if you have 2 bitcoins in your wallet one day (let's say for simplicity sake you bought the. For $1 each) and then you go buy a cup of coffee for $2, but at the time of your purchase, your bitcoins doubled in value and are now worth $4 so you only need to spend one of them. Now in the eyes the government you just PROFITED $1.

So? You did profit $1. You started with a bitcoin worth $1, and exchanged it for a cup of coffee worth $2. Unless your accountant is skilled at bistromathics, $2 - $1 = $1 profit.

Quote from: MinorError on March 26, 2014, 09:56:55 AM

For now at least, it is completely not feasible for any consumer to keep track of this. And you can say yes it's impossible to keep track of AND enforce....but the tax manwillnot give a fuck if they audit you. "You didn't keep diligent records on your bitcoin purchases and expenditures....fuck you, pay me."

Actually, it's impossible not to keep track of this. Your wallet software keeps track of all your transactions, so all you have to do is export it to a spreadsheet, email it to your accountant and let them figure it out. Simple (unless you're the accountant, but that's you get paid for).

Point taken, but this does not make using bitcoin easier or more attractive to either the consumer or the merchant. I thought bitcoin was supposed to eliminate the middleman? Seems to me it's becoming more complicated and therefore more middlemen/opportunities for middlemen will pop up. To be clear, I am NOT against the IRS taxing of bitcoin, but I think it should be treated as a foreign currency, not property.

Maybe you can clear this up for me. Let's go back to the coffee analogy. Let's say one day I buy a bitcoin for $1. The next day I but a bitcoin for $2 because the worth has doubled. I now have 2 bitcoins worth $4, one has doubled in value but the other still has the same worth as what I bought it for. If I buy a coffee for $2 with one bitcoin, how do we know which bitcoin I used to buy the coffee? They are all in the same wallet. So essentially I have two bitcoins...one of them I would owe capital gains tax of $1 if I used it to buy the $2 coffee. The other bitcoin I would owe no capital gains tax on if I used that bitcoin. How is that determined? And I'm not being a dick...I really just don't understand how that would work.

The IRS allows a number of methods to determine basis. The default option is FIFO.

So if you bought the following Bitcoins

10 BTC @ $10 ea
20 BTC @ $30 ea
50 BTC @ $60 ea
10 BTC @ $20 ea

and then you decide to sell some Bitcoins (either for fiat or in exchange for goods and services) and the exchange rate today is $50 per BTC then you simply start at the oldest coins.

If you sold 10 BTC it would be ($50-10)*10 = $400 capital gain.
If you sold 20 BTC it would be ($50-10)*10 + ($50-20)*10 = $700 capital gain.
If you sold 70 BTC it would be ($50-10)*10 + ($50-20)*20 + ($50-$60)*50 =$500 NET capital gain. Note the third batch is sold at a loss.

Understand capital losses would work exactly the same. Someone who bought BTC at the peak and then today decided to spend/sell them would get a tax break on the difference in value.

There are more complex forms of computing basis by tracking each individual coin but it doesn't NEED to be done. It is done by people who want to control their taxes (note it doesn't reduce your taxes but it allows you to control when you pay it). Hedgefunds and major companies will almost certainly be using coin control to pick the exact coins they sell/spend in order to exactly control their tax liability.

Thanks for clearing that up. Your explanation is thorough and really helped me grasp how to calculate expenditures in BTC. However, for the average person, this is just too much. You don't have to do any of this nonsense with dollars. So, I get how bitcoin could possibly survive as some sort of alternative to gold and then therefore exist in a commodities world, buying and selling futures, things like that....but becoming a viable currency....I don't see it.