Topic: ZGL wallet: achieve zero gain/loss for tax purposes with coin control - page 5. (Read 9466 times)

As Jonathan strode through the town he immediately noticed a
dignifi ed well-dressed man kneeling in the street, trying pain-
fully to walk. Yet, the man didn’t appear to be crippled – just short.
Jonathan offered a helping hand, but the man brushed him aside.

“No, thank you!” said the man, wincing in pain. “I can walk
okay. Using knees takes some getting used to.”

“You’re okay? But why don’t you get off your knees and walk
on your feet?”

“Ooooh!” moaned the man, squirming in discomfort. “It’s a
minor adjustment to the tax code.”

“The tax code?” repeated Jonathan. “What’s the tax code have
to do with walking?”

“Everything! Ow!” By now the man settled back on his heels,
resting from his torturous ordeal. He pulled a handkerchief from
his shirt pocket and mopped his brow. He shifted his balance to
massage one knee, then the other. Many layers of worn-out patches
had been sewn on at the knees. “The tax code,” he said, “has
recently been amended to level the fi eld for people of different
heights.”

“Level the fi eld?” asked Jonathan.

“Please stoop over so I don’t have to shout,” pleaded the man.

“That’s better. The Council of Lords decided that tall people have
too many advantages.”

“Advantages of tallness?”

“Oh, yes! Tall people are always favoured in hiring, promotion,
sports, entertainment, politics, and even marriage! Ooooh!” He
wrapped the handkerchief around the newest of many rips in his
grey pants. “So the Lords decided to level us with a stiff tallness
tax.”

“Tall people get taxed?” Jonathan glanced sideways and felt his
posture begin to droop.

“We’re taxed in direct proportion to our height.”

“Did anyone object?” asked Jonathan.

“Only those who refused to get on their knees,” the man said.

“Of course, we’ve allowed an exemption for politicians. We usually
vote tall! We like to look up to our leaders.”

Jonathan was dumbfounded. By now, he found himself slouching,
self-consciously trying to shrink. With both hands pointing down at
the man’s knees he questioned incredulously, “You’ll walk on your
knees just for a tax break?”

“Sure!” replied the man in a pained voice. “Our whole lives are
shaped to fi t the tax code. There are some who have even started to
crawl.”

“Wow! That must hurt!” Jonathan exclaimed.

“Yeah, but it hurts more not to. Ow! Only fools stand erect and
pay the higher taxes. So, if you want to act smart, get on your knees.
It’ll cost you plenty to stand tall.”

Jonathan looked around to see a handful of people walking on
their knees. One woman across the street was slowly crawling.
Many people scurried about half-crouching, their shoulders hunched
over. Only a few walked proudly erect, ignoring the sanctions
completely. Then Jonathan caught sight of three gentlemen across
the street sitting on a park bench. “Those three men,” indicated
Jonathan. “Why are they covering their eyes, ears, and mouths?”
“Oh, them? They’re practising,” replied the man as he leaned
forward on his knees to shuffl e along. “Getting ready for a new
series of tax proposals.”

This is an advantage of the ZGL wallet.  It performs automatic coin control to ensure zero capital gain/loss on day-to-day purchases, while keeping private records of all transactions.  



We need legal confirmation on this point as applied to ZGL.  Upon my preliminary research, I believe you are required to report the events where you realized a gain, and should keep private records of the ones that were a wash.  

On reddit, it was argued that filling 3,000 (ZGL) transactions would be considered a "frivolous filing" and that you would be subject to the $5,000 Frivolous Filing Fine.  


Once again: this is not legal advice.  IANAL.  

When you want to make specific identification you also need to make sure the specific identification of which one you are selling is done verifiably at the time you are selling it,  and be able to prove WHEN you decided and made the record which one you were selling, in order to provide adequate identification ---- typically, this would be done in writing with the broker you use to sell the capital asset.    For example:  to sell a specific lot of stock,  you must identify which basis lot(s) you are selling  before the settlement date of the trade.

It is fine, if you make the decision on the fly, and can prove you did.

Something the IRS says is not allowed though, is to go back to past transactions and re-characterize or re-assign buy/sell  pairs, or change your accounting method later, in order to reduce or defer tax  for  transactions before the decision.




In the US; there can also still be reporting requirement, even when there is a loss or  wash.   Further... if you 'borrow' some Bitcoins from a bank and spend them  -- that activity may be considered a constructive sale  of  Bitcoins  in your other wallet.

yea I think it moved after I got done with the first post.... 
Seriously this is some clever thinking on the part of the Op and I for one plan to look into this as things progress which I suspect will be rather quickly for the most part +5..

I'm glad you like the idea.

I don't see why ZGL support couldn't be added as a feature for Armory, or any other wallet for that matter.  It requires detailed coin control, but from the user perspective the complexity can remain entirely hidden.  

The wallet would need to have real-time BTC price data from a source that the IRS would deem reliable, and it would need a way to occasionally realize capital gains on "low cost basis" coins.  

I think the most effective way to realize a capital gain for tax purposes is to use a coin mixer.  You would send 1 BTC + fee into the mixer and receive a new 1 BTC coin sharing 0 taint with the original coin.  Since this is a new piece of property exchanged at arm's length, you are required to recognize the capital gain on this "low cost basis" coin you sent into the mixer at the moment of the exchange.  

This has the added benefit that it legitimizes the use of coin mixers (which some erroneously view as being only useful for illicit purposes).  By using coin mixers in the ZGL wallet, we can more accurately ensure compliance with US tax laws.

With a bank there is very little to do. With stocks (or commodities, etc.) trades, there are many transaction records. In fact the IRS doesn't really get involved, the sales are reported but it is up to you to come up with documentation for the cost basis and holding period. If they have some reason to doubt your accounting (i.e. someone who claims to lose money all the time yet is buying houses and cars) it may be challenged, and the records will need to be examined. Otherwise they never look at it. Most of the tax system in the US is based on voluntary compliance.

The zero-gain/loss wallet is amazing.
Even better, could a secure wallet like Armory add this feature?

My point is with traditional banking, there is very little work the IRS has to do. But with bitcoins, they're not happy if you hand them 40,000 pages of tx records.

I never said you gained income. But in the eyes of IRS, they dont have info from your banks to verify.

This goes back to my bitcoin "bank" theory. And gods know what coin validity leads us.

Also i would argue ZGL only use avg cost basis of address, it certainly helps but doesnt cover all scenarios.

If you purchase a $200k asset with bitcoins, then unless you paid more than $200k for those bitcoins, you've realized a capital gain and should declare it.  If you sell some stock and buy a $200k asset, then unless you paid more than $200k for those stocks, you've realized a capital gain and should declare it.

If this $200k asset is a yellow Lamborghini, then the dealership is required to file a report for AML purposes.  But they would file this report whether you paid using BitPay or with a bank wire. And what makes you think that buying an asset would lead to being "asked questions and audited" in the first place?

This has nothing to do with ZGL and very little to do with bitcoin. 

Gee didnt i already say ZGL is just book keeping? Why do you still insist i meant he gained $200k?

I'm not saying you MAKE $200k. But simply you purchase $200k asset. You will be asked questions and audited.

At least with traditional banking system, it will be very clear if the money you used was taxed or not. Now with bitcoin you will have issue if you cant prove thats your money or not and if there is capital gain or not.

You still don't understand. If you made $200K from bitcoin, you WILL have a capital gain, which you should report, and if you report a 200K capital gain and buy a Lambo, you should not have an issue with the IRS.

The only way ZGL avoids having a capital gain is if you BOUGHT a sufficient number of coins ABOVE the price at which you are selling them. If you did that, then you very likely have USD income you are supposed to be reporting.

Nothing you can do will prevent you from being audited. If you report a $200K capital gain, they may still audit you, in fact the more income you report the more likely you are to get audited, all else being equal.

That's a good point bananas.  If you spend your high-cost-basis coin, then you'd have a capital loss, and, at least in Canada, would not be subject to any reporting requirements.    

The ZGL concept makes this process more tax efficient (you have exactly zero gain/loss) and keeps better records in case you ever did want to prove it.  

If there is no capital gain, is there anything to claim?

You don't need a wallet for this.

You just tell IRS, i bought 1 btc for 500 and 1 for 1000.
Sold 1 for 800, but it was the 1000 one.

You misunderstood my example completely.

The IRS WILL audit when you claim you dont have any capital gain. I'm fully aware that the wallet client doesnt not eliminate tax, but helping you to avoid paying tx thro book keeping.

@ Seriouscoin: there are many ways you could handle the details.  The important part is that with sufficient coins purchased above and below the current market price, it is always possible to pick a suitable linear combination that would result in a ZGL coin.  

In a very simple case, the wallet would have two addresses: Address A where it stores coins purchased at (say) $200, and Address B where it stores coins purchased at (say) $1000.  The ZGL transaction would have at least 2 inputs (coins from A and B) and probably 3 outputs (coins to the merchant, and change back to A and B).  If you really want to be anal about taint, then you'd need to use two intermediary addresses, but this is provably redundant with a proper ZGL set-up so likely not required.  

In a more complex case, Addresses A and B could each be BIP32 deterministic address chains to improve privacy.  

Of course, you can have C, D, E, … as well.  All that matters is that your ZGL wallet knows the cost basis of any coins entering the ZGL section and the current market price: with this information it can create a ZGL coin.  By default, the wallet would probably assume that the cost basis of coins entering do so at the current market price unless you specified otherwise.  

Another thing I realized, is that you don't have to convert to USD to recognize a gain to "recharge" your high-cost basis coins.  Just like you aren't allowed to play tricks to force a capital loss, you aren't allowed to play tricks to avoid recognizing a capital gain.  This means that an automated swap with an arm's length 3rd party of your "low cost basis" bitcoins, into litecoins, and back into bitcoins, would be a "taxable event," giving you a new batch of "high cost basis" coins that the ZGL wallet could use.  

Of course, this ZGL wallet doesn't solve every hassle.  For instance, if the bitcoin price keeps making all time highs, you'd likely keep running out of "high cost basis coins" and be forced to recognize a greater number of "taxable events."


The existence of ZGL coins means that it is possible that a user could make daily bitcoin purchases without ever recognizing a capital gain or loss.  

But the problem is I have 2 inputs each with vastly different basis, and only one output.  How do I determine how much of the first input was spent and how much of the second input was spent?  Clearly the new output will have to have a new basis that is somehow a combination of the two original inputs.

I suppose it would be treated a bit like if I sold two previous separate stock purchases and then immediately made a new single purchase of the stock at the current price?

It doesn't work that way. If you made the money by holding btc, you will have capital gains, maybe not on that transaction, but on some other transaction. Reread the OP. It explains that this does not eliminate capital gains, it just groups them into a smaller number of larger transactions instead of throwing off a tiny bit of gain every time you buy coffee.

If you made the money some other way, you would have documentation for that income and the IRS doesn't care that you are buying a Lambo.

The only case where the IRS cares that you are buying a Lambo is when you don't have the documented income to justify buying one. The ZGL wallet has nothing to do with that at all.

You can't reset your basis (or holding period) by trading with yourself, so any change outputs would retain their original basis. Moving your own asset around, for example moving a stock between certificate form and book entry form, does not change your basis.

The outputs that represent spending would have a new basis (to the recipient), and would be a sale by you.

Of course, I am not the IRS. They might see it differently.

IRS: " you're telling me you just bought a Lambo without having to pay any capital gain tax? "

Holiday: " yes sir, here is my record to prove it"   * hanging the IRS 40,000 pages of tx records *

You think they would not just slap you with a penalty and fine, and let you spend your time and money thro court process?