I probably dont remember correctly,
but by Coin Set X, you mean tx X and not Wallet or Address X right?
Topic: ZGL wallet: achieve zero gain/loss for tax purposes with coin control - page 7. (Read 9444 times)
March 26, 2014, 03:10:10 AM
March 26, 2014, 02:26:31 AM
The recent IRS guidance changes no laws regarding the tax treatment of bitcoin; however, it gives clarity to individuals and businesses. I believe this clarity is necessary in order to push forward adoption.
Reading user comments, I get the sense that some people are concerned about gain/loss accounting paperwork for day-to-day purchases should they choose to report to the IRS. Barry Silbert mentioned that automated wallet software is ready and the owner of https://bitcointaxes.info has been promoting his website on the forum. So we already have this and more will soon come.
But Holliday just said something that blew my mind:
Because of this property of bitcoin, it is possible to design a wallet that automatically organizes your day-to-day spending such that the capital gain is identically zero for each and every purchase that you make:
If you have a sufficient amount of coins acquired both above and below the current bitcoin price, then it is always possible to create a new coin that is a linear combination of your existing coins that has a gain/loss for tax purposes of identically zero.
Assume the current price of bitcoin is $600, and assume that you control Coin Set A acquired at $200 (gain of $400) and Coin Set B acquired at $1200 (loss of $600). If you wish to purchase a coffee for $2 and not deal with gain/loss accounting, your wallet can automatically select a suitable combination from the two sets of coins such that the present value is $2 (to pay for the coffee) and the gain/loss is identically zero (to simplify your taxes).
In[1120]:= Solve[{400 a - 600 b == 0, 600. (a + b) == 2}, {a, b}]
Out[1120]= {{a -> 0.002, b -> 0.00133333}}
Provided your wallet has real-time BTC price data from a reliable source, and provided your wallet has knowledge of your cost basis, it would know to purchase your coffee using 2.0 mBTC from Coin Set A and 1.33333 mBTC from Coin Set B. In other words it would forge a ZGL (zero gain/loss) coin specially for this purchase.
ZGL coins are created in real time (they are "current") such that at the moment of creation (spending) your gain/loss is identically zero.
The ZGL wallet does not allow you to avoid incurring capital gains. Instead, it allows you to defer realizing capital gains over a long sequence of day-to-day transactions, effectively lumping the gain/loss in a much smaller number of events where a gain or loss was realized (coin swaps). This reduces paperwork for both the filer and the IRS, and helps to preserve the privacy of your day-to-day transactions. Its simplicity makes it easier to comply with US tax law, increasing expected revenue for the IRS.
The way these "lump sum" capital gains work is as follows: eventually, if the bitcoin price continues to rise, your wallet will run out of "high cost basis" coins and will no longer be able of forge ZGL coins. I think the most effective way to realize a capital gain for tax purposes is to use a coin swap service (also known as a mixer). Your wallet 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 just swapped. Your ZGL wallet would automatically initiate these swaps when required, logging all pertinent tax data to ensure compliance with US tax laws. When filing your taxes, you would report each of these swap events where you realized a capital gain or loss. For example, you may report 12 such events if the price over the year was rapidly increasing, and perhaps 0 such events in a declining market.
From my preliminary research, it seems the ZGL concept is on solid legal grounds. However, there is one unresolved question: is there a requirement to report the ZGL transactions that did not result in a capital gain, or is it sufficient to report only the transactions where a gain was realized but keep private records such that you could prove your claims if audited? I have posted a poll question to get us thinking about this.
Reading user comments, I get the sense that some people are concerned about gain/loss accounting paperwork for day-to-day purchases should they choose to report to the IRS. Barry Silbert mentioned that automated wallet software is ready and the owner of https://bitcointaxes.info has been promoting his website on the forum. So we already have this and more will soon come.
But Holliday just said something that blew my mind:
Quote
Quote
…FIFO…LIFO...debate about how to pick which coin to spend for taxes purpose…LIFO…FIFO…
Of course you can pick if you are using a wallet with coin control.Because of this property of bitcoin, it is possible to design a wallet that automatically organizes your day-to-day spending such that the capital gain is identically zero for each and every purchase that you make:
If you have a sufficient amount of coins acquired both above and below the current bitcoin price, then it is always possible to create a new coin that is a linear combination of your existing coins that has a gain/loss for tax purposes of identically zero.
Assume the current price of bitcoin is $600, and assume that you control Coin Set A acquired at $200 (gain of $400) and Coin Set B acquired at $1200 (loss of $600). If you wish to purchase a coffee for $2 and not deal with gain/loss accounting, your wallet can automatically select a suitable combination from the two sets of coins such that the present value is $2 (to pay for the coffee) and the gain/loss is identically zero (to simplify your taxes).
In[1120]:= Solve[{400 a - 600 b == 0, 600. (a + b) == 2}, {a, b}]
Out[1120]= {{a -> 0.002, b -> 0.00133333}}
Provided your wallet has real-time BTC price data from a reliable source, and provided your wallet has knowledge of your cost basis, it would know to purchase your coffee using 2.0 mBTC from Coin Set A and 1.33333 mBTC from Coin Set B. In other words it would forge a ZGL (zero gain/loss) coin specially for this purchase.
ZGL coins are created in real time (they are "current") such that at the moment of creation (spending) your gain/loss is identically zero.
The ZGL wallet does not allow you to avoid incurring capital gains. Instead, it allows you to defer realizing capital gains over a long sequence of day-to-day transactions, effectively lumping the gain/loss in a much smaller number of events where a gain or loss was realized (coin swaps). This reduces paperwork for both the filer and the IRS, and helps to preserve the privacy of your day-to-day transactions. Its simplicity makes it easier to comply with US tax law, increasing expected revenue for the IRS.
The way these "lump sum" capital gains work is as follows: eventually, if the bitcoin price continues to rise, your wallet will run out of "high cost basis" coins and will no longer be able of forge ZGL coins. I think the most effective way to realize a capital gain for tax purposes is to use a coin swap service (also known as a mixer). Your wallet 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 just swapped. Your ZGL wallet would automatically initiate these swaps when required, logging all pertinent tax data to ensure compliance with US tax laws. When filing your taxes, you would report each of these swap events where you realized a capital gain or loss. For example, you may report 12 such events if the price over the year was rapidly increasing, and perhaps 0 such events in a declining market.
From my preliminary research, it seems the ZGL concept is on solid legal grounds. However, there is one unresolved question: is there a requirement to report the ZGL transactions that did not result in a capital gain, or is it sufficient to report only the transactions where a gain was realized but keep private records such that you could prove your claims if audited? I have posted a poll question to get us thinking about this.
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