Do you think Bitcoin is a safe store of value?

[rkbabang]

Nobody enjoys paying taxes but nearly everyone enjoys the benefits of living in a developed economy (except those who are deluded into thinking things aren't GREAT here (insert your own country for "here").

 

People who invest with tax avoidance as their primary focus will wave flags at parades expressing faux appreciation for their country.

 

Fire away!

 

I don't wave flags or have any love for any country, but I also don't try to avoid taxes.  I follow the laws in the place I choose to live even though I disagree with many of them (taxes included).

 

The point of the last few posts isn't that taxes are good or bad it was that some people are claiming that the IRS going after crypto investors for taxes is a part of a bear case against crypto-investing.  But the IRS wants its cut in absolutely everything you invest in, so how is that a negative only for crypto-currencies?  It is a negative for people who choose to break the law (and get caught), but it has no effect on people who keep good records and pay their capital gains same as they would with stocks, or bonds, or real estate, or gold, or diamonds, or cattle futures, or anything else people invest in.

 

It's bearish for cryptocurrencies because equity traders know they have to pay taxes on gains so they plan for the continual liquidity needs of taxes. Many bitcoin traders are anarchists who laughingly believe that the US government is simultaneously a tyrannical state and incompetent/incapable at collecting taxes, so they haven't planned to pay taxes on their gains. This is clear from how few coinbase accounts pay any taxes on their bitcoin gains. Further, the IRS will tax bitcoin realized gains as ordinary income, creating a larger liquidity needs than securities which pay lower cap gains rate. If the IRS comes after $10B in bitcoin related taxes, that will create a large amount of selling pressure on bitcoin.

 

Where did you get that the IRS will tax it as ordinary income?  What I understood was that it was treating it as an asset (same as stocks) so it would be a capital gain.  Only mining income would be treated as an regular income.

 

EDIT:  This link explains what I have read in multiple other places:  https://www.investopedia.com/articles/investing/040515/are-there-taxes-bitcoins.asp

 

"every US taxpayer is required to keep a record of all buying, selling of, investing in, or using bitcoins to pay for goods or services (which the IRS considers bartering). Because bitcoins are being treated as assets, if you use bitcoins for simple transactions such as buying groceries at a supermarket you will incur a capital gains tax (either long-term or short-term depending on how long you have been holding the bitcoins). When it comes to bitcoins the following are different transactions that will lead to taxes:

 

Selling bitcoins, mined personally, to a third party.

Selling bitcoins, bought from someone, to a third party.

Using bitcoins, which one may have mined, to buy goods or services.

Using bitcoins, bought from someone, to buy goods or services.

 

Scenarios one and three entail mining bitcoins, using personal resources, and selling them to someone for cash or equivalent value in goods and services. The value received from giving up the bitcoins is taxed as personal or business income after deducting any expenses incurred in the process of mining. Such expenses may include the cost electricity or the computer hardware used in the mining of bitcoins. Thus, if one is able to mine 10 bitcoins and sell them for $250 each. You have to report the $2500 as taxable income before any deductible expenses.

 

Scenarios two and four are more like investments in an asset. Let’s say bitcoins were bought for $200 each, and one bitcoin was given up in exchange of $300 or equivalent value in goods. The investor has gained $100 on one bitcoin over the holding period and will attract capital gains tax (long-term if held for more than one year, otherwise short-term) on $100 earned by selling/exchanging the bitcoin."

 

 

[rkbabang]

"virtual currency is treated as property for U.S. federal tax purposes"

https://www.irs.gov/newsroom/irs-virtual-currency-guidance

 

[SharperDingaan]

Agreed that if trading is how you make your living - the FX gain/loss every time you buy/sell a Bitcoin is part of taxable income.

 

But if you're not a trader - this is no different to buying Euro (Bitcoin) to spend when visiting Europe, and selling back whatever Euro you have left on your return 'home'. You aren't taxed on the FX gain/loss as the Euro (Bitcoin) you bought, was for personal use. There is also no stipulation that you have to buy the foreign currency (Bitcoin), immediately before you intend to spend it.  No taxes.

 

Nothing prevents a Bitcoin held for investment, from being held by an controlling entity domiciled in a off-shore tax haven. And nothing prevents that off-shore entity, from being owned by an entity that exists purely in cyberspace - it's what we pay tax accountants to do. No taxes. 

 

Because Bitcoin has dual use (its both currency AND a asset class) it's hard to make the case for taxing it. 

 

SD

 

 

 

[rb]

Agreed that if trading is how you make your living - the FX gain/loss every time you buy/sell a Bitcoin is part of taxable income.

 

But if you're not a trader - this is no different to buying Euro (Bitcoin) to spend when visiting Europe, and selling back whatever Euro you have left on your return 'home'. You aren't taxed on the FX gain/loss as the Euro (Bitcoin) you bought, was for personal use. There is also no stipulation that you have to buy the foreign currency (Bitcoin), immediately before you intend to spend it.  No taxes.

 

Nothing prevents a Bitcoin held for investment, from being held by an controlling entity domiciled in a off-shore tax haven. And nothing prevents that off-shore entity, from being owned by an entity that exists purely in cyberspace - it's what we pay tax accountants to do. No taxes. 

 

SD

SD, as I understand it you are a Canadian so I will address this for the Canadian point of view.

 

Firstly, you are wrong that you are not taxed on FX for personal use. FX is taxed in Canada. It doesn't matter if it's for personal use or not. The CRA is not unclear about this. There is a small exemption. FX gains and losses under $200 CAD do not have to be reported - this intended to exempt most of the personal FX use. If the gain/loss the exceeds $200 CAD the whole gain/loss has to be reported and is taxed. It can be taxed as capital gain or income depending on the circumstance.

 

Secondly, crypto currency in Canada is considered a security not a currency. So no $200 exemption as for FX. You need to report income/losses like you would for a stock.

 

Thirdly, the offshore scenario you describe is impossible. There is no such thing as an entity that exists purely in cyberspace. Every legal entity exists in a legal and geographic jurisdiction. Furthermore Canada has very strict rules about offshore money. You need to have legitimate offshore command and control over the funds. That's expensive and you cannot have anything at all to be with the money, otherwise it becomes very taxable. Of course, you could do x,y, and z and hope that the government doesn't find out. But that doesn't fall into the legal bucket and is another cup of tea.

[SharperDingaan]

Agreed that if trading is how you make your living - the FX gain/loss every time you buy/sell a Bitcoin is part of taxable income.

 

But if you're not a trader - this is no different to buying Euro (Bitcoin) to spend when visiting Europe, and selling back whatever Euro you have left on your return 'home'. You aren't taxed on the FX gain/loss as the Euro (Bitcoin) you bought, was for personal use. There is also no stipulation that you have to buy the foreign currency (Bitcoin), immediately before you intend to spend it.  No taxes.

 

Nothing prevents a Bitcoin held for investment, from being held by an controlling entity domiciled in a off-shore tax haven. And nothing prevents that off-shore entity, from being owned by an entity that exists purely in cyberspace - it's what we pay tax accountants to do. No taxes. 

 

SD

SD, as I understand it you are a Canadian so I will address this for the Canadian point of view.

 

Firstly, you are wrong that you are not taxed on FX for personal use. FX is taxed in Canada. It doesn't matter if it's for personal use or not. The CRA is not unclear about this. There is a small exemption. FX gains and losses under $200 CAD do not have to be reported - this intended to exempt most of the personal FX use. If the gain/loss the exceeds $200 CAD the whole gain/loss has to be reported and is taxed. It can be taxed as capital gain or income depending on the circumstance.

 

Secondly, crypto currency in Canada is considered a security not a currency. So no $200 exemption as for FX. You need to report income/losses like you would for a stock.

 

Thirdly, the offshore scenario you describe is impossible. There is no such thing as an entity that exists purely in cyberspace. Every legal entity exists in a legal and geographic jurisdiction. Furthermore Canada has very strict rules about offshore money. You need to have legitimate offshore command and control over the funds. That's expensive and you cannot have anything at all to be with the money, otherwise it becomes very taxable. Of course, you could do x,y, and z and hope that the government doesn't find out. But that doesn't fall into the legal bucket and is another cup of tea.

 

Thanks for the update. It's been a while since I last went through the tax code.

 

SD

 

 

[Cardboard]

It is clearly laid out in every General Tax Guide every year and also in the capital gains schedule. There is also a clear heading at the 2nd page of your tax return about holding more than $100,000 overseas. You don't do your taxes yourself nor read what you sign?

 

So no, you don't have to review the tax code...  ::)

 

Cardboard

[DTEJD1997]

Hey all:

 

I think that there very well might be "shenanigans" going on with recent bitcoin price movement:

 

I know a couple of hapless dudes who have had their computers locked up with ransomware.  The hijackers were demanding payment in bitcoin.  One person paid it, the other did not...  That is certainly driving demand to some degree.  Is is 1% or 20% of bitcoin demand?  Hard to say....

 

I also wonder how much/how vulnerable bitcoin is frontrunning/promotion/churning.  That is, a group of scam artists buy up some bitcoin....then they start trading among themselves, always agreeing to buy it higher.  Thus, their false demand/trading is moving the price higher.  They agree to do this for a set period of time, drive the price up, then quickly liquidate.

 

I also know there is some demand from people in China.  They are trying to move their assets OUT of China.  China has capital controls to some degree.  Bitcoin is an effective way to get $$$$ out of China, without the government knowing.

 

How much other demand is coming from Zimbabwe, Venezuela, Syria, Yemen, other trouble spots?  Bitcoin can help people get capital out of these trouble spots.  How long though until there are other widely used crypto currencies?  Ethereum has also made a move...but what is to stop there from being 5, 10, 20, or even more crypto currencies in the near to intermediate future?  That will put downward pressure on Bitcoin, as there are more options to move capital.

 

Sure seems like a bubble and that nefarious activities might be going under the surface.  Crazy that bitcoin has moved as high as it has, as quickly as it has.  Got to wonder where this all ends up...

[formthirteen]

The future is bright for cryptocurrency :P:

 

I am sending this message from the year 2025. Things are looking bleak here, and some of you will carry blood on your hands.

If you don't believe me, please move on, as I have no way of proving to you I'm really who I claim to be.

I don't want to waste any of your time, so I'm merely going to explain what happened.

 

On average, every year so far, the value of Bitcoin has increased by about a factor ten. From 0.1 dollar in 2010, to 1 dollar in 2011, to 10 dollar in 2012, to 100 dollar in 2013. From now on, there's a slight slowdown, as the value increased by a factor ten every two years, to 1,000 dollar in 2015, to 10,000 in 2017, 100,000 in 2019, and 1,000,000 in 2021. From here onwards, there's no good way of expressing its value in dollars, as the dollar is no longer used, nor is any central bank issued currency for that matter. There are two main forms of wealth in today's world. Land and cryptocurrency.

 

 

Transactions are irreversible and uncensorable as long as no single coalition of miners has more than 50% hash power and the transactions have an appropriate number of confirmations.

 

China has ~70% of the mining power.

 

My personal opinion is that cryptocurrency is designed in a way that makes it possible to create the biggest bubble of all time. The crazy thing is that if enough people believe in Bitcoin it will become a self-fulfilling prophecy. History repeats itself.

 

I like to speculate that the biggest use for cryptocurrency today is:

 

1. Money laundering (Russia, China, etc).

2. Transferring money out of the country (Russia, China, etc). See for example Tether https://tether.to/.

3. Fundraising through ICOs. People will fund anything. If you had a startup idea before cryptocurrencies, good luck with getting any money. Today, just include "ICO" and "blockchain" in the press release and people will literally sell their house and give you their life savings to fund your luxurious lifestyle and crazy ideas.

4. Speculation that there is a greater fool. This includes believing Bitcoin is gold or a currency.

5. Stealing other people's money online through ransomware and hacking exchanges and computers.

6. Buying drugs and guns illegally.

7. Buying things.

8. Making a bet that, for example, Bitcoin will someday become a useful technology. Today it is not.

9. Destabilizing countries. This will become more popular, or might be the reason Bitcoin was created originally.

 

As you see, I am speculating that the usefulness of Bitcoin today is close to zero unless you are a criminal or you are raising funds. The only thing I would bet on is #8. About the future, I know nothing so I'm not buying any bitcoins.

 

 

[clutch]

 

I like to speculate that the biggest use for cryptocurrency today is:

 

1. Money laundering (Russia, China, etc).

2. Transferring money out of the country (Russia, China, etc). See for example Tether https://tether.to/.

5. Stealing other people's money online through ransomware and hacking exchanges and computers.

6. Buying drugs and guns illegally.

 

As you see, I am speculating that the usefulness of Bitcoin today is close to zero unless you are a criminal or you are raising funds.

 

But can't you argue that these activities will always exist and hence the usefulness of cryptocurrency?

 

[DooDiligence]

 

I like to speculate that the biggest use for cryptocurrency today is:

 

1. Money laundering (Russia, China, etc).

2. Transferring money out of the country (Russia, China, etc). See for example Tether https://tether.to/.

5. Stealing other people's money online through ransomware and hacking exchanges and computers.

6. Buying drugs and guns illegally.

 

As you see, I am speculating that the usefulness of Bitcoin today is close to zero unless you are a criminal or you are raising funds.

 

But can't you argue that these activities will always exist and hence the usefulness of cryptocurrency?

 

Makes it harder to "follow the money" in a criminal investigation?

 

Makes it easier to legitimize illegal gains?

[wachtwoord]

Wealth protection is one of the most obvious use cases. You know that's big business (and completely legal) right?

[DeepSouth]

The IRS has at least 2 major problems

1) If you bought/sold crypto via a fund, you have a gain/loss - that in theory, could be taxed. If you bought the same cypto directly, you just bought 'money' and the FX gain/loss is not taxable. Same asset (crypto), different treatment.

2) Crypto exists only in cyberspace, there is no domicile, hence the tax rate is zero.

 

SD

 

LOL. I'm sure the IRS will be blown away by these arguments. This sounds like the morons who claim to be sovereign citizens in court before they are summarily taken to prison.

[rkbabang]

The IRS has at least 2 major problems

1) If you bought/sold crypto via a fund, you have a gain/loss - that in theory, could be taxed. If you bought the same cypto directly, you just bought 'money' and the FX gain/loss is not taxable. Same asset (crypto), different treatment.

2) Crypto exists only in cyberspace, there is no domicile, hence the tax rate is zero.

 

SD

 

LOL. I'm sure the IRS will be blown away by these arguments. This sounds like the morons who claim to be sovereign citizens in court before they are summarily taken to prison.

 

Exactly.  Those people who think they have some argument based on the text of this law or that law are idiots.  It helps to look at the government as a gang of thugs who take what they want and are perfectly willing to use violence against you if they don't get it.  It doesn't matter who is right and who is wrong.  They have the power to take what you have, and you don't have the power to stop them.  And most importantly,  99% of the people in society are sufficiently brainwashed to believe that the government is always right and you are a criminal if you say different.  So you will have zero help from anyone if you resist.  This is why I say it is worse than organized crime, because if you resist the mob at least your friends and neighbors won't look at you as the criminal.  Government is the mob with a child brainwashing system.

 

Long story short...pay your taxes.

 

[wachtwoord]

I agree with the sentiment here. SD you seem to have an overly simplistic view on this and it seems you were not aware of specifics of the Canadian tax code. If you're going to try anything you better be damn sure you're factually correct and even then I doubt this will be accepted.

 

Be safe, these are not organizations you want to mess with ...

[SnarkyPuppy]

Tulipmania!

 

Just curious, at what age and price point would this move from being tulips to being an actual store of value ala gold?  Ignore volatility, bc it seems obvious to me that at a certain market cap volatility will be similar to that offild today. 

[rkbabang]

Tulipmania!

 

Just curious, at what age and price point would this move from being tulips to being an actual store of value ala gold?  Ignore volatility, bc it seems obvious to me that at a certain market cap volatility will be similar to that offild today. 

 

This was written in April/2013:  ( https://fee.org/articles/bitcoin-for-beginners/ )

 

"As of this writing, a Bitcoin is trading for $88.249.  Just three years ago, it hovered at $0.14. Many people look at the current market and think, surely this is a speculative bubble. That could be true, but it might not be. People are exchanging an unstable, fiat paper for something with a real title that cannot be duplicated. Everyone knows precisely how many Bitcoins exist at any time. Anyone can observe the transactions taking place in real time. A Bitcoin’s price can go up and down, and that’s fine, but there is no real speculation going on here that is endogenous to the Bitcoin market itself.  Is it a pyramid scheme? The defining mark of a pyramid scheme is that more than one person has an equal claim on the same money or good. This is physically impossible with Bitcoin. The way the program is set up, it is a strict property rights regime with no exceptions."

 

[wachtwoord]

Probably gold back in ancient times (but obviously at a delayed speed due to a much lower population and absense of world wide instant communication network.

[rkbabang]

Tulipmania!

 

Just curious, at what age and price point would this move from being tulips to being an actual store of value ala gold?  Ignore volatility, bc it seems obvious to me that at a certain market cap volatility will be similar to that offild today. 

 

This was written in April/2013:  ( https://fee.org/articles/bitcoin-for-beginners/ )

 

"As of this writing, a Bitcoin is trading for $88.249.  Just three years ago, it hovered at $0.14. Many people look at the current market and think, surely this is a speculative bubble. That could be true, but it might not be. People are exchanging an unstable, fiat paper for something with a real title that cannot be duplicated. Everyone knows precisely how many Bitcoins exist at any time. Anyone can observe the transactions taking place in real time. A Bitcoin’s price can go up and down, and that’s fine, but there is no real speculation going on here that is endogenous to the Bitcoin market itself.  Is it a pyramid scheme? The defining mark of a pyramid scheme is that more than one person has an equal claim on the same money or good. This is physically impossible with Bitcoin. The way the program is set up, it is a strict property rights regime with no exceptions."

 

 

Do you believe that this parabolic spike up is driven by the world suddenly realizing the fundamental value of bitcoin?  What is that fundamental value?  Every other knucklehead on the planet is picking up a little bc right now to play the rush.  They have no clue how the technology works or what its intrinsic value is. I'm not saying bc is valueless, its actually has some neat uses.  So do tulip bulbs, they can grow lovely flowers. 

 

Please show me an example of an asset that has spiked in value like this that wasn't a bubble.

 

 

 

People all over the world (rich and poor, dumb and smart, educated and ignorant) use the USD every day. Do you think 1 in 10 has a deep understanding of the Federal Reserve system and how it works?

 

Even if Bitcoin replaces all money on Earth the average person won’t understand the technology behind it anymore than they have a deep understanding of how the cellphone in their pocket works.

[SharperDingaan]

"Every other knucklehead on the planet is picking up a little bc right now to play the rush.  They have no clue how the technology works or what its intrinsic value is. I'm not saying bc is valueless, its actually has some neat uses.  So do tulip bulbs, they can grow lovely flowers."

 

... Just to add to this.

I've had 4 students approach me this week alone - asking to meet for a beer, & talk about how Bitcoin and Etherium works. Shocks the hell out of them, when I tell them where the Etherium ATM is! 

 

SD

 

[DooDiligence]

Nearly every friend I have has asked me about cryptocurrency & these are people who've asked about investing in the past & when I start with "think of stocks as an ownership stake in a biz" their eyes glaze over.

[Mark Jr.]

Tulipmania!

 

Say what you want about Bitcoin, Tulipmania is a bad analogy.

 

http://guerrilla-capitalism.com/articles/this-time-is-different-part-i-what-bitcoin-isnt/

[SnarkyPuppy]

Nearly every friend I have has asked me about cryptocurrency & these are people who've asked about investing in the past & when I start with "think of stocks as an ownership stake in a biz" their eyes glaze over.

 

Is it possible that you're explaining two independent and largely unrelated situations with one framework?  Is a bubble (severe price rise without similar increases in value) fundamentally different for a brand new commodity versus a business with cash flow stream? Is it possible that future events are easily predictable and obvious at first glance? 

 

Is it possible that you're correct and this is the most obvious bubble of all bubbles?  Absolutely.

 

Is it appropriate to simply dismiss as a bubble because of recency bias related to asset classes which are valued in fundamentally different ways from the asset we are currently discussing?  I'm not so sure. 

 

[DooDiligence]

Nearly every friend I have has asked me about cryptocurrency & these are people who've asked about investing in the past & when I start with "think of stocks as an ownership stake in a biz" their eyes glaze over.

 

Is it possible that you're explaining two independent and largely unrelated situations with one framework?

 

I totally am & thanks for making me aware of the distinction.

 

My answer to any friend who asks me about bitcoin is "always try to understand what you're putting your hard earned into."

 

I've asked each of them to read up on crypto$ & then teach me because I totally don't understand it & am not willing to put in the time to learn.

 

I told a buddy of mine's kid who's a finance major, that if he could convince me I'd toss a little cash his way.

 

(rkbabang graciously provided me with a great set of reference links which I passed on to the kid but so far, nobody's reported back & as I said before, I'm not willing to put in the time to, oh crap; do I really have to read up on this?)

 

---

 

You're also right about my dismissing something due to bias & I would add, my own ignorance (I'll remain blissful on this one...)

[tede02]

Nearly every friend I have has asked me about cryptocurrency & these are people who've asked about investing in the past & when I start with "think of stocks as an ownership stake in a biz" their eyes glaze over.

 

Is it possible that you're explaining two independent and largely unrelated situations with one framework?  Is a bubble (severe price rise without similar increases in value) fundamentally different for a brand new commodity versus a business with cash flow stream? Is it possible that future events are easily predictable and obvious at first glance? 

 

Is it possible that you're correct and this is the most obvious bubble of all bubbles?  Absolutely.

 

Is it appropriate to simply dismiss as a bubble because of recency bias related to asset classes which are valued in fundamentally different ways from the asset we are currently discussing?  I'm not so sure.

 

I think you're over analyzing.  It's basically exactly what Peter Lynch talks about in his books.  When you start to hear regular people talking about a new hot investment concept often, it is a red flag for excesses.  It's just crazy right now.  I know of at least two people, who probably couldn't explain what a mutual fund is, that are buying bitcoin.  When easy money is being made, that is also a huge warning for speculation.  Howard Marks always mentions, "What the wise man does in the beginning, the fool does in the end."   

[SnarkyPuppy]

Nearly every friend I have has asked me about cryptocurrency & these are people who've asked about investing in the past & when I start with "think of stocks as an ownership stake in a biz" their eyes glaze over.

 

Is it possible that you're explaining two independent and largely unrelated situations with one framework?  Is a bubble (severe price rise without similar increases in value) fundamentally different for a brand new commodity versus a business with cash flow stream? Is it possible that future events are easily predictable and obvious at first glance? 

 

Is it possible that you're correct and this is the most obvious bubble of all bubbles?  Absolutely.

 

Is it appropriate to simply dismiss as a bubble because of recency bias related to asset classes which are valued in fundamentally different ways from the asset we are currently discussing?  I'm not so sure.

 

I think you're over analyzing.  It's basically exactly what Peter Lynch talks about in his books.  When you start to hear regular people talking about a new hot investment concept often, it is a red flag for excesses.  It's just crazy right now.  I know of at least two people, who probably couldn't explain what a mutual fund is, that are buying bitcoin.  When easy money is being made, that is also a huge warning for speculation.  Howard Marks always mentions, "What the wise man does in the beginning, the fool does in the end." 

 

Couldn't agree more.  With that said- the presence of these attributes != bubble in and of itself.