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Ask Slashdot: How Does One Freely Use Bitcoin In the Land of the Free?
New submitter devrtm writes: It appears that Bitcoin, a currency designed with anonymity in mind, can be effectively used almost anywhere in the world, except in a few countries where it is regulated, and in one country where you can only use it if you give up your privacy. That country is the United States. I have accumulated quite a few BTC from the currency's early days where block rewards were still at $50. There was a period of time where one could get a nearly anonymous debit card, or use BTC online with merchants. Nowadays, non-U.S. payment providers no longer issue debit cards to the U.S. residents and the U.S.-based merchants accepting BTC are nearly extinct. The only way to use BTC in the U.S. is to convert it to USD. Unfortunately, that conversion requires giving up your personal information to a U.S.-based BTC payment processor, and there are rumors that signing up for those services raises red flags with certain three letter acronym organizations. I have nothing to hide, but I do value my privacy. Can one freely and anonymously live off of their Bitcoin wallet in the U.S.? I am afraid the answer is no. Does anyone have an experience that proves me wrong? Please share.
If you're a US resident you would have to pay income tax or at least declare it as an investment income regardless of how you convert it. You can go to any other country to cash out or convert it into goods, even if you could buy a car with it, you have to pay the tax man. And that's not unique to the US.
The tax man however does not necessarily need to know where the money has been or currently is (how you are investing or realizing the profit is not recorded) as long as you don't use the money.
Monetary transactions above a certain value also need to be recorded, again, not unique to the US. If you make any further investment (house or otherwise) with the money/value, the bank also wants to know where it came from for credit reasons (to make sure you didn't owe a loanshark).
In none of those instances do you need to declare the full transaction history of your investments or profits. The "problem" with Bitcoin is that it explicitly does not offer anonymity (you can't launder bitcoins) and gives you a full transaction history regardless. To request anonymity from an explicitly public ledger is ludicrous. You can only hide the owner of a bitcoin through technical means as you can attempt to hide any transaction on the Internet but it's only incidental and also detrimental to the Bitcoin system.
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"It appears that Bitcoin, a currency designed with anonymity in mind..."
FALSE.
Bitcoin was NEVER meant to provide anonymity. Can we please stop with this misconception?
Devrtm (the original poster) can donate his/her Bitcoin to any IRS 501(c)(3) tax exempt charity(ies) that accept(s) Bitcoin, for example the Electronic Frontier Foundation. Devrtm can then enjoy a U.S. personal income tax deduction for the full, fair market value of his/her donation, with no capital gains tax owed. It may be possible to make the donation anonymously, but Devrtm must keep records of the donation in his/her personal files, to document the tax deduction in case there is a future IRS inquiry. The tax deduction will likely be worth substantially more than what Devrtm paid (if anything) to obtain the Bitcoin. If Devrtm is subject to state or local income tax then there may also be charitable deductions allowed in those tax returns.
The IRS considers bitcoin an asset, if you are selling bitcoin or bartering it for goods you are subject to capital gains tax on it, just like any other appreciating asset. It's got nothing to do with the Federal Reserve. Bitcoin rising in value isn't inflation of a currency, it's the market attempting to price the future value of an asset, same as with a stock.
Enigma
To simplify the instructions: take your pile of BTC, convert it to cash as a single event, pay your taxes, and live off your BTC proceeds.
20% capital gains isn't killing anyone. If you want US dollars, you'll need to pay US taxes on your BTC gains, or be a criminal. Your choice.
He had x bitcoin 5 years ago, he has x bitcoin today
He had X BC 5 years ago. His basis was either what he paid for them, the money invested in mining them, or in certain cases (such as a if he received them as an inheritance), the fair market value at the time he came to possess them.
His capital gain or loss is the dollar value of any proceeds from any sale or trade minus his basis, subject to "wash sale" and other rules that would make hte sale a "non-taxable" event.
In any case, as long as he continues to hold the BC, he doesn't owe any taxes. If he holds them until they are worth no more than his basis then sells them, then he won't owe any taxes. If he holds them until he dies, the tax basis is "reset" to the fair market value at the time of his death, likely saving his heirs a boatload of capital-gains taxes.
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And for the last time,
bitcoin IS NOT DESIGNED with anonymity in mind.
It is designed for being a distributed system with no central authority (in theory at least).
And this system works by replacing any central authority with a consensus among all the nodes of the network.
Which is achieved by all (full) nodes of the network having, by design, a local copy of the whole ledger (= the blockchain).
That mean each of them can see any single transaction you did at any point of time.
(Again, by design. That's how the bitcoin protocol can reach consensus and trust without needing any central authority to act as a reference).
That means that no, you're not anonymous, I can see all the transaction you ever did inside the blockchain on my own locally run node.
At best, bitcoin protocol provides pseudonymity.
It's not Facebook require real names.
Transaction aren't officially done in the name of your real identity, they are done in the name of some base64 encoded public key.
And normal client are constantly shuffling sums around so there might be hundred of transaction between the time you received some amount of BTC and the time you spent them at an online shop where you order something to be mailed to you (and thus where some phyical world coordinates can be linked to your bitcoin identity).
That mostly prevent casual/accidental snooping.
But that's not beyond the capability of data-mining any government-level agent.
If your neighbour want to spy on you, he can't do it easily.
If any three-letter agency wants to track you, they just need to spend some of their tremendous computational power.
Your are not anonymous on the bitcoin network (at least to to governments).
And that's part of the design (it also help you trust the network without needing there to be a "Bitcoin Global Inc." to be held accountable).
Also, because the lack of central authority, nobody can prevent you to spend or receive any BTC money.
Government can see you and track you in the global ledger, but they can't prevent you.
There's no PayPal, Visa, or any other company that can block transactions.
Transaction can happen between any end-points as long as they conform to the bitcoin protocol.
(And that is one of the big motivations behind the rise of bitcoin protocol : people getting fed up of their account getting frozen for any random reason.
e.g.: see donations to WikiLeaks)
If you want (Relative) lack of control AND total anonymity, as suggest above : USE CASH.
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