Bitcoin Makes Historic First Appearance In US Supreme Court Opinion (ccn.com)

hyperclocker shares a report from CCN: Thursday marked a historic day for bitcoin, as the flagship cryptocurrency made its first appearance in an opinion published by the U.S. Supreme Court. The case, Wisconsin Central Ltd. v. United States, did not involve bitcoin's regulatory or legal status. Rather, it examined whether employee stock options represent taxable compensation under the Railroad Retirement Tax Act of 1937.

That may seem like an unlikely place for a discussion of bitcoin to appear, however, as justices noted in both the majority and dissenting opinions, the case forced them to consider a fundamental question that has also taken on a renewed importance in the decade following the publication of the Bitcoin white paper: "What is money?" "Ultimately, the 5-4 majority ruled that employees should not be taxed for exercising stock options since the action does not constitute 'money remuneration,'" the report adds. "However, writing in a dissenting opinion, Justice Stephen Breyer argued for a 'broader understanding of money' and said that stock options should be classified as taxable compensation."

Comments

Hmmm

[rmdingler]

It's a bit confusing, but rest assured, corporate CEOs, that there are ways around paying income tax as long as the wording and protocol are just right.

Non-qualified stock options differ from incentive stock options in two ways. First, NSOs are offered to non-executive employees and outside directors or consultants. By contrast, ISOs are strictly reserved for employees (more specifically, executives) of the company. Secondly, nonqualified options do not receive special federal tax treatment, while incentive stock options are given favorable tax treatment because they meet specific statutory rules described by the Internal Revenue Code...

Re:Hmmm

[Anonymous Coward]

Maybe for CEOs. But for the rest of us, if you've ever been caught in the exercised non-qualified stock option trap, you'll know why they should not be called compensation. Basically the IRS expects you pay taxes even if the value has dropped below the exercise price and you sold in order to stop losses during the qualification period. You can write off the losses later, but only against a few thousand of regular income each year. Pay up now, we'll "give" you the loss later.

Re:Hmmm

[TomR teh Pirate]

No idea why your comment was modded down as you are exactly right. Back in the 90s, hundreds of Sun Microsystems were caught by this trap in which they exercised stock at their low "purchase price" of say $10/share while its fair market value was an order of magnitude greater. The taxes they owed on pieces of paper became the fair market price at time of exercise minus exercise price * number of shares. Then quite suddenly the stock crashed, the IRS came for their taxes the following April, and people who had briefly been theoretical millionaires were instead taxed like millionaires but in fact held nothing of value.

This type of stock option is called an ISO, and they were all the rage as a form of compensation in Silicon Valley, especially during the 90s through 2000s. Many lives were ruined by the taxation of a speculatively valued stock, and the only entity to truly benefit from the sky-high price of those stocks was the IRS. ISOs have since given way to RSUs as they represent a different method of taxation, but I happen to share the court's opinion that stock != money until that stock is liquidated. The value of a greenback is consistent from day to day while stocks, bitcoin, art, etc. are not.

Re:Hmmm

[Anonymous Coward]

That was not the IRS's fault, that was the fault of the morons that on exercising kept the shares. Everyone with half a brain during that period exercised and sold the shares in a single transaction, I had my share of options back then and also watch many people get burnt like you explained, but that was purely their own fault and a decision they made.

Re:Hmmm

[Anonymous Coward]

you are blaming the IRS for a greed based risk that people chose to take. maybe they were poorly informed or just stupid, but this was not some random screwing by the IRS, it was a financial risk/investment they took on themselves and lost. The IRS doesn't get to make decisions for your investment stupidity, nor do they or should they compensate you for your stupidity.

Re:Hmmm

[bloodhawk]

Tax is applied the moment you receive a benefit/payment from your employer. At that point you get to make a decision, Do I take a risk and keep the asset even though I have just incurred a tax debt or do you dispose of the asset and collect your money. those that got burnt chose poorly, though many people also hugely profited from that risk exposure. Personally I always vested my options and disposed of the shares in a single hit, no risk and take the cash. I can then if I choose repurchase the shares or more sanely distribute my exposure across many shares.

Re:Hmmm

[Kjella]

Back in the 90s, hundreds of Sun Microsystems were caught by this trap in which they exercised stock at their low "purchase price" of say $10/share while its fair market value was an order of magnitude greater. The taxes they owed on pieces of paper became the fair market price at time of exercise minus exercise price * number of shares. Then quite suddenly the stock crashed, the IRS came for their taxes the following April, and people who had briefly been theoretical millionaires were instead taxed like millionaires but in fact held nothing of value.

1) If you know the tax bill is coming at least sell enough to pay it off while you're still a "theoretical millionaire" even if you want to speculate on the rest.
2) They could have bailed out any time in the same year and have an equally big deductible loss.

I'll admit that once you put yourself in that hole though you got a problem. The IRS will want money on your imaginary profit and you can't effectively use your unrealized loss to cover it.

Screw this noise

[rsilvergun]

had lots of AOL friends who had stock stolen from them in the 90s when the Time Warner buyout happened. A judge just gave them the middle finger. If the stock has monetary value you pay taxes on it. Hell, if I trade chickens for corn that gets taxed. Why not this?

Re:The liberal judges used an expanded definition

[Joce640k]

There's not much point in taxing it though: Bitcoin is only going downwards.

I guess they might have some taxable income if they bought Bitcoin last December when the lunacy was at it's height. Apart from that? Nope.

Re:The liberal judges used an expanded definition

[Joce640k]

They don't need one though.

Bitcoin 'profits' will only be taxable the moment you convert Bitcoins into real money. When that happens the existing tax laws can be applied.

Hm... Can I go back and re-file?

[Mike Van Pelt]

I exercised some options on pre-IPO (i.e., completely non-tradable) stock back in 2011 because I was planning to leave the company and thought it might IPO.

Alas, it did not, but the IRS considered the difference between my option price and some theoretical measure of what the CEO claimed the stock would be worth then if it were tradable to be income. Which pushed me into AMT Hell.

The company still hasn't IPOed, and its remnants seem to be circling the drain, more or less, as near as I can tell.

I'd sure like to get that money back from the IRS. (Yeah, like getting a steak back from a pit bull...)