Since I bought it anonymously, own it anonymously and spend it anonymously how do they imagine they’ll catch my “Subway” purchases?
How exactly would one even begin to put this event on an IRS form?
For capital gains, you have to know what something was worth when you purchased it. If I mined the coin myself and there was no USD to Bitcoin trading market at the time, who is to say what it was worth when it was generated? It wasn’t worth zero… and it took time, electricity, resources to create. What if you disagree with the IRS’s valuation at the time you purchased it? Much like… if I were to buy a chair at a garage sale that I know is worth $100 to someone else, but I only paid $5. And later, I am able to sell it for $500 because someone really, really wants it to match their other chairs.
And what if the coins were a gift? One person can give another around $15,000 a year as a gift without a gift tax. How can they prove they weren’t gifts and prove the value at the time they were gifted for me to have to state their gains? Madness.
Lets start with cost basis. There are three means of acquisition you mentioed: gifting, purchasing, or mining.
For gifting, the cost basis of gifts are the fair market value (I will cover this at the end) of the item at the time of gifting. Whoever gifted them may also be subject to gift taxes if they exceed the threshold based on the market value at the time of the gift.
If you bought Bitcoins their cost is simply whatever you paid for them. If you exchanged goods for the Bitcoins, it is likely they will be valued at the FMV of the bitcoins at the time of the transaction as that is more readily determined and presumably something both parties agree to. But it can get more complicated.
Now for mined bitcoins, if we are talking capital gains your cost basis would be $0 as that was what you paid for it. You may be able to add some of your expenses mining them to the cost basis or claim a deduction for investment expenses, the specific details are more complicated than I am willing to get into, However there is a good chance that mining them would trigger it to be in the nature of business rather than capital so you would report your revenues from selling bitcoins against operating expenses and costs of mining the bitcoins sold.
Now on to the proceeds, it will typically be worth cash you receive for the bitcoins (less transaction costs) or the market value of the bitcoins at the time of the transaction as it can be established. Like I mentioned above this can get more complicated, especially if you are trading for something with a readily established value (such as if you trade $10 of Bitcoins for $20 of a publicly traded stock).
No the big crux of many of these things is establishing the market value. There are plenty of public markets trading Bitcoins, so all they would do to establish market value is google “Bitcoin value” at the time of your transaction. If you dispute the valuation, it would be the standard process as disputing any IRS determination. You would politely ask them to consider your position, then you file a formal object, then you go to court and a judge will decide whether you or the IRS have the correct value.
None of this is any different than any non-cash transaction. Such as if you give someone shares to purchase something. And it is pretty easy since there are clearly established market values for Bitcoins.
“Crypto currencies are not like real dollars. The IRS considers crypto currencies to be a form of property, which means that every crypto currency transaction, no matter how small, triggers a separate tax gain or loss. So, the seemingly casual nature in which one might exchange Bitcoins or other virtual currencies for everyday items could leave users and businesses with untold tax liabilities and a record-keeping nightmare, depending on the frequency with which they are used.”