Making a relatively small bet of $1000 on Ethereum in September 2015 when it was trading at $1 would now be worth approximately $350,000 for a gain and return of 34,900%!!!!
At a marginal tax rate of 33% that means that one is liable to the tax man for about $115k!
This whole recent crypto price blow up must be giving tax collectors around the world a permanent "woody", right?
Hmmm... let's think about this.
What is "tax". A tax is a levy charged to an entity for the use of.... something. Could be land (like in the old days, or perhaps a tariff for shipping goods into a country, etc. Ok... got it.
In all cases there are two parties. The owner/controller of the land/space/environment or product and the other party who wants something from the owner/controller. This is contract law 101.
Understanding this, then we can look back to the question of the capital gain liability on a crypto gain.
To establish tax liability we have to ask - who is the owner/controller of the land/space/environment or product (in this case the product is Ethereum). It is clear that neither the US Gov nor the IRS created Ethereum. Thus they have no claim nor authority to levy a tax on the use of the product.
Think about this. Society does not pay taxes on the gas they buy or the beer they drink. You might think you do (do to propaganda and an unreadable tax code), but the fact of the matter is that you are liable to pay taxes because you are using a Government issued product... the $USD.
You are paying taxes for the use of the currency.
Now I can already hear a thousand voices saying no, no, no, taxpayers are liable for taxes because we are citizens of the country and we pay sales tax and land transfer tax and dog license fees because the law says so.
Nope.
If my neighbor and I trade a lawn mower for a chainsaw there's no tax. If I trade my time in service to my neighbor for his chainsaw, there's no tax. If I trade my gold for his silver, there's no tax. But if I buy a chainsaw from a Government registered entity who has agreed to follow the rules of registration, then there is most definitely a tax liability.
So back to crypto.
If one makes a significant gain in the cryto world, the only time they will be liable to pay a capital gain would be if they revert the Ethereum product back into $USD. If you don't use their product or service then there's no liability.
Beautiful post