Topic Wiki

Editor’s note: I know enough about this topic to be dangerous, but I’m not a true expert so please feel free to add to or edit anything in this wiki that will improve it. The FAQs contain many oversimplifications but that is intentional to make the information relatable to the audience. Thanks!

Frequently Asked Questions

What are blockchains and bitcoins and what is the difference?
A blockchain is the fundamental element in a crypto currency system. A blockchain is an accounting ledger. Each block contains a bunch of journal entries (i.e. a chronological record of transactions) that gets encrypted (by miners) but can be downloaded and read by anyone on the network. Why the blockchain ledger is secure and how we can vouch for its integrity is a slightly more advanced topic.

An accounting ledger typically keeps track of money, and a blockchain is no different. But the only type of money that it can accurately track is digital money that lives on the blockchain network. So dollars, euros, etc are out. The digital money that lives on the blockchain is called a crypto currency, and the most well-known one at this time is Bitcoin.

Currently there are a few major blockchain networks: the Bitcoin Network, the Ethereum Network, and the Litecoin Network. Each one has its own currency, which are Bitcoin, Ether, and Litecoin, respectively.

I’m just a simple DDFer and not an accountant + cryptographer + hacker all at the same time. Can you make this a little simpler to understand?
Let’s try an analogy. There is a certain website called Dansdeals.com and it has quite a following. Some of the followers are just users/readers but others are more active and produce value for the website. When they provide value, they earn currency for their work – called “EQP” and “HT”. So we have something we will call the Dansdeals Blockchain Network that is simply a record keeper of various ongoing deals and it issues a native currency that is fractionable (10,000 EQP = 1 HT). This is similar to the Blockchain network recording financial transactions and issuing bitcoins. The ones who work for the network (miners) earn bitcoins and everyone else needs to buy it to participate.

The analogy improves if you imagine that the Dansdeals website visitors have to pay a small amount, let’s say 5 EQP, in order to access a deal or a code that is recorded on the network. If the website has 30,000 followers who love deals, but only 1,000 active members who earn EQP, then you can see that there is a need for a marketplace to be created where you can buy EQP for later use.

Of course, websites are not networks, and this analogy is far from perfect. But useful.

How much is a Bitcoin worth
No one knows. A few people are speculating its worth based on the potential that Bitcoin will one day become a major world currency that people use in their daily lives. Most people though are speculating its worth based on what the next new investor will pay them for it (google “Greater Fool Investing”).

Even if a crypto currency becomes dominant, who says it will be Bitcoin? Maybe it will be Schmitcoin?
This is completely possible. Bitcoin and Ether are the most likely at this point, but their long term survival is not at all guaranteed.

So why all the fuss about Bitcoin? Shouldn’t we wait for Schmitcoin and its cousins to come out?
You could, but you don’t want to ignore how hard it is to start up a network from scratch. It may be that as little as one person can create rival code to compete with the existing digital currencies and blockchains, but one person is not a network. You need a lot of highly technical and motivated people to join you and also to invest their time, energy, and money in making that network run. It’s a highly specialized group of people, and most of the people who would fit that profile are already tied up with an existing network. So it’s not impossible, especially in the long-term, but even if it does happen it would be unlikely to pop up overnight and so Vegas odds for Bitcoin are way shorter.

Let’s go back to the Dansdeals analogy. Imagine that Dansdeals is not the only such website, and there are other websites in existence that provide similar services. For the sake of the analogy let’s call them MMS and OMAAT. They too have big enough followings to survive independently, and even though each one offers a slightly different flavor that differentiates them, anyone on one of the networks could also get their most important needs met on one of the other networks. In this analogy, do you think it’s worth collecting EQP/HT or not? After all, Schmansdeals.com could open up one day and all the business could move there.

The argument for the difficulty of starting up a rival blockchain network is much stronger than in the analogy (especially if we start to include “smart contracts” in the discussion), but the basic idea that you need a critical mass of follows to be successful and compete with existing rivals is the same.

« Last edited by yuneeq on December 25, 2017, 01:05:21 AM »

Author Topic: BitCoin Master Thread  (Read 61882 times)

Offline churnbabychurn

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Re: Whats the story with BitCoins ?
« Reply #75 on: December 04, 2013, 01:23:09 AM »
That article sounds fishy. Thousands of small donations I would believe. But 22 $1,100 donations?
His account definitely did go up to 22 btc...
There are plenty of btc millionaires who would do anything to gain publicity and pump it up though.

ETA this confirms. It stinks
http://m.goingconcern.com/post/espn-bitcoin-sign-guy-raises-over-22k-now-needs-tax-advice

« Last Edit: December 04, 2013, 01:34:04 AM by churnbabychurn »

Offline henche

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Re: Whats the story with BitCoins ?
« Reply #76 on: December 04, 2013, 08:52:44 AM »
He doesnt need tax advice. (And this certainly is not advice). The result is obvious.

(Also, theres no such thing as being shoved into a higher bracket and being worse off)

Offline churnbabychurn

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Re: Whats the story with BitCoins ?
« Reply #77 on: December 04, 2013, 09:10:41 AM »

(Also, theres no such thing as being shoved into a higher bracket and being worse off)
-1 maybe not from a gift...

Offline henche

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Re: Whats the story with BitCoins ?
« Reply #78 on: December 04, 2013, 09:15:54 AM »
-1 maybe not from a gift...

-1, there still is no such thing

Offline MarkS

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Re: Whats the story with BitCoins ?
« Reply #79 on: December 04, 2013, 09:26:00 AM »
There is a common misconception that if you go into a higher bracket, all of your income is taxed at that bracket and therefore it's better to be just under a threshold than just above.
In reality, the tax brackets are tiered so you pay 10% on anything up to $17,400, 15% on anything from $17,401 to $70,700, 25% on anything from $70,701 to $142,700 etc.

Even a millionaire only pays 10% on his first $17K and 15% on the next $53K.

The only times you can lose out by making more is with certain credits like the Earned Income Credit and the Obamacare credits.

Offline henche

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Re: Whats the story with BitCoins ?
« Reply #80 on: December 04, 2013, 09:29:04 AM »
There is a common misconception that if you go into a higher bracket, all of your income is taxed at that bracket and therefore it's better to be just under a threshold than just above.
In reality, the tax brackets are tiered so you pay 10% on anything up to $17,400, 15% on anything from $17,401 to $70,700, 25% on anything from $70,701 to $142,700 etc.

Even a millionaire only pays 10% on his first $17K and 15% on the next $53K.

The only times you can lose out by making more is with certain credits like the Earned Income Credit and the Obamacare credits.

+1

More accurately, even with EITC you cannot lose out. You can only lose out when it affects other benefits such as medicaid, foodstamps, etc. And in our community, tuition.

Offline churnbabychurn

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Re: Whats the story with BitCoins ?
« Reply #81 on: December 04, 2013, 09:44:48 AM »
+1

More accurately, even with EITC you cannot lose out. You can only lose out when it affects other benefits such as medicaid, foodstamps, etc. And in our community, tuition.
Waddaya mean, dont you lose the credit when you go over the limit?

Offline henche

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Re: Whats the story with BitCoins ?
« Reply #82 on: December 04, 2013, 09:57:06 AM »
Waddaya mean, dont you lose the credit when you go over the limit?

It phases out. The graph looks something like this:


Offline churnbabychurn

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Re: Whats the story with BitCoins ?
« Reply #83 on: December 04, 2013, 10:22:31 AM »
It phases out. The graph looks something like this:
Thats my point ???

Offline henche

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Re: Whats the story with BitCoins ?
« Reply #84 on: December 04, 2013, 10:38:16 AM »
So you can see that it phases out gradually. It works out that your marginal rate in the phaseout range is quite high, but at no time is it higher than 100%.

Let me try and find a graph for that.

ETA: Here's what I have. Let me explain a bit:

Effective Tax Rate: Add up all your money and divide by the amount of tax you pay. This is the number you look at and yell at the darned liberals for stealing your money.
 
Marginal Tax Rate: The % tax you would pay on the next dollar you earned. This is the important number in determining how worth it it is for you to earn.

Here's a chart of how tax brackets work:


But then there is also the EITC, which gives you a payment based on the amount you earn at lower incomes, so you have to subtract this EITC payment from your Marginal rate.



As you see, it phases out. So when you earn more money at that point, not only are you paying tax on that extra money, but it reduces your EITC payment, so you get hit twice! When you add it all up, it looks like this:



Note that the marginal rate starts at negative, since you get back money from the govt in the form of EITC. It goes up to 40% at the EITC phaseout, and then drops back to 10%, before rising again. But, for you to actually lose money by making more money, you'd need to have a Marginal Rate of over 100%, which never happens, because the tax lawyers who write this stuff don't want that to happen.

The bizarre part of this, is that you do have a Marginal Rate of 40%, and you are also losing other benefits like Food Stamps, so it is rarely worth it to take a small promotion and earn a few more bucks in that range. You should only advance if you can make a real jump.
« Last Edit: December 04, 2013, 10:53:51 AM by henche »

Offline churnbabychurn

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Re: Whats the story with BitCoins ?
« Reply #85 on: December 04, 2013, 10:49:29 AM »
So you can see that it phases out gradually. It works out that your marginal rate in the phaseout range is quite high, but at no time is it higher than 100%.

Let me try and find a graph for that.
Im not a lawyer so I dont speak your language.

"You make more than 50k you dont get the EIC" That right?

Offline henche

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Re: Whats the story with BitCoins ?
« Reply #86 on: December 04, 2013, 10:54:20 AM »
Im not a lawyer so I dont speak your language.

"You make more than 50k you dont get the EIC" That right?
See above.

To answer that specifically: Yes, but you also made more money.
« Last Edit: December 04, 2013, 10:57:47 AM by henche »

Offline churnbabychurn

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Re: Whats the story with BitCoins ?
« Reply #87 on: December 04, 2013, 11:20:13 AM »
If you shift to a higher bracket you will be taxed on the LT cap gains when selling the btc at a large gain.
True or false?  ;)

Offline henche

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Re: Whats the story with BitCoins ?
« Reply #88 on: December 04, 2013, 11:26:05 AM »
If you shift to a higher bracket you will be taxed on the LT cap gains when selling the btc at a large gain.
True or false?  ;)

Yes. But you still can't have higher than 100% Marginal Rate. I going to a meeting, but I'll be back with the math at some point.

Long Term KG has a funny bracket, where it is calculated separately from other income, but then applies its own brackets. It is 0% if you make less than like 37k, and then 15% on income in excess of 37k (and then 20% higher up the line but lets ignore that for now).

Some examples:
Ordinary income: 10k; KG 10k= no tax on the KG.
Ordinary income: 30k; KG 10k= 15% tax on the 3k that is above 37k.
Ordinary income: 50k; KG 10k= 15% tax on all 10k of KG.

So in your example you wanted to know how making more ordinary income will affect what you pay on the KG. As you can see, it will kick you into paying 15% on that KG, but certainly nothing over 100%.

If you meant to ask about the capital gains a dude like this will have when he sells the bitcoin, I don't know why you assume bitcoin generates capital gains tax at all, but if it does, gifts have a carryover basis from the donor so his basis I guess would be whatever theirs was (no way he'll know what their basis was, no idea what he'll do, I suppose that is a complication)

« Last Edit: December 04, 2013, 12:18:46 PM by henche »

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Re: Whats the story with BitCoins ?
« Reply #89 on: December 04, 2013, 12:04:59 PM »
That article sounds fishy. Thousands of small donations I would believe. But 22 $1,100 donations?
The article mentioned that there were about 100 donation amounting to 22 bitcoins. Only an average of ~$300 each.