How to tax trading in colored coins representing fiat? Say Kraken and Bitstamp both issue colored coins for USD, called KrakenDollars and BitStampDollars. Then I find an colored coins exchange where I can trade between the two, and deposit some KrakenDollars. In the eyes of the IRS, these are still dollars I think. Then I start trading between KrakenDollars and BitStampDollars, and make a respectable profit. Then I put my KrakenDollars back into Kraken, and withdraw to my bank account. How on earth should that be taxed? I was just trading between dollars and dollars...
You trade a bunch of stuff, you wind up with more dollars than you started with, you have a taxable profit.