US tax obligations with bitcoin increase in value

[mcdett]

I think Im going to have my corp accountant write a brief on tax obligations with trading and having btc increase in value.  I may publish the report here on the forum under a cc license.

... or maybe there is an accountant on this site who can speak authoritatively on the subject.

My understanding is that I would need to report the gains at the end of the year.

Thoughts?

Another thing I'm considering is hiring a local attorney who is knowledgeable with FTC laws to write up a brief on the legality of doing btc trading against USD.  I figure being on the correct side of the law when you liquidate could go a long why in protecting your earnings.

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[tomcollins]

I think Im going to have my corp accountant write a brief on tax obligations with trading and having btc increase in value.  I may publish the report here on the forum under a cc license.

... or maybe there is an accountant on this site who can speak authoritatively on the subject.

My understanding is that I would need to report the gains at the end of the year.

Thoughts?

Another thing I'm considering is hiring a local attorney who is knowledgeable with FTC laws to write up a brief on the legality of doing btc trading against USD.  I figure being on the correct side of the law when you liquidate could go a long why in protecting your earnings.

Dont trust this as fact, but I'd imagine you are subject to the same rules as capital gains.  So if you don't sell, you don't gain yet.  But hopefully someone actually knows.

[just_someguy]

IANAL but I believe you are supposed to report a capital gain on anything you buy then sell at higher value.
If you don't sell them and they aren't paying dividends then I don't know how you could possibly have a tax liability.
Even then it would just be the difference between your cost basis and what your purchase price was.

Mining is an interesting case though. There would be two ways to look at it:
You just received goods for services (barter income) and it is taxable immediately OR you have a gain when you sell with a cost basis of 0$.
Either way I imagine you could write off what it takes to run your mining operation.
Very interesting question.

[mcdett]

Mining is an interesting case though. There would be two ways to look at it:
You just received goods for services (barter income) and it is taxable immediately OR you have a gain when you sell with a cost basis of 0$.
Either way I imagine you could write off what it takes to run your mining operation.
Very interesting question.

Most of my earning have come from mining on two machines way back when the mtgox price was.... .20 cents a btc (early 2010).  I generated quite a few coins.  This to me is a taxable event because I now have something of value that far exceeds the costs of electricity and hardware.  I don't believe one has to "cash out" to be exposed to tax liability.

Buying and selling stocks (out side of ira) require payment of gains at the end of the year regardless of selling (sometimes shares are sold simply to pay tax on gains).

[error]

Interesting reading. I'm so glad Bitcoin allows people to escape this system.

[just_someguy]

I'm not aware of any tax you have to pay on holding stock that has increased in value.
You have to pay tax on dividends but bitcoins have none.
Are you referring to mutual funds?
You have to pay taxes on your portion of the buying and selling inside a mutual fund regardless of whether you sold shares of the mutual fund itself. This sounds like what you are describing.

[just_someguy]

Interesting reading. I'm so glad Bitcoin allows people to escape this system.

Bitcoin won't help you escape taxes. You are always free to lie on tax return if that is your inclination.

[mcdett]

Interesting reading. I'm so glad Bitcoin allows people to escape this system.

Bitcoin won't help you escape taxes. You are always free to lie on tax return if that is your inclination.

I am certainly not implying that I want to lie to the feds.  Quite the opposite.  I think it is important for every geek on this site to be aware of tax liabilities when they buy and sell btc.

[marcus_of_augustus]

yeah, like nobody is aware of the fucking gargantuan taxes the banksters are shafting us with every year .... !

[mizerydearia]

Ohnoes, I must permit the government to steal a percentage of money from me and possibly later to allow me to collect a percentage of the stolen monies at a later date?  What is the reason for this again?

[ploum]

I think that the topic is not whether or not the laws are good.

The question is "If you want to respect the current law (regardless of its stupidity), what should you do?"

So please, don't fall in the anti-government rhetoric as nearly every other topic here. The question is interesting by itself.

[proudhon]

I think that the topic is not whether or not the laws are good.

The question is "If you want to respect the current law (regardless of its stupidity), what should you do?"

So please, don't fall in the anti-government rhetoric as nearly every other topic here. The question is interesting by itself.

Not only is the question interesting, but I think it's important.  There's a good chance some people are holding quite a bit of USD value in bitcoins, and if the project continues to grow in the same way, then there could be many more.  Regardless of what any of us think of the laws, we are subject to them, and there could be very real tax or other implications associated with using, holding and exchanging bitcoin.  I'd like to know what those are as far as I can know.

[ribuck]

Most of my earning have come from mining on two machines way back when the mtgox price was.... .20 cents a btc (early 2010).  I generated quite a few coins.  This to me is a taxable event because I now have something of value that far exceeds the costs of electricity and hardware.

Suppose the MtGox price had plummeted and your BTC had become worthless. Would you have been entitled to a tax deduction for your losses? If not, it hardly seems fair for you to be taxed on your gains.

[Cryptoman]

Most of my earning have come from mining on two machines way back when the mtgox price was.... .20 cents a btc (early 2010).  I generated quite a few coins.  This to me is a taxable event because I now have something of value that far exceeds the costs of electricity and hardware.

Suppose the MtGox price had plummeted and your BTC had become worthless. Would you have been entitled to a tax deduction for your losses? If not, it hardly seems fair for you to be taxed on your gains.

It seems everything is classified as a hobby with write-offs disallowed until you make the first cent of profit, then it's a taxable enterprise.  The laws are always slanted in favor of the US Treasury.  However, if Bitcoin became classified as a true currency, you could likely write off the first $3000 per year in losses (with carry forwards allowed).  This is my understanding at least.

[tomcollins]

Ohnoes, I must permit the government to steal a percentage of money from me and possibly later to allow me to collect a percentage of the stolen monies at a later date?  What is the reason for this again?

Not getting assraped is a good reason to conform.  When a mugger puts a gun in my face and demands my wallet, I pay him.  It doesn't make him right. 

[tomcollins]

Most of my earning have come from mining on two machines way back when the mtgox price was.... .20 cents a btc (early 2010).  I generated quite a few coins.  This to me is a taxable event because I now have something of value that far exceeds the costs of electricity and hardware.

Suppose the MtGox price had plummeted and your BTC had become worthless. Would you have been entitled to a tax deduction for your losses? If not, it hardly seems fair for you to be taxed on your gains.

It seems everything is classified as a hobby with write-offs disallowed until you make the first cent of profit, then it's a taxable enterprise.  The laws are always slanted in favor of the US Treasury.  However, if it Bitcoin became classified as a true currency, you could likely write off the first $3000 per year in losses (with carry forwards allowed).  This is my understanding at least.

Laws on hobby income are weird.  The government tries to make everyone report things as a hobby unless it's in the governments interest to make you classify as a business.  I had hobby income for a few years where I may have been able to count it as business income, but it made no sense.  I would have had few deductions and would have had to pay the extra social security and medicare taxes on it.  Usually, the government is very strict about what counts as a business.  I filed as hobby for a while.  Then they mailed me and said the previous few years should count as business income and I owed a lot of money.  It took a big fight but eventually they let me count it as hobby.

You can profit and still have it counted as a hobby in some cases (I won't advise on which cases those are, though, save that for a lawyer).  Even if it's not a currency, you could deduct losses (if I traded baseball cards at swap meets, I could deduct losses if I had been profitable in the past).

[abyssobenthonic]

Buying and selling stocks (out side of ira) require payment of gains at the end of the year regardless of selling (sometimes shares are sold simply to pay tax on gains).

Not in the US.  Capital gains taxes (the only applicable taxes in this case) are paid only after selling.

If you hold shares in an investment company (e.g. a mutual fund), the fund is buying and selling all the time and thus distributes capital gains through to you (this property is what allows an investment company to not pay taxes itself, as long as the gains are passed through to the owners of the funds), then you do get a capital gains tax liability even though you haven't directly received any gain, though.

[abyssobenthonic]

Most of my earning have come from mining on two machines way back when the mtgox price was.... .20 cents a btc (early 2010).  I generated quite a few coins.  This to me is a taxable event because I now have something of value that far exceeds the costs of electricity and hardware.

Suppose the MtGox price had plummeted and your BTC had become worthless. Would you have been entitled to a tax deduction for your losses? If not, it hardly seems fair for you to be taxed on your gains.

In the US, you would.

You would be entitled to claim a capital loss to offset any capital gains made during the year (so if you made $1,000 profit from a sale of Google stock, you could then make a sale of BTC that loses $1,000 (provided that the BTC sale has the same long-term/short-term holding status as the Google shares) and wipe out the capital gains tax liability from the Google... this is known as Tax-loss harvesting and is quite common).  Beyond that, you can use up to $3,000 of a net capital loss to offset personal income (I forget whether the AMT disallows that deduction...) a year.  If the net capital loss is greater than $3,000, you would use $3,000 to reduce your income tax and then carry the loss forward to offset against any capital gains realized the next year.  If your cumulative capital loss remains after that next year, then you can take another $3,000 to offset your regular income for that year and carry the remainder forward and so on.

Example:

year 1: net capital gain of $10k => you pay capital gains tax on that at whatever the appropriate rate is
year 2: net capital loss of $2k => deduct $2k from your taxable income
year 3: net capital loss of $5k => deduct $3k from your taxable income, carry the other $2k forward
year 4: net realized capital gain of $1k => use the $2k carry-forward to fully offset the $1k gain (so no capital gains tax is owed) and deduct $1k from your taxable income
year 5: net capital loss of $7k => deduct $3k from your taxable income, carry the other $4k forward
year 6: no net realized capital gain or loss => use the $4k carry-forward to deduct $3k, carry the remaining $1k forward

It is true that there is an element of "heads we win, tails you lose" at play here: tax on a net gain is immediately due, while a large capital loss may result in the entirety of the tax deduction not being claimed because you die before using up your $3k a year (to say nothing of opportunity and lost time-value of money considerations!).  This is slightly ameliorated by the fact that the tax rate on regular income is generally markedly higher than that on long-term (held for at least a year) capital gains: at the moment, the long-term capital gains tax rate is capped at 15% (assuming that bitcoin is not classed as a collectible, as gold is...) while if your income is between roughly $35k and $80k (as a single person), the tax deduction effectively operates at a 25% rate... if you're making $200k a year or more (as a single person), then deducting against regular income saves you more than double what it saves you as a gain offset.

IANATA and IANAA, but I would suspect that (assuming bitcoin is not considered a collectible...) the tax-efficient strategy would be to use LIFO accounting (considering each sale to use the cost-basis of the earliest unsold transaction) and try to hold for a year before selling for USD (otherwise it becomes a short-term capital gain and is essentially treated as regular income).

The lower long-term capital-gains tax rate also makes it rather foolhardy, imo, to put a lot of your 401(k) or IRA into investments that realize most of their gain via long-term capital gains (as opposed to short-term trading or dividends/interest).

[marcus_of_augustus]

Been wondering about legal status of bitcoin ownership and it is very, very nebulous. As you'll notice in the disclaimer in my signature I admit to possessing keys but not to bitcoins themselves (this was for the purposes of 'disclosure' to jokingly avoid accusations of conflict of interest).

The coins are held in the database that is distributed in the network, so I, myself, do not actually have possession of the bitcoins, the network does. I hold the keys to access certain coins but can only do so with the collaboration of the network. The closest thing in current law might be a custody arrangement but since the network is not a legal entity, like a bank, then it is not clear who actually has custody of the coins, or if they even exist as assets at all, under current legal definitions. Are the coins really there? The only way of verifying that is to move them into another asset class, up until that point they do not really exist legally speaking, particularly not until the bitcoin network is recognised as a legal entity existing in its own right, like a bank.

So I'm not convinced that legally I actually own anything except the keys. Maybe the keys could be classed as virtual good, but not the bitcoins themselves since they do not really exist as an asset in any legal definition. If I use those keys to make a transfer that results in US, or other state monies or assets that the state recognises, then maybe I'm liable for tax on any profits of bitcoin activity. Until the keys are used for an exchange into 'real' assets (bits in US$ bank account) I'm struggling to see where the liability comes from, legally speaking.

[mjsbuddha]

I've talked to some accountants and this is what I understand on the matter and what I do personally.

If you just cash out bitcoins to yourself thats capital gains. you pay 10 to 35% depending on your tax bracket unless you hold onto the bitcoins for more then a year, then its long term capital gains which is 5-15%.

If you start a business and pay yourself a salary from bitcoin earnings that normal income tax. Thats the same 10 to 35% as short term capital gains.

What I did is incorporate and I pay myself in dividends. Dividends tax is 0-15%

Im no accountant. this is just what my accountant friends told me.