Bitcoin Forum

Just want to get your guys thoughts on this. 

http://qz.com/72637/why-bitcoin-millionaires-could-accidentally-become-tax-felons/

1) don't sell, problem solved
2) the heat on media scare stories is really cranking up
3) If you do sell, be a good doobie and pay your taxes

'Tis no different than reporting and paying taxes for other types of capital gains, such as stocks and precious metals.

A question if you will. How does it work in the US? One must declare the bitcoins that he holds, or just declare the income when converting them to dollars?

Here in 'merica you would only have to claim your income you made from selling Bitcoins, the Bitcoins you're holding are completely worthless in the eyes of the IRS, they can't tax it. Which is why it is a good thing to pay for things using bitcoins.

I don't think that would be true in all cases. I might go with that if you bought 100 BTC at $100 and sold 100BTC at $200 however if you mined those same coins you would at best fall under the Uniform Capitalization Rules and since my cost would be included in determining Cost Basis the "income" if any would be what I determined much of it to be. At the same time if I traded those BTC for say silver I'm pretty sure there is no "gain" to be taxed. A Capital Gain is when you buy an asset at one price and sell it at a higher one. Income is derived from employment. BTC falls under neither unless we start stretching the terminology and laws.

Guys the way you are view this is not a form of stock or a form of bitcoin for bitcoins good. Bitcoins are a barter currency. In the EYES of the IRS that is what it is... so if you made money off of the money in 2013 then when you file the taxes you will be asked to for other income and this is where you would put your barter income from bitcoins.

One way to do this is
1) start it as a small home business. This way you can write off your business cost and your internet, eletro etc..

either way if you sold a old toy for $800 that would be barter income because it was more then the original cost of the toy and thus in IRS's Eyes its taxable.

You're right, since it seems that Bitcoin has been legally defined as a 'commodity' ( lol ) despite more and more people accepting it as a currency you could just trade for stuff in Bitcoin and you wouldn't have to pay taxes, the only time you'd ever have to pay taxes is if you're dealing purely in paper with the classic utility companies and so on.

Currency (i.e. Forex) trades pay taxes on their gains as well.

Simple version: if you profit from it the IRS wants a cut.  Now our tax code fills a small room so the rules get complex and there are long term capital gains, short term capital gains, special tax rates for dividends, rules for wash sales, limits on this, cutoffs of that, etc.  Simple version if you profited the IRS wants a cut.

The answer is simple:

Get Bitcoin.  Keep Bitcoin.  Spend Bitcoin.

The IRS only works when it comes to the dollar.

Are you sure about that? I think the guys above that mentioned barter income are correct. If you spend bitcoins, in the eyes of the IRS it's as if you sold the bitcoins and used the USD proceeds to buy goods. So at the time of spending them you are subject to capital gains tax.

This should apply regardless of how you got the bicoins.

Example 1: You buy 10 BTC @ $10. A year later you buy something for 5 BTC. At that time 1 BTC = $100. You are liable for tax on capital gains of 5 BTC * (100-10) = $450.

Example 2: You mine 10 BTC. Price of BTC when you mine them is $10. Later you spend 5 of them, when 1 BTC = $100. You are liable for tax on capital gains of 5 BTC * (100-10) = $450.

In the second example you haven't even touched dollars yet you have to pay taxes.

Be very careful with taxes.

Okay, does the IRS allow you to write off losses on Bitcoin as well?

You could be right.  However, the IRS is American, and Bitcoin is global.  If the IRS plans on profiting from someone's gains, they would first have to figure out who has Bitcoin in America and how much Bitcoin they have.  This is very difficult to do, as the IRS does not keep tabs on Bitcoin; they only keep tabs on USD.  It would be the same as trading cash; the IRS can't tax you when you hand your buddy 50 bucks for fixing your roof; they can only tax your buddy if he spends that cash on, say, food, or clothing, and then the inescapable taxes of land etc.  One would need to declare he is making purchases with Bitcoin for the IRS to tax them for it.  Otherwise, it's as if it's not happening.

They have no idea whether I made capital gains or not. They don't know who owns the addresses that sent to and received from my Coinbase account.

True, in most cases they won't be able (or won't bother) to find you. But the fact that you can escape being taxed, doesn't mean you are legal. Quite the opposite. You are breaking the law, and what you are telling me (quite right) is that it will be difficult for them to discover you. Yes, possibly, just the same as if you work for cash and don't declare the income. Still, it's a) risky and b) illegal.

More reason to stay out of the Federal Reserve's realm.

If you're worried about the IRS, don't let me stop you.  Report all your earnings on BTC and roll with it from there.

sell btc and transfer into offshore bank account.

Good question. But I don't know. And I'm assuming you mean if you buy btc at price 'X', then the price drops and you sell out for a loss.

...hmmmm...

You can with stocks and forex trading. But let's a assume worse case that this is not like either of those.

Seems almost as if you don't have at least claim a home business you are operating under, it might be difficult to categorize the loss. But I'm not sure.

..............

Here's a scenario:

Assume the following under two circumstances:
either a home business model and as just individual speculation.

1. You mine bitcoins.

2. You sell them on an exchange. (effective gain)

3. You keep the money in the exchange, and buy bitcoins again to trade.

4. You sell those at a lower price. (effective loss)

Can you deduct (4) from (2) under either circumstance?
Ifso, which one and how?
If not, then in what other circumstance could it be deducted?

Could this be applicable with speculation in trading bitcoin?

http://turbotax.intuit.com/tax-tools/tax-tips/Taxes-101/Can-You-Claim-Gambling-Losses-on-Your-Taxes-/INF14370.html

How can I prove I held bitcoins more than 1 year, for long-term capital gains?
Should I declare them now so to set purchase base date?

Fiat operates like a commodity as well in a way,  in the way people horde money and assets, and always have.

In the days before a trade medium like banknotes, all trade was done with a commodity. This is just old school barter.

Bitcoin does blur the line a lot more though, as it acts like both at the same time right now, but that is because Bitcoin is so young and susceptible of the tremors of real world financial failures. As money or a commodity, we're in for a wild ride. Today they are viewed more like gold as an appreciating asset that can also be traded for goods and services. Someday it will be viewed as the real currency it is as it grows up and is used more.

Over the long term however the exchange rate will start meaning less and less as the USD continues to lose spending power and dominance, and more and more businesses start accepting Bitcoin and more and more users join the fray, slowly shifting us to the Bitcoin economy and abandoning the old. Products will start being repriced in the new economy as it continues to widen the gap between Bitcoin spending power and Dollar spending power. If you can buy what you want with Bitcoin, why would you convert it back to depreciating currency to buy the same thing.

I've gotten a myriad of differing (and thus, confusing) answers from accountants on the following scenario:

1) I invested dollars into mining hardware in 2010/2011
2) I invested ongoing expenses such as electricity and spare parts
3) I exchanged some of the bitcoins generated from the mining hardware to dollars in 2013
4) This amount was greater than the amount spent on hardware (call it cashing out at $10,000 and expenses of $5,000 to keep the math simple)

So.. I've just received my $10,000 wire into my account, and in 2010/2011 I had $5,000 worth of expenses.

How is this taxed?

I've gotten answers ranging from it being regular wage income (really? shit!), to it being capital gains, to it being long term capital gains.

Can I write off my expenses in some manner to offset the gains later made? 

And what happens if I want to exchange more bitcoin to US dollars at a later date?

Professional accountants need to get a "Bitcoin Certified" logo program going - I'd love to talk to someone who's eyes don't glaze over while I try to explain things.  Yep, I bought computers.  Yep, they did math and made numbers that other people find valuable, yep, I later exchanged those numbers for money and put it in my bank account.

I'd like to pay the legal amount of taxes necessary, but no one really seems to agree on how exactly this works yet.

-Phil

Phil, I would personally ask the IRS directly.
If it's like the UK and assuming that bitcoin is treated as a commodity, i.e. the same way a shoe merchant would treat shoe inventory, my guess is that you are running a home business (sole trader) and your losses can be carried over, and any profit is treated as regular income. So, in 2011 let's say you had spent $5k and ended up with BTC worth $1k, you have $4k carried over losses, and then in 2013 you had $9k gains (sales proceed minus previous value of inventory), so you are liable for taxes on $5k regular income (could be zero if this is your only income). But again, I would ask the IRS directly, that way you are covered.

Not true. If you don't know something, it's better to say that (or preface it with "I think") than saying an outright lie. They DO care about direct conversion to assets.
http://www.irs.gov/taxtopics/tc420.html
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Bartering-Tax-Center
So, Phil, do yourself a favour and ask the IRS directly (start by reading their website linked above).

Stockholm syndrome much?

"Thank you master for allowing me to work and earn money. I can't wait to give you half of it."

pay your taxes, people, and then we won't have to worry about anybody trying to hijack the currency.  =)
unless the tax is BS, in which case, don't pay it, keep a record of it, and if/when audited, pay it and the fines.

So you mean if you don't pay taxes you can get in trouble?  Zounds!  I never knew that!

Karl Denninger is a whack job and an Obama birther who has had a hate-on for Bitcoin since the start.  Google Karl Denninger Bitcoin to see his previous ignorant rantings on the subject.

That's Theta - I'll give them a call and see what they have to say.  I still have some time (I hope) to get this done, as all my conversion to USD was done in 2013.  My real concern is since I didn't write off the expenses in 2010/2011 what I'm allowed to do "after the fact".

And regarding transferring them to assets - I think it's pretty well understood (maybe not based on posts here?) that barter/trade is still taxed at whatever the real value in USD is.  Yes, this can be gamed/scammed/ignored and is regularly, but it's still violating the law by doing it.  If you trade your computer repair services to the roofer for a new roof - you're still liable for taxes on the value of that trade of services.


It really comes down to what they can prove - if you're cashing out bitcoins for gold, I wouldn't exactly advertise that anywhere if you don't plan on reporting it to the IRS :)

No, do NOT ask the IRS directly.  They will generally tend to give a self-serving answer and not one that is necessarily the law.  See, for example, the recent IRS opinion that they are allowed to spy on American email despite a direct court ruling telling them they are wrong (http://www.foxnews.com/politics/2013/04/11/irs-tells-agents-it-can-snoop-on-emails-without-warrant-internal-documents-show/).  Yes, it is a Fox News article, but it correctly states the law.  The relevant case is United States v. Warshak (http://en.wikipedia.org/wiki/United_States_v._Warshak).

The point is the IRS cannot be trusted to state the law accurately when they stand to make a lot of money (or as they call it revenue) from your ignorance of the law.  I would say speak to an accountant, but if the money is substantial enough to trigger an audit, a specialist in tax law may be even better.

Do not consult sovereign citizen non-lawyer nutjobs who lose cases and get their suckers sent to prison.

For emphasis ;)

The IRS is interested in the IRS.  If they were interested in anything else, such as human evolution, or the well being of society, they would cease to exist.

Get LegalShield people. Speak to a Tax Attorney anytime you want for $17 a month. Plus many more services than that. Available in every state but Alaska.

PM me to get signed up.

You still have income taxes from bartering.

They can be a trifle more difficult to collect, like tip income.  The IRS still lays claim to them. 

And, amazingly, tax evasion is still illegal in the land of the U.S. dollar.  Who knew it before Karl Denninger told us?

OK, so I've finally come up with something worthwhile I can "sell" for bitcoins.  I'm a licensed CPA who is willing to offer some suggestions on how to deal with specific situations that may arise from the sales or holding of Bitcoin or other crypto-currency.  I'm not specifically offering tax advice aimed at avoiding any penalties or amounts owed, nor am I offering to prepare a tax return.  For obvious reasons, I'm not going to disclose my license information on these forums. 

However, if you're interested, I'm happy to have a conversation via PM and then you can pay what you think the information I provide is worth.  If you ultimately decide I'm a phony, feel free to pay nothing. 

Also, for any trolls out there, this is not a FUD post at all.  My guess is most of your have already decided whether you're going to follow the U.S. laws and tax code.  If you've decided not to concern yourself with it, that's your own business.  This is only an offering to people who are interested in real advice from somebody who understands both the technology and the financial ramifications of using it.


BitCoin: 1Lh5sAtxy4BqddMFu1Vu9dL5u4JfSnA1LE
LiteCoin: LTziohcPos9PRb3EM6EKQaxMHAQbrdiicq

Isn't there some sort of "minimum" that one must make in order for it to even be taxable?

Say...hypothetically, that someone was unemployed during 2010/2011, and did some small time bitcoin mining, but sold those coins back in 2010-11 and made less than $500 total from all the sales.

Aside from kicking themselves for not holding them and selling at the recent peak for $260....would the said person be liable for any tax on that "income"? Hypothetically again, if it were conducted via paypal and the sales were done OTC.

OK, some confused folks here:

1) Spending bitcoins on goods/services still requires you to pay tax just the same as if you cashed them. If you buy a computer with bitcoins that appreciated in value from $5 to $200 you have to pay taxes on that increase in value as if you had sold them for USD first and then bought the computer with USD. However, note that it is harder for the IRS to determine what you have purchased with bitcoins directly, especially if you order via Tor and have said goods shipped to a friend. Not that you should do that since that's illegal.

Note that I am not condoning tax evasion, even though some crazy people think it's our duty as patriotic Americans to evade the taxes imposed upon us by our corrupt, terrorist government who uses the money to kill innocent people with bombs all over the world and give ridiculous subsidies to oil, defense, nuclear fusion plants, Monsanto, and other nice people.  ;) Not condoning tax evasion at all. 

2) Sorry, you can't just ACH money from your exchange account into your bank account and then not report it. Any large transfers could be reported by your bank to the IRS, and transfers above a certain amount are required to be flagged and reported. Also, the IRS could decide to audit you, and could request bank statements from your bank, and could ask why you didn't report the $700/week transfer coming from MyBitCoinExchange.net.

Fortunately, there is hope. You could OTC everything. That's harder, especially for those who can only afford to invest small amounts at a time. The risk there is unknowingly selling BTC to an IRS agent - and I wouldn't put it past them.
A slightly less secure option for buying - is to sign up for an exchange account and only ever access it from within the Tor network, and you could hop accounts frequently. Funding is the only issue. You'd have to appear in person at a bank to make cash deposits to said exchange, and if the IRS really wanted to get people, they could subpoena exchanges for records, subpoena BitInstant or LocalTill for bank cash deposit records, subpoena the banks for security camera archives, and get your picture from that. They could go that route in the future for very large evaders.
Of course, after buying at the exchange, you'd then have to sell OTC if you wanted cash, which brings the same risk mentioned before - undercover agents. You can partially avoid this risk by only selling to friends, which requires you have a significant network of trusted friends or family with enough capital to buy BTC from you when you wish to sell.

So, it would be a bit of work to effectively evade the IRS in regards to bitcoin profits, but as they tell us in state-sponsored kindergarten, "you can do anything if you put your mind to it."

Care for this, the IRS is nothing to play with.

Yep.  Cheat on your taxes like "everyone does" for a couple grand here and there, and even if you get caught, they might waggle their finger at you and say "Oh you."  And, of course, collect the delinquent taxes plus a nice fat penalty and interest.  Do it for a few million, though, and you're looking at serious time.

People who get caught at that level often haven't been tracked down by any extraordinary means or any genius investigation.  The IRS just gets interested in you for whatever reason and notices you claim to do tech support for a buck above minimum wage and yet you showed up at the audit driving a Rolls, live in a million dollar house, and wear a Rolex.

Hmm..this is quite annoying >:( damn IRS always wants to steal every penny it can. But I don't plan on ever selling off my bitcoins, even if they one day are worth a million dollars xD So this doesnt terribly bother me.

Technically speaking, any profits would be capital gains and thus are reportable.  Whether it's taxable or not depends on whether sufficient deductions or credits are available in your situation to offset the gains.  $1 of gain is still a gain.  Now, having said that, the IRS is likely looking for worse offenders in general.

There is a certain complexity here when you're gambling with BTC and that is your main source of the commodity.  Almost all my BTC come from poker in one way or another, or through some other form of gambling.  The tax law for gambling, especially in the United States, is basically nutty.  It requires accounting for every session, and allows deductions for losing sessions, but those also must be tracked and you have to do enough gambling that it exceeds the standard deduction.  You also have to itemize deductions.

The taxable event in this case is actually winning the money at the table.  It can't be dodged by simply keeping the money (denominated in dollars) as casino chips and putting them in a safe deposit box.  In fact, the IRS has often gone after gamblers and the casinos generally cooperate in emptying out such safe deposit boxes to cash the chips.  If the gambler can't then document session losses and gains, tough titty.

However, BTC and the sale of BTC (especially when purchased with fiat) is a lot like the kind of event that triggers short-term capital gains taxes, particularly if you only hold the BTC for a year or less.  So what about the situation where you played a lot of Bitcoin poker when it was practically play money, you now have a bunch, and you cash out some when it hits $250?  

Capital gains is generally applied to when a purchased asset appreciates in value.  To some extent, even mining constitutes a capital investment, but suppose you just got it for free by playing poker freerolls, then letting that money ride until it turned into something real, then held it for a while?  

The fact is, the IRS has neither sane nor sensible regulations on these policies, and the statutory law is even further behind the times.  If the IRS does what the IRS does in any other case, it will adopt whatever position enables it to gouge the most money from you.

I know, some will say fuck the IRS, just do whatever, evade taxes, whatever.  Can't do that.  I'm in a profession where getting in IRS trouble gets you kicked out of the profession.  Won't work for me.  When I was making money on poker to the point it exceeded the income from my "real" job, I paid every damn penny of taxes and had my paperwork (well databases) in order to withstand any possible audit.

However, the denominated in Bitcoin shit presents serious accounting and legal issues.  I think anyone in that situation (including me) would benefit from professional advice in that area if the cost of the professional advice does not exceed the comparative benefit of having the advice.  One guy (apparently an accountant) who posted in this thread, is probably qualified to give such advice, but frankly, I am in just as good a position to give advice to myself.  The law is not established in this area, and it is dangerous ground.

Are there any other (mostly) law-abiding citizens out there who have established their own personal "best practices" in this area?  

Remember, the law is not what makes sense when you read it in a book of statutes, or even the regulations, it is what some 80 year old guy decides while his bowels are acting up and he doesn't understand your argument.

the IRS goes after unreported income. That will always be true whether gold coins or bitcoins.

This.

Doyle Brunson is a very wealthy man from his poker empire...
But he makes clear, "You can only get rich by paying taxes".

This allows you to leverage everything with real estate, loans, etc...
Any rich man should control assets 10 times his net worth...
In the end, it's what you control... not your liquidation value that matters.

It may sound glamorous to be a tax outlaw at 22...
But being outside the system will get real old at 40 or 50 or 60...
And the IRS plays the Loooong Game.

I fully expect Bitcoin to continue to grow...
And I fully expect 100s if not 1000s of BTC millionaires...
To end up in US Federal prisons.

Question: If I buy one bitcoin, hold it for a year, buy another bitcoin, hold it for a month, then sell one bitcoin, should I count that as long-term capital gains or short-term capital gains?

Is there any reported cases of anyone getting in trouble for this yet?

Use your gains to buy bitcoins December 31st. Boom. No capital gains for the year. Sell Jan 1st to get your money back.

Oh please!

Since when is KD some kind of tax expert dispensing IRS rules and regulations?

Denninger is a nutjob.  He is also apparently of the belief that he is basically an expert on everything, and seems to have a specialty in believing himself to be an expert on subjects he understands less than the rankest BTC noob.

You can actually choose the method you wish to account for it (assuming you treat it as an investment), but in this case, likely the most advantageous approach would be to adopt a first in, first out (FIFO) approach and thus consider the sale for long-term capital gains.

The IRS has informants everywhere and can basically violate all privacy. There is nothing they can't search, no one they can't question and no rule they can't bend or break to get the information they want.

Because taxes are legit? Don't think so. Taxation is at best extortion.

Pay your taxes because they have no problem bringing the full weight of the law down on you for not letting them steal the wealth you produce from you. But otherwise don't agree that taxation is legitimate, it's not.

yes,  it is.

le·git·i·mate  (l-jt-mt)
adj.
1. Being in compliance with the law; lawful

 Are you  really not aware of the tax laws  or do you not know the definition of legitimate?

A law that states a man can love a horse would be legitimate.  That doesn't mean you have to agree with it.

Oh wait, yes it does.  Boy I sure do love this State business!

Yes, it would be taxable income in that transition if you had made any gains.

I keep seeing people say if they buy something with their bitcoins they don't have to count it as income, but that is just silly.

If you buy a bitcoin for 1 USD, and then later buy an item with that bitcoin which is worth $10, then clearly you have made $9 worth of income and you need to count that somehow in your income for taxes. It does not matter if you use the bitcoin to buy usd or a pizza.

Technically you are right and it would be the right thing to do, pay taxes honestly.  However, in practice most people will not and I seriously doubt there will be consequences.  Is the IRS spending massive resources to track BTC transfers to make sure you paid tax when you bought a pizza?  I know people (immediate family) who have owed the IRS for decades (10s of thousands of dollars) on reported income and haven't had the IRS come knocking.  They seem to be understaffed and focused on the big fish in reality.

I am not trying to say what most people will do, or what is even feasible (the way tax laws are written, it is almost surprising anybody gets their taxes right), I am just stating the honest thing to do.