Bitcoin Forum

Does anyone have opinions as to the correct way tax should be managed with Bitcoin?

The wiki is down for technical issues at this particular moment, but when it returns, here's information:
 - http://en.bitcoin.it/wiki/Tax_compliance

 :D TAXES? the BRITISH ARE COMING THE BRITISH ARE COMING!

I think this is a country specific question. But generally you should always have two points of view. One is where you look at Bitcoin as an asset. Then the same tax regulations should apply which apply for commodities like gold or copper where the gains you make from speculation are taxed. The other view is if you look at Bitcoin as a currency which you use to pay for your expenses and which your customers use to buy goods and services from you. Both should already be known from a tax perspective.

IN the second case, Bitcoin should simply be treated as a foreign currency which you need to convert to local currency. To give an example, let's assume you are based the UK where your local currency is GBP. You sell goods at home in the UK (in GBP), to continental Europe (in EUR) and to the US (in USD). Then, when you start selling something for Bitcoins you just add another currency. In this example, all of these currencies need to be converted to GBP at some point in order to produce a profit & loss statement and to make a tax declaration. For the conversion you simply use the official exchange rate and apply it according to the rules that are already there for foreign currency conversion.

Any thoughts on this?

What if you didnt convert to GBP and instead purchased some goods or services with the bitcoins?

Well this is the grey area, because it is yet to be recognised as a currency. From what I understand with respect to the UK, you are liable for capital gains at the point of exchange, therefore if you remain in BTC there is no issue as of yet...

You do not actually have to convert your Bitcoins. If you run a business you just have to look at it from an accounting standpoint. There you 'convert' only for the records but can either keep your Bitcoins in your wallet or use them to buy goods and services.

As for capital gains it depends on the concrete treatment. Some countries might tax unrealized ganis and some only those that you realize after you sold your Bitcoins. Interestingly, the German government has made a statement about this recently as you can see here http://bitcoinmagazine.com/germany-provides-leadership-for-bitcoin-tax-clarity/ (http://bitcoinmagazine.com/germany-provides-leadership-for-bitcoin-tax-clarity/). It says "profits from the sale of bitcoins held as an investment are exempt from taxation if the coins are held for over one year".

I find tax declarations so confusing. I guess the truth is that I hate paperwork but really to go back through all the transactions one makes in a year and figure out a profit/loss for the whole thing is really forensic accounting.

Just think,

wages -> transferwise -> bitstamp -> BTC -> (BTC rate rises - taxable) another exchange -> another foreign account -> buy gold -> gold value drops -> sell the gold to the foreign account

Now imagine all that happening with different things, transactions flying everywhere. How the heck are you supposed to declare this kind of stuff to the tax man?

I guess the way is that any money you receive in fiat you should have your own accounting trail for. Just look at the money hitting your fiat bank accounts in order to simplify.
With this born in mind I'm going to plan any future transactions around this to keep things as simple as possible. It's not so much the nightmare of having to pay tax (since often we make losses too), but it's the beaurocratic nightmare of all the paperwork that's the worst. And if you think it's bad where you are, just try some poorer countries (poor in part because of such beaurocracy!... usually along with inflation too!)

This is why ID verification is Bitcoin's Achilles heel right now. The beauty of bitcoin is the lack of beaurocratic crud... but ID verification is just the start of this. We had gold years ago and that got eroded, there's no reason why Bitcoin won't be bastardised as well eventually.