Bitcoin Forum

Despite a recent plunge, bitcoin has had a banner year. Now comes the hard part—figuring out the taxes on it.

For the uninitiated, bitcoin is the most prominent of several "virtual currencies"—money that exists only online and isn't backed by any government. Released in 2009 by an unknown person or group going by the name Satoshi Nakamoto, bitcoin is maintained by a decentralized network of computers, called "miners," that process and verify transactions. As of Friday afternoon, the value of all bitcoins in circulation was nearly $8 billion, according to CoinDesk.

This year the price of a bitcoin has risen from about $13.50 to about $650 on some exchanges, down from a November high of about $1,200 just before concerns arose that China will crack down on the virtual currency.

Experts say, however, that there's no agreement on a host of fundamental questions for U.S. taxpayers holding or using virtual currencies. "People who invested in bitcoin or used it to buy goods or services this year have gains or losses, but no rules for reporting them," says Omri Marian, a professor of law at the University of Florida in Gainesville. "What should they do in April?"

Among the pressing issues: When should bitcoin be considered a commodity, a currency or a capital asset for tax purposes? Are bitcoin transactions similar to barter? Is bitcoin subject to the same stringent tax rules as secret offshore accounts? And how will U.S. officials keep bitcoin, which is even more anonymous than cash, from being used to promote tax evasion or money laundering?

So far, the Internal Revenue Service hasn't ruled on or addressed such issues directly. An agency spokesman released the following statement: "The IRS continues to study virtual currencies and intends to provide some guidance on the tax consequences" of transactions involving them. The agency is also "aware of the potential tax compliance risks posed by virtual currencies," he added.

Meanwhile, bitcoin investors and users should be aware of some thorny basic issues. If bitcoin is a capital asset like a stock, says David Shapiro, a principal at PricewaterhouseCoopers in Washington, then long-term capital gains and losses—those on assets held for more than a year—would qualify for a top federal rate of about 24%. But losses above $3,000 could only be deducted against other capital gains.

If, on the other hand, bitcoin counts as a currency (like euros or yen), then gains will be taxed at federal rates on ordinary income up to 43.4%, Mr. Shapiro says, and losses will be fully deductible against ordinary income like wages.

In its preliminary filing, the Winklevoss Bitcoin Trust—a public fund registered by brothers Cameron and Tyler Winklevoss, of Facebook fame—said it intends to treat bitcoin as a capital asset instead of a currency, unless the IRS rules otherwise.

Clearly, someone could have a taxable gain or loss in bitcoin when it is sold or given away. But there could also be a taxable gain or loss when bitcoin is used simply to purchase goods or services, says Mindi Lowy, a tax director at PricewaterhouseCoopers in New York. "The fact that using bitcoin to buy something could trigger taxes will come as a surprise to typical consumers," she says. Most people, after all, don't think of spending money as an act that could generate taxable gains or losses.

Taxpayers may also have difficulty tracking a bitcoin's "cost basis," which is the price used as the starting point for measuring taxable gain or loss, says Ms. Lowy. Unlike with assets such as stock or mutual funds, there's no institution keeping bitcoin records, and taxpayers may not even know they need to do so themselves.

Also up in the air: whether offshore-account reporting rules apply to bitcoin. Taxpayers with $10,000 or more in non-U.S.-based financial accounts often have to report the accounts to the U.S. even if they don't generate income, or else they risk severe penalties.

A spokesman for FinCen, the U.S. Treasury Department unit charged with preventing financial crimes, says this question is "under consideration and will be made in consultation with the IRS," but it's unclear when.

The IRS could face a bigger headache if bitcoin and its kin replace tax havens as the venue of choice for tax evaders, Mr. Marian says.

"Virtual currencies possess the traditional benefits of tax havens: anonymity and no tax," he says. While rules now taking effect are putting pressure on governments and financial institutions to end offshore tax evasion, he adds, "virtual currencies pose a threat to this recent success because they don't depend on banks or governments."

Mr. Marian says that he and many other specialists are "stumped" as to how the IRS will rule on bitcoin. He says his own sense is that it's a commodity similar to gold, because there's a finite supply and it's a store of value. He adds that some bitcoin transactions may be akin to barter—which has its own tricky tax rules.

In the absence of guidance, advisers are telling clients that bitcoin income, gains and losses should be declared to the IRS.

"If you take a reasonable position, they probably will accept it," says Jonathan Horn, a certified public accountant in New York. He plans to advise his clients to file foreign account disclosures if they meet certain thresholds and hold bitcoin through an entity that isn't located in the U.S.

Taxpayers who have bitcoin and flout the tax rules, Mr. Horn warns, "are opening themselves to penalties, interest and possible fraud prosecution."

—Email: taxreport@wsj.com

Write to Laura Saunders at laura.saunders@wsj.com

http://online.wsj.com/news/articles/SB10001424052702304773104579268322915488180

bitcoin does not exist on the material plane and is subject to no human authority

you can not tax an idea

nation states have no jurisdiction in realms of the mind, and I declare war on any who would claim such

Tell that to the IRS, lol. Have fun in jail.

Well what im wondering is if you just only mine, never put $$ into it, it doesnt seem you would ever have to pay capital gains? From what I understand, capital gains are only if you purchased the product..  What do you guys think?  Seeing as I didnt "invest" but rather "produced" the product?

To me it only makes sense as a capital asset, so like any other unrealized capital gain, you should only be taxed when and if you trade it in for profit.  Hey, I'm no tax expert, so don't take my advice, but that's my gut.  If and when it ever becomes a real currency, meaning you can use it for buying tons of things without ever changing it for fiat, they'll put a stop to that quickly since you could avoid all tax completely if you're paid only in coins.  Until that happens, I'll treat it as capital gains.  I'm careful to never pull out more fiat than I put in for now, I'm not a short-term profiteer, unless it's to gain more coins :)

Talk to a real accountant/lawyer. But it seems likely to me that the cost basis would be the price at the time the block was mined / share paid out.

Why do you think that the IRS has any claim on any part of your Bitcoins?

There is a group focused on tax issues now.  There are an incredible number of issues out there to be answered but the IRS is not ready to draw the line.  _wayfarer_, it looks like the Winlklevoss Bitcoin Trust documents, certainly drafted by attys., sides with you on looking at it like a capital asset where it is held for investment.  We won't know the 'right' answer until the IRS chimes in.  I hate guessing when it comes to taxes...... but we may have to unless the IRS says something soon.....

MrMirkin, I suspect there are a few bitcoin miners who would not agree with the suggestion that they didn't put $$ into it.... especially the more recent miners who are investing in ASICs.  For those who mine, the biggest issue appears to be when you have to report your 'earnings.' Do you report them when you successfully have a block added to the block-chain (and therefore got your coins and the transaction fees)..... or when (and if) you sell them or use them to purchase something.

If you visit the mining forum there is much discussion about expenses - and whether you can deduct them when they are incurred or must treat them as a cost of acquiring the bitcoin (and, therefore, think of them as the "purchase price" of the mined coins).  

This will be quite important to many given the rise in value of BTC.  It is also an area that only your accountant can help you determine, because the 'right' answer (guess) may also depend on whether your BTC activity is considered a hobby or for profit/as a business....

I think most everyone would agree that you account for your income or loss when BTC are sold or used to purchase something.  What is not clear is if you treat a mining allcation as income when you get it.  The IRS could go either way here.  They may say it was taxable when you got your 50 coins (now 25).  They could even treat the reward element of mining different from the transaction fees.  In one you got an award from mining, in the other you got kind-of a 'commission' from the transactions you included in the block.  

I don't think the transaction fees are giving anyone a lot of heartburn today as they tend to be so small.  But in the basic design of bitcoin by Satoshi - once we reach maximum currency at 21M the transaction fees will be THE mining reward.

Until the IRS weighs in it's a best-guess world for us all.  I suspect the more conservative will take recognize income from mining when their coins were awarded.  Others will not.  For those who had blocks accepted early this year when the coins weren't at the $700 level this will not be near the challenge as it is for those who got mined coins in the past few months......

BTW anyone wanting to join in on the group assessing the tax issues pm me.

bob

Seriously? Have fun in prison.

The real long-term question might actually turn out to be "How will the IRS survive Bitcoin".

Hey maaku.....

Agree with you that, if you choose to treat the mining income as taxable when you get the coins then the basis is going to be the price when the block was mined.  

Can't say what exchange to use.... and how you determine the price for the day you get the coins (the spread is so large.....), but I am still struggling on what day you really get the coins.... what is the SPECIFIC time you can spend the coins.... is it after 6 confirms?  And if so, how is the ability to spend the coins triggered - is there a verification if you try to spend them that you are the owner and the six confirms has occurred?

It may seem like splitting hairs - but at the volatility we are seeing these past few months, it can make a material difference in what you report......

your thought s appreciated.  And touche greenlion!

If the correct metric is "the time at which you can spend the coins," then it is after 99 confirms if it is a coinbase payout, or immediately otherwise. That is the point at which a transaction spending the output can make it into a candidate block being mined.

Bob, I look at it a little different...  Take this example.

Imagine there is a company that makes frozen banana machines.  I purchase a banana machine and produce my own frozen bananas.  I then find a group of people who are willing to accept payment for my goods in frozen bananas.  Im no tax expert, but it seems to me that the IRS has no control over my frozen bananas in this barter system and only when it changes to fiat and I start selling them, then I pay sales tax/business taxes.  Now even if I do decide to sell them, seems i should only pay sales taxes/biz taxes.  I dont see where a capital gains tax comes into play here. Even if i produced TONS off banans when the price was lower.. Or if the great banana shortage of the 30s comes back and they skyrocket.  Its still a banana, not fiat...

Is this an incorrect assumption?

I guess capital gains only makes sense if you're trading on the market place, buying bitcoins and holding them for future value.  Then, if you sell your appreciated/depreciated capital at any point you calculate the gain/loss.  On the other hand, if your main purpose is to sell merchandise and convert it into fiat, then pay yourself a salary, it would seem to me you would be subject to all the norms of running any other business that creates income through normal means.  If you're mining coins this seems like it would apply also.  Hey, don't take my advice though, I'm not a tax pro.  It's a complicated question.

MrMirkin

I think your example is different in a couple of ways.  First, you are making bananas as a business and they would likely be treated as inventory and not as an investment.  As such, there would be no capital gain or loss when you sold them (and your gain or loss would likely be ordinary income, not capital gain or loss......).

And I don't think if you exchanged your bananas for something other than fiat (like maybe one of my oranges) it would make any difference on wither or not the income tax was applied to the trade - inventory or investment property.  It would be taxed at that time.

This was settled with the barter clubs of the 1970s..... trades are taxed at the fair market value of the property traded - usually the value of what you gave and, if this was not something that could be valued (no market, etc.) at the value of what you received.  I am quite certain it does not need to involve fiat on either side of the transaction for it to be taxed....... so in that part of your suggestion, yes, I suspect you are incorrect.

There are some VERY RARE exceptions for 'like kind' exchanges which your accountant can fill you in on - both under a code section (Section 1031) and where the property exchanged is near identical (like BTC for BTC - and this is in the Regulations).  There are narrow exceptions, however.....

bob

I've engaged an attorney to help me work through compliance.  Thankfully, It's been a long time since my bitcoins have sat on any exchange, let alone a foreign one.  Most of my bitcoins have been sitting still in offline wallets only I control, some for over a year at this point, which will help me make a case for long term capital gains treatment, which is ideal.

Cost basis would be your cost to produce.

It is an incorrect assumption of how the IRS will treat such a frozen banana maker.
There is nothing magical about converting to fiat triggering tax, any soft of conversion can work similarly.
Bitcoin is a pretty good unit of account in its own right.

Take your cost of production, and the value at which they are converted to something else (and as proudhon reminds us, the interval between the dates, for LTCG) and do the math.
Including all your costs of production for some people they will have losses as a miner depending on their depreciation rate for equip.

Then there are wash-sale rules, and mark-to-market opportunities... there is a lot of money to be made in writing or adapting software to read your block chain inputs, pulling exchange data, and making tools for automating this.

Ah I see, well thanks for the feed back!  Always nice to have someone who knows more about it.  :D

You're probably right, especially with that new company car on the expense sheet.
There have been a few US accountants posting in the forums that take BTC but have not worked with any here yet.

How can they know you have bitcoin (if U not use it). It is just a file in you PC.  ???

What's the point of having it if you're never going to use it?

Same here, if First In, First Out applies, a lot of us that were around in 2011/2012 are going to be taxed at long term capital gains rates if the IRS does make a ruling.

Well, my accountant is pregnant and due in a month and I also bought a house this year as well so we're probably going to file an extension. She's told me that filing an extension doesn't increase my chance of being audited, but I pretty much think everything about me is going to trigger about fifty "needs to be audited" flags, anyway.

I suspect that the Winklevoss will have figured out what the ETF tax situation is going to be by around June 2013, then we'll probably make modifications as necessary from there.

If for some reason they still haven't made a judgement call, we're going to assume it falls under "Other Income" and get taxed at the highest rates. After that and an expected audit, I might move to Thailand to be your neighbor if you don't mind... I'll probably renounce my US citizenship sometime after that and not sell again till 2015.

This is my first big "test", to see how moronic the feds are going to be regarding Bitcoin and conversion to fiat. If another country makes it easier or is going to let me hold on to more of it, I'm more likely to move there.

I have a few candidates, Ecuador, Chile, Thailand, Singapore, etc. New Zealand and Costa Rica were the first two I looked at, but they are in housing booms that aren't busting, so they kind of fell out of favor. Singapore is where Jim Rogers and Eduardo Saverin are, but housing is expensive there (not necessarily in a bubble, it's just such a small country and has no extra space to expand). I know some Thailand missionaries that need help with a school in Lampang. I know parts of NW Thailand are dangerous, but I still think it'd be cool to set up a nice computer lab and educate kids there about IT stuff for the rest of my life. Chile is attractive because of its libertarian tendencies, but is likely semi-unstable. Ecuador is more free-speech oriented, but I don't know how safe it is from interference in business.

I think it'd be nice to run an email service to compete with US-based Gmail, YahooMail, Hotmail, etc. If those Iceland programmers (https://www.mailpile.is/) get a quality encrypted mail services app working, I might just do that somewhere as the NSA has just created the best marketing campaign for external privacy-related email the US has ever seen. I've spoken to a few dozen folks that are willing to spend upwards of $5-15/month for truly private email, but only because they trust me and pretty much me alone for keeping their personal communications truly private. I think it'd be nice to run my own datacenter in SE Asia or Latin America at this point. I have to believe there's a huge need for outside-the-US privacy-oriented emailing services right now. If I could reliably get something like that to integrate with BitMessage, it'd be another benefit as well.

A tip - have your atty./accountant understand the block-chain as a ledger - so they can appreciate FIFO may not by the only option.  If you had multiple wallets and/or processed transactions directly from the block chain addresses - you can trace the coins you sold to the coins you bought right from the block-chian.  This may allow you to use the 'specific identification' method instead of FIFO. 

Help your accountant understanding this and they may steer you away from FIFO so you have more control over what coins you sell in the future both to trigger long term capital gain and/or to minimize the overall gain on the transactions.  How you treat the way you account now will be called a "method of accounting" and you will have to live with it for all future transactions unless the IRS lets you change - which is a real pain.

The bitcoin protocol has an API for raw transactions that allows for specifically identifying your trades but it does not appear to be incorporated into the -Qt wallet.  Never-the-less your block-chain activity will have a specific listing of the source transactions for your bitcoin sales if it was a block-chain transaction (by that I mean off an exchange....). 

Your accountant or atty. may simply not understand how bitcoin works if you don't educate them.  It will be new to them on the accounting side as well as they, like me, will probably look for something similar but, as with all disruptive technologies... it is difficult to fit into existing ruels.

I first referred to the stock and commodity broker/dealer rules in this area for guidance as there is no clear guidance for bitcoin.......  They may find this a fertile area for help as well.  As a bonus, in the area of stocks you can "specifically identify" the stock you sold despite that the stock sold came from an account of commingled groups of the same stock (i.e. stocks that you bought over time in a brokerage account but were never in certificate form or separately kept in journal form).  You might apply the same principals for a bitcoin transaction..... 

IRS hasn't provided guidance yet.... but that doesn't mean you need to take the worst possible position.  If you're afraid of the penalties and interest because they might decide otherwise when they provide us some guidance, ask your accountant about filing the return, then a refund request through an amended return.  If you look for guidance up front through a private letter ruling, it can take months (maybe more) and they don't have to issue any letter ruling if they don't feel it appropriate.

Bob,
Thanks. I appreciate the advice. I'm actually taking the route with my LLC specifically to see how the IRS handles the FIFO designation. I'm going to acknowledge to the IRS that I have other coin owned personally, but sell my LLC-based coin to see what their reaction is.

Part of this is to determine the fungibility of Bitcoin with regards to the IRS. The other part is to determine their concern. My hope is that an audit will help clarify what their position actually is, because whatever it is, it'll be something I can immediately report here, to others that will need the info.

It is worth noting that FIFO is actually beneficial to me from a tax standpoint, but not from an anonymity standpoint. I have no doubt that Coinbase is giving US intelligence agencies information regarding our personal holdings, however it remains to be seen whether or not they are giving details regarding our non-Coinbase assets. Such information will be integral to determining if they are actually able to confiscate our coin, assuming they do so in a manner akin to FDR's confiscation of gold. If they really want this info, we'll know that coin purchased prior to the MtGox confiscation (coin purchased via Gox anyway) is truly anonymous, and can be sold at a premium.

I suspect they do not have such capabilities, and have no special agreement with MtGox, which means several of us are shielded from such possible future confiscation by the fact that they don't actually know what we own if purchased via Dwolla.

Make no mistake, my intentions in this are not necessarily anti-American-intelligence-agency, but I really do want to know if they have such capabilities with IRS audits. The closing and confiscation of the MtGox Dwolla accounts tells me they do NOT yet have this capability. I'll be particularly interested during my audit in what the IRS specifically requests from me to validate the FIFO.

Raize:

FIFO is the default for tax purposes, so absent a strong indication that it distorts your income, and I doubt that would be the case with bitcoin, this is relatively safe method overall.

You can not 'ask' the IRS to come visit you unless you apply for a letter ruling (a kind of guidance ruling along the lines of what Milly Bitcon/Atlantic City did with FinCEN).  Even then the decision is theirs.  I think I recall a prediction on this board that they would provide guidance before April 15th - I'm not holding my breath...

Rather than you test the IRSs position, it would be nice if you chimed in on the foundation to open a dialogue with the IRS or that they take steps to test the waters. 

But if you go it alone be careful what you wish for.  You will find that the government has an incredible number of ways to determine your assets, they are in no hurry, and if they want you, money is quite there for investigative work. You can be a little feisty today and not see it come back to haunt you for years.

There are ways to pressure the IRS to give clarity in the area, which is really what most want.  The virtual world companies have dealt with this for years - and the gamers - Blizzard, Second Life, etc.  I think we need to reach out to them as they have been there for a long time and we don't need to reinvent the wheel..... and by we I really mean we - not you as an individual.  Do not take the IRS on as a personal crusade.  Rather, be a catalyst and help pull a group together to represent us before them.

Hope I interpreted your post correctly......

bob

Well, you did understand what I was saying. I'm not a fan of the federal government. I have much less problems with state government because they are actually using our money domestically. I guess I was just looking for more reasons to be upset.

I am not trying to "take the IRS on" or anything. I just expect an audit due to the massive jump in money I will have this year, and the fact that most of it came from Coinbase. I have a paper trail for everything, so I don't think I'm going to run into any problems anyway. At the worst an audit drains me of every fiat I own and I leave the country to go somewhere more accommodating. The US has a chance to become the place people flee "to" with Bitcoin by forcing the IRS to classify Bitcoin as capital gains at the lowest tax rates or a currency with the 40/60 Forex rules. Or perhaps something new. The more attractive the tax laws, the more likely a country will be the ones Bitcoiners settle into, IMHO.

The problem I suppose I really have is how is stuff like this not settled already? No doubt many of the US-based exchanges have already gotten clarification on how they are taxed on their own Bitcoin holdings (let's be honest, they can't all be converting to fiat entirely), so why is this information not public knowledge at this point?

I doubt US based exchanges have guidance yet - or we would see it as the only guidance they could rely on is a private letter ruling.  IRS private letter rulings are made public.  I can also easily understand why the IRS is not ready to weigh in on this yet - we're still sorting out what bitcoin is ourselves.  From a policy perspective, it is sad that the IRS is in this position.  

Virtual currencies predate bitcoin by over a decade.  The IRS hasn't given any 'safe harbors' for those of us who are willing to do the right thing.  Then again, they have not aggressively pursued the arena that I can see.  I see no court cases or taxpayer challenges.  What a mess for the IRS to have a judge decide how virtual currencies will be taxed.......

It would be nice if the service were to issue  'temporary' guidance while this virtual currency space works itself out.  Many are in for the investment - more like gold.  Many are in it as a currency - to support a consensus based transactional medium.  

As a miner you face, from a cerebral standpoint, the more discrete but interesting judgments..... do you recognize for tax purposes the coinbase when it is awarded or when it is spent - do you recognize it as of the date you become a part of the block-chain, at a safe margin of confirms or at the 100 confirm requirement for spending?  This stuff was pretty inconsequential when it was a $750 issue when this year began.

And since the block time stamp is not an indicator of the time of the coinbase award or its confirmation, tracking will be interesting....

And what do you use for valuation - interday average on Mt. Gox, Bitstamp.... some blend, some running average..... ?

Take heart, though, as your issues are pretty obvious and you have lots of options that are rational and will not be a compliance nightmare once they are made.  I am dealing with a bigger issue right now on those who are determined on using bitcoin for purchasing transactions in a business.  

We are facing some very real compliance issues not only for valuation but also for accounting where bitcoins are regularly used in purchase transactions by a firm...... say you bought your bitcoin for $100, then you used it to buy a portable computer.  The portable may be $800, so there are two transactions here - you made $700 on your bitcoin, you purchased an asset...... Straight forward transaction, but for an individual using Quickbooks (or big boys on an Oracle or SQL solution), it's not easy to track without double entry, and double entry is twice the work.......

All the luck Raize.  Congrats on having the problem you do and I hope you 'ASIC Up' as a friend says, the market only appreciates for bitcoin, and your problem is only worse next year as you pocket some coinbase.......  ditto for you Goat - and I want a ride in that new car.......

I'll probably get an accountant to look this over (anyone know a good one in the SF bay area?), but this is how I'm going to proceed to get an estimate of what I owe and prep the documentation for the c.p.a:

I'm going to do specific identification using the block chain ledger. The block chain records which coins were used in a transaction, and so I can use that to determine the cost basis of coins sent to an exchange or used in a purchase. I did not think ahead enough to plan which coins I used, but I would like that capability in the future and therefore need to establish the specific identification method now. Within an exchange I'm not sure whether to use FIFO accounting or a weighted average since the coins are no longer distinguished. This distinction doesn't really affect me much as I tend not to leave coins on exchanges, but I'd be interested to know what approach is best for the future.

This will probably require a number of custom scripts to gather this information from the blockchain and generate CSV outputs, I'll publish that when it's ready.

I assume that I'll have to start paying quarterly income taxes now that most of my income is not from W-2's...

This wiki says that you can now change your chosen cost-basis method for investment assets:

http://www.bogleheads.org/wiki/Cost_basis_methods

Is this true?

Goat -

First - remember that I am at 7,000 ft. and we love ice and snow.  We're at a 40 inch base here.... and do take a look at how a Tesla handles ice.... you may re-think what you have..... but I digress....

Yes, there are several items surrounding a theft loss that your accountant will sort with you - typically quite quickly but always based upon your own circumstances.  It will depend on whither your bitcoins lost were part of a business, held for the prouction of income, as an investment or as a hobby.... and that it entirely dependent upon your circumstances.

Depending on the above, it may be limited to the basis or fair market value of your bitcoins - so your accountant will likely need both.  

Basis is typically what you purchased the bitcoins for or, if you do pool them, the value under the pooling convention you use (FIFO, Weighted Average, etc.).  For the fair market value of the loss make sure you bring to your accountant some exchange numbers from the likes of Bitstamp, etc. - and a chart works best as the exact 'date' your loss occurred may be as much a guess as anything.  In any event, make sure the exchange price or method you use it is the same exchange you used to value your bitcoin (if you were a miner) in the first place.

Finally, take care to explain the loss clearly.  Your accountant may ask that you file a police report or the like, to help substantiate the loss.  In bitcoin a 'loss' by theft is typically evidenced by little more than a transaction on the block chain.... so you want to think about how this loss can be documented for an agent if you are audited a year or two later who will likely not understand bitcoin. Showing that it was a theft can be a more difficult part of the process.  

As well, determining 'when' the theft occurred is many times interesting.  If you loaned the guy some coins involved in a 'test' - when did it go wrong to the point of being a loss or theft - and when did you discover it.  Did you discover it immediately or did a suspicion ripen into an certainty.  

Also, just fyi - keep in mind a gambling loss is different event than a theft loss, and I am not sure where your loss fits.  You need to be very clear here, as gambling losses are treated quite differently from a theft loss and we're talking about a good deal of money.  It may be critical what you were specifically doing - because if you are 'testing' a gambling site that, to me, is quite different from simply gambling at the site.  Testing implies there is a business going on here - either because you are in the trade or business of gaming as a gambler, or as an owner of a gaming space or location.

This is were one needs to be so cautious and clear.  Let's pretend it was 'gambling.'  The worst of all worlds could arise if the IRS said when you cashed in you effectively 'sold' your bitcoin for its the value of the account you received - a transaction where you have to recognize income and one that you may not be able to net your gambling losses agains.... and then you gambled..... an activity where your losses could be non-deductible... in short, a double whammy.  

Finally, you need to be careful to document in this space the circumstances surrounding the loss to make sure it is not colored as part of an 'illegal' activity.  It's not in the IRS Code, but there are court decisions permitting the IRS to deny the loss deduction simply because it was incurred in an activity that was illegal and 'violated public policy.'

If you want, Goat, email me - you have that info.  I am responding to this depth here so that others who are taken in this space understand that their accountant is critical in dealing with things like this.  I can't tell you where you fall in the spectrum, only the guy who knows your business can.

For that guy, this should be an easy question, they understand your circumstance and your options in how you treat and document the event.  They won't be able to give you certainty, but they will be able to give you a way to report this that is accurate and protects you best should it be questioned later..... if you need someone in the SF bay area - that's where I'm from and I can give you a lead or two......

I was a CPA for over 10 years working in an International Firm
and an NYSE listed bank. I am also a miner. I've been a corporate
CFO and COO over 20 years since then….

For buying on an exchange, the price you pay for a bit coin is your cost.
the price you sell it at is your proceeds. the difference is your gain or loss.
If you hold it over a year, use schedule D, long term capital gain. Else,
use short term capital gain. This is a very reasonable approach. If you do
this offshore, you can probably do it without being found out, but the US policy
is to tax its citizens no matter where they make income. I don't agree with that
but it is what it is. Proceed as you see fit.

If you mine, its less clear. To me, my cost of mining equals
Cost of mining equipment / estimated coins to be mined = $cost per coin mined.
There are some details, but I will leave those to you to ponder...

sales proceeds are realized when sold. Ordinary income rates would apply.

However, if no sale occurs, no dollars go into your bank account. That implies
no gross income (as defined by the IRS). At the same time, your costs associated
with mining those coins probably should not be deducted before they are sold, instead
capitalized…(e.g. not deducted)  some of you may want to deduct the costs before the proceeds arrive,
but the IRS would probably want to ding you on that… Can't say I'd blame you, but
its not what I would do. on the other hand, if its not a lot of exposure, go for it…see what happens :-)

the interesting side is if you buy and sell bit coin for alt coins or something else.
in this case, there is no US dollar realized as cost or proceeds. Take your own approach on that :-)

Barter transactions (bitcoin for bicycles, etc) -- i Think it only matters if its not a one-off transaction.
The IRS really is not in the business of going after a $1000 here or there… just not enough meat on the bone...

JD

The following is free information for entertainment purposes solely, does not include any specific tax advise, and cannot be used to avoid penalties...

The first thing this hypothetical guy needs to do is get his wife an ITIN (individual tax identification number similar to a SSN but only for tax filing purposes), so that she can be included on his US income tax returns. All US citizens must file income tax returns, and if the US citizen is married, the spouse, even if she is not a US person, must be included in the return. The US citizen must file a return that has an accurate filing status (Married Filing Jointly or Married Filing Separately -- advantages and disadvantages to either) In either case, you must file married and declare your non-US person wife. To file, but to not include your spouse, is incorrect and illegal. Whether her income is included on your tax return depends a many details.

The second thing is, an American living overseas, running a business denominated in a foreign currency does not release the American from his legal obligations to file and pay taxes as a US citizen living and working abroad. You will file your income taxes and denominate your income in USD, converted from Thai Baht based on average annual FX conversion rate.

The third thing is, yes capital gains is the most advantageous method of paying taxes on your bitcoins, but will it hold up in court is another issue up for debate with no definitive answer at the moment.

Lastly, I assume, and I apologize if I am making an incorrect assumption, this hypothetical American has been living abroad for many years and has failed to file income tax returns either because he did not make much income, wanted to give a big F U to Uncle Sam which is probably why he moved abroad in the first place, or just was lazy and Uncle Sam wasn't there to make sure he did the right thing. Whatever the reason might be, not filing and not paying taxes while living abroad is the same as not filing and not paying taxes while living in 'merica, it's illegal. If you do have unfiled tax years, get that taken care of first. Then worry about the correct treatment of your bitcoin gains.

The following is free information for entertainment purposes solely, does not include any specific tax advise, and cannot be used to avoid penalties...

Correct, if you made $0 income then you do not need to file. However, very few people actually make $0 income. If you had self-employment income over $400, then you must file (for all you tax geeks out there, he must pay SE tax) Do you really think you can make the argument that you didn't engage in any sort of activity that led to the creation of $400 of profit for yourself in a year? Not even selling pineapples in Bangkok?

The following is free information for entertainment purposes solely, does not include any specific tax advise, and cannot be used to avoid penalties...

I'm just playing agent Smith here...

IRS Agent Smith thinks :I don't like the tone this guy is taking with me. He is not submitting to my authority: "So you had a bank account? Foreign bank account? (go google the penalties for not reporting a foreign bank account)" "So you received interest of less than $400 a year? How did you survive living on less than $400 a year? Possibly some illegal activities?" "Oh you didn't live off of your interest income, you lived off of savings? Let's take a look at those years you earned all that "already taxed income" and see what if we can make some adjustments."

Morphs back into Morpheus...You see how this game goes when you think you didn't do anything wrong? There is nothing wrong in trying to minimize your taxes. But when you take the attitude, that many in this community have, that I am going to use the law to get around the simple fact (but not a law) that the IRS will get a certain percent of what you make, then you will start getting into trouble.

tbh

the issues with bitcoin taxation aren't that thorny. any good accountant you can find will be able to sort it out. Just pay your dues to the man and you should be fine.

hanwong, his wife is not a U.S. person, correct? So he has to file "Married, filing separately", and his wife is not required to do anything, correct? I understand why his wife needs a taxpayer identification number (to list on his filing), but why does she need to pay U.S. taxes too?

The following is free information for entertainment purposes solely, does not include any specific tax advise, and cannot be used to avoid penalties...

To determine whether the spouse is or is not a US person is fairly complicated with a long list of tests. The US citizen has the option to file MFS or MFJ, with many advantages and disadvantages to consider.

If the wife is truly a non US person, and he chooses to file MFS, then her income MAY be kept off of his income tax return. As always the true test if this possible scenario of keeping her income off of his US income tax return, contains many many hoops you must jump through.

If your just asking about what the law is, then the above statement is correct. If you care about how a real life situation where a US citizen hasn't filed or paid any taxes in years, lives abroad, has a wife that can afford a 200K car, but your still asking the IRS to give you the best possible tax treatment of your bitcoins so that you can minimize your pound of flesh you have to give up, well I have no comment there.

The following is free information for entertainment purposes solely, does not include any specific tax advise, and cannot be used to avoid penalties...

ur welcome.

to be clear, I don't believe I said the non US wife needs to pay US taxes on Thai income. In fact the last post to another poster, I said that if the wife is truly a non US person and the US citizen chooses to file MFS, then the wife's income may be excluded from the US income tax return.

But my overall point in that last post was that, in an audit situation this will be hard to explain, a US citizen not having filed or paid taxes in years, living abroad with no income, with a wife that can buy a 200K car, now you go to the IRS asking for a favorable tax treatment of bitcoin gains. In that type of situation, I do not foresee a favorable encounter with the IRS. Although the rules and the law states one thing, how field agents apply these rules and laws to your specific situation is an entirely different story. In my opinion, if I saw this situation, I know what the field agent would do. He would launch a rectal audit to try to sniff out if you've done anything wrong in the past. Now if you survive that audit because you absolutely haven't done anything wrong in the past, then congrats. It's just like a black kid wearing a hoody walking down the street. He's done nothing wrong, but that doesn't prevent the police from stopping him and asking him questions. Now go and ask how many black kids have been stopped by police having done nothing wrong, but ended up in trouble anyways.

In any event, since I'm ignored :(, I hope that little story was illustrative and helpful to others who are in delicate tax situations.

Thanks, and I seriously mean thanks for contributing. You and hanwong's comments are both appreciated.

I do trust my tax advisor to handle this professionally and I actually spoke with her this weekend about it, but I can tell you there's not only a dearth of people informed on how to do this, but a dearth of accountants that are *willing* to do it, so the fact that you're willing to provide any advice at all, with or without the disclaimers is beneficial.

I don't think Goat or I really have any animosity toward the IRS itself, but I, at least, feel like if those with billions of dollars in assets, like the Warren Buffets of the world get to talk like they aren't being taxed enough while still setting up charitable trust funds with billions in holdings for their kids, there's definitely a double-standard going on. It's like they want the rest of us to be punished for not taking advantage of loopholes which they consistently abuse. I don't want there to be loopholes I have to pay to take advantage of, I'd rather see a system where everyone just pays a set rate and the gov't doesn't pick who gets credits and who gets subsidies.

I believe that's probably the biggest problem with fiat, anyway, the way it's been gamed. Anymore the amount of paper with numbers on them you hold is meaningless, it's the power with which you wield it that matters. I'm not sure why this ruse wasn't uncovered earlier, honestly. We owe Satoshi a lot more than we think.

your looking for fairness in the tax system

what's the old saying "who said life is supposed to be fair?"

I suppose "fairness" is one way of saying it, but honestly, I'd just be happy with consistency at this point. Why do we change subsidies for say, agriculture every year? I live in Iowa and I'd be happy with just eliminating everything, including ethanol subsidies. All I'd ask is that we get rid of oil and other subsidies as well. Let them all compete on an even keel, the market will sort them out. If something is "bad" then the environmentalists will boycott that product and the companies that distribute it, thus decreasing demand. It seems kind of self-explanatory at this point, I'm not sure why government in particular has to be involved.

Anyway, I'm preaching to the choir I'm sure. Sanity simply has no place in politics.

Sanity has no place in taxation either.

So here's a story about tax fairness...

I have a friend he's in the cigar business. Totally legal business, but of course it's frowned upon by the government and society at large what with all the cancer thing and of course the smell of cigar smoke. He must pay 75% excise taxes on cigar sales. Is this fair to the cigar business? Imposing such a high tax? Or if you took the tax away, now is it fair to the rest of normal society who hates smelling cigar smoke and paying for cancer treatment?

Tax policy is not about fairness, and many times it is about the opposite of fairness, which is power. Non-smokers have the power. Iowa corn farmers have the power. Which side of the power coin (u see what I did there?) do you think bitcoin falls on? And what do you think the ultimate tax treatment for bitcoin will be? Fair or unfair to bitcoiners?

Is Bitcoin mining income taxable the moment it is received, or at the time it is converted to goods, services, or fiat?

There is no guidance on when to recognize mining income kendog77 - I think the IRS will ultimately say it is taxable at time of receipt of the coinbase and valued  using a reasonable valuation method (pull it from coindesk?) either on the date the block is included in the blockchian, the date it has sufficient confirms (6?) so as not to be considered an orphan or the date it reaches the 99 confirms required for it to be spendable.  I think any convention on timing of the three is supportable, but once you select a method you will have to stick with it for other income from the same mining operation.

You might choose to report it on disposition or sale of the BTC but you may need to consider disclosing what you are doing on the return to avoid significant penalties.

Now how you tax it - ordinary income, capital gain, etc., will be more of a conversation between you and your accountant.  They may also disagree with what I state above.... the 'right' answer is not entirely clear and I have spent several hours on mining income recognition.....

Note if you are in a pool or mining as a group the above may be quite different as the mining pool structure will impact how the income is recognized.........

my two cents.

The only reasonable decision to make by IRS is that there's no tax on digital currencies. If I buy btc on LocalBitcoins or similar site anonimously and sell them later for a profit, how will they control that? For gold, stocks etc. it is different because there's no easy way to make anonymous purchases, so they can easily find if someone "forgot" to declare gains.

If you buy gold for cash in person, guess what? It is taxable.

Only if you declare that you bought it and have some evidence. You must also have evidence that you either hold it at the end of the year or that you sold it during the year, right?

No, if it happens it's taxable. If you fail to declare it, you are evading taxes and just haven't been caught (yet).

Excellent (free) advice from a tax attorney posting on reddit:

https://bitcointalk.org/index.php?topic=398262.new#new

It's not that simple. Let's say I buy bitcoins on LocalBitcoins and sell them later for a loss. I declare that loss to IRS - will I be able to deduct that amount from my income? I highly doubt it.

Yes, yes you could.

I can declare anything but how will I prove my loss? Screenshots? List of transactions and a statement that the username "btcloser" belongs to me?

I wonder to what extent it might be possible that the lack of IRS guidance is putting an upward pressure on price.

Personally, I have no desire to take profits in fiat whatsoever yet (I don't necessarily mean cashing out of Bitcoin entirely a la what the cynical mainstream media pushes as the "bubble" narrative), simply because the risk of having to deal with audits and scrutiny is not worth it even if you have nothing to hide and everything is completely above-board.

Could it be that the lack of guidance actually promotes the fairly commonly-held notion that "once it's time to cash out, you won't need to cash out"?