Bitcoin Forum

The U.S. government will treat Bitcoin as property for tax purposes, applying rules it uses to govern stocks and barter transactions, the Internal Revenue Service said in its first substantive ruling on the issue.

Today’s IRS guidance will provide certainty for investors, along with potential income-tax liability. Under the ruling, purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of income for the coffee shop.

The IRS, faced with a choice of treating Bitcoins like currency or property, chose property.

“The danger is the creation of an electronic black market, similar to the cash economy,” Joshua Blank, a tax law professor at New York University, said in a December interview. “That’s what the IRS wants to avoid.”

Bitcoin, the most popular digital currency, emerged from a 2008 paper written by a programmer or group of programmers under the name Satoshi Nakamoto. The Bitcoin network uses a public ledger to record transactions made under pseudonyms, a technological breakthrough that allows purchases and sales without using a trusted third party, such as Visa Inc. or Western Union Co.

Powerful computers that record the transactions and guard against double-spending the same currency generate new Bitcoins, a process referred to as mining. Mining has made some early Bitcoin adopters wealthy in dollar terms.
50-Fold Gain

Others bought into the currency in early 2013, before its price rose more than 50-fold to peak at $1,200 in early December. A Bitcoin was worth $577.11 at 11:38 a.m. New York time, according to the CoinDesk Bitcoin Price Index.

Under the IRS ruling, Bitcoin investors would be treated like stock investors. Bitcoins held for more than a year and then sold would pay the lower tax rates applicable to capital gains -- a maximum of 23.8 percent compared with the 43.4 percent top rate on property sold within a year of purchase.

For investors with losses, U.S. tax law allows taxpayers to subtract capital losses from any capital gains. They can also subtract up to $3,000 of capital losses a year from ordinary income.

As with stocks, Bitcoin dealers would be subject to different rules that wouldn’t allow for capital gains treatment.

Bitcoin miners would have to report their earnings as taxable income with a value equal to the worth on the day it was mined. If they mine as part of a business, they would have to pay payroll taxes as well.
Information Reporting

The IRS will require information reporting similar to how the tax agency receives notification of stock transactions and payments to independent contractors.

The ruling takes effect immediately and covers past and future transactions and tax returns. The IRS said in the notice that it may offer relief from penalties to people who engaged in transactions before today and can show “reasonable cause” for any underpayments or failure to file.

The ruling comes fewer than three months after National Taxpayer Advocate Nina Olson said the IRS should issue guidance to taxpayers on digital currency transactions.

“It is the government’s responsibility to inform the public about the rules they are required to follow,” Olson, who runs an independent office within IRS, wrote in her annual report to Congress in January. “The lack of clear answers to basic questions such as when and how taxpayers should report gains and losses on digital currency transactions probably encourages tax avoidance.”

This is not good

For Americans..

For Americans..

So Money Transmitter Licenses not needed because it is "Property" not a "Currency"?

Any clarification on  long term capital gain tax applying to holdings over a year?  I belive that is taxed at a lower rate.

IRS will provide guidance to regulators.


Bitcoins held for more than a year and then sold would pay the lower tax rates applicable to capital gains -- a maximum of 23.8 percent compared with the 43.4 percent top rate.

not for bitcoin either

I'd debate that.. IMO some whales were waiting for this, we'll see though I suppose.

Thanks, I wonder how this could really be done.  Technicaly there is no way for anyone to prove time of ownership.  The guess the IRS would just have to take someone's word on it .   Seems like an easily expoitable system.

This is what I was wondering. There is no reasonable way to track this. I can see two ways of doing this: Attempting to track how many coins you had a year ago versus what you have today and taking that difference with the amount of coins you "mined/earned" during that fiscal year to determine how many one year old-coins you have, or assume you spend you always spend your newest coins. Gah, tons of paperwork that frankly isn't going to be worth it...

There is no reasonable way to track this.

Nonsense. All transactions ore visible on the blockchain. Just choose between LIFO and FIFO accounting models, then get to finding the dates of each of your transactions.

No, it does not reset the ownership clock if you transfer to yourself. Would that happen with money in bank accounts?

This isn't rocket surgery.

With third party services, you should obtain proper documentation from them.

my concern is around that fact that this system is dependant entirely on the honesty of the tax payer.

Wow, as if we didn't have enough bad news this year... yup, 2014 is a shit year for bitcoin

Does this mean sales tax may be enforced on BTC as well?

Wow, as if we didn't have enough bad news this year... yup, 2014 is a shit year for bitcoin

Wow, as if we didn't have enough bad news this year... yup, 2014 is a shit year for bitcoin

Nonsense. All transactions ore visible on the blockchain. Just choose between LIFO and FIFO accounting models, then get to finding the dates of each of your transactions.

I'm confused.  So I bought 10 btc this year.  Even if I don't sell them this year am I supose to pay taxes on the increased value for 2014?

Does this mean sales tax may be enforced on BTC as well?

It could well mean just that.

My $.02.

;)

All I'm thankful for is I didn't preorder those 1TH+ miners... with the difficulty this high and now daily mining being taxable as ordinary income (and not when btc are sold/exchanged) and with cost of hardware and power, there's no ROI left. IRS has essentially gifted mining to the Chinese.

All I'm thankful for is I didn't preorder those 1TH+ miners... with the difficulty this high and now daily mining being taxable as ordinary income (and not when btc are sold/exchanged) and with cost of hardware and power, there's no ROI left. IRS has essentially gifted mining to the Chinese.

One word:

Corporations.

Watch for my offerings in that regard, coming soon to an internet forum near you.

My $.02.

;)

The only way you'd owe taxes is if you were making income by mining (by definition!).  

One word:

Corporations.

Watch for my offerings in that regard, coming soon to an internet forum near you.

My $.02.

;)

So basically you mine as income and offset it with expenses such as hardware, utilities, depreciation, etc.? 

From what I understood, that's only if you file "self-employment", then you can include expenses like hardware and power and then it will all net out plus some writedowns ... if not, then its just ordinary income (although obviously a monetary loss with costs and taxes included)

If you made a ton of micro payments over say the course of a year when the bitcoin price was rising relative to usd, what are you supposed to do, go back and find the exact capital gains of each micropayment and total them? That's what they are implying and few people are going to do that.

How does this work for stocks.  If I own 100 Shares of Stock XYZ for 364 days and then purchase 10 more shares and then wait one day then sell 10 shares.  Would that sell be at taxed at long term or short term gains ?

From what I understood, that's only if you file "self-employment", then you can include expenses like hardware and power and then it will all net out plus some writedowns ... if not, then its just ordinary income (although obviously a monetary loss with costs and taxes included)

Lets say I mine 1 btc on a pool and the pool sends me the BTC.  I have a record of the transaction being sent to my wallet.  I can then look up the value on bitstamp at the time I received the BTC, lets say it's worth $580.  The IRS says I'm taxed on the $580 as "income" minus any expenses such as cost of miner and electricity.  Now I wait 6 months and the coin I mined is only worth $200 and I sell.  The question becomes, have I just realized a $380 capital loss to adjust income?  This is the big question I have from reading the IRS FAQ.  

The real reason this is bad is for miners is that it could greatly increase the risk.  The IRS just said you are taxed at the rate when you receive the coin.  What happens if the coin loses value from the point when it's mined to the point when you sell it?  

Lets say I mine 1 btc on a pool and the pool sends me the BTC.  I have a record of the transaction being sent to my wallet.  I can then look up the value on bitstamp at the time I received the BTC, lets say it's worth $580.  The IRS says I'm taxed on the $580 as "income" minus any expenses such as cost of miner and electricity.  Now I wait 6 months and the coin I mined is only worth $200 and I sell.  The question becomes, have I just realized a $380 capital loss to adjust income?  This is the big question I have from reading the IRS FAQ.  

Thanks, I wonder how this could really be done.  There is no easy way for anyone to prove time of ownership.  I doubt its feasiable for the IRS to investigate this.I guess the IRS would just have to take someone's word on it .   Seems like an easily expoitable system.

Thanks, I wonder how this could really be done.  There is no easy way for anyone to prove time of ownership.  I doubt its feasiable for the IRS to investigate this.I guess the IRS would just have to take someone's word on it .   Seems like an easily expoitable system.

The problematic part has been touched on above, but to add to that, if the miner is taxed at the time of mining, how is the sale handled when they sell the coins? What basis is used? I suppose the FMV at the time of mining, but of course there will be no receipt. Normally, basis is what you paid for the item, which in this case would be 0.  If it were 0, that would result in double taxation of the same income.

So it is important to separate out "the tax code" with "can I cheat on my taxes and get away with it".  

The handling of mined coins seems inconsistent and problematic.  A painter is not taxed the value of her painting as she paints. She's taxed when she sells her creation.  A closer analogy is a team of software engineers creating a game. They're not taxed as they code; they're taxed on the income from the sale of the game.

So when will the first whales renounce citizenship?  ;)

It is en vogue

http://www.forbes.com/sites/robertwood/2014/02/06/americans-renouncing-citizenship-up-221-all-aboard-the-fatca-express/

Perhaps Iceland is an option?

This is confusing as hell. Really sucks for American bitcoin users.

This might be helpful to some:

Determining Whether Sales Are Hobby or Business

Income made from online sales can be reported to the IRS as "hobby income" if the sales activity qualifies as a hobby according to the IRS, i.e. sale without the intention of making money. For example, a recreational photographer selling a photo on eBay should report the sale as hobby income. One test is whether the seller has made no profit from the hobby in two of five consecutive years. If the income does qualify as a hobby income, sellers can deduct hobby expenses from the income but cannot use hobby losses to offset other non-hobby income. - See more at: http://tax.findlaw.com/federal-taxes/do-you-need-to-report-your-online-sales-to-the-irs.html#sthash.nNPeBs1B.dpuf

The software engineers are taxed as they code. It's called salary. Even if they are paid in stock they might be taxed on the value of the stock (complex rules apply).

However, if you are mining on a pool you are not really creating bitcoins, you are providing a service to the pool and being paid a fee (usually in bitcoins) based on some formula related to the quantity of service you provided. This is a lot being an employee or independent contractor. The IRS rules are less goofy in this case, though I doubt this was really their intent. Sort of a goofiness-reducing accident.

Agreed that this does complicate the issue.  However, it is also akin to a group of people working together to create something, as in the software engineers above.

Only if you actually have some participation in operating the pool, as opposed to merely using it. It seems possible there might be public a pool organized as a coop where the miners could vote on decisions about running the pool, etc. but I'm not aware of one. But in general that's not how pools work, aside from private pools organized by a small group of miners, and those could fit your description. The pool is a separate business and you are contracting with it.

The basis would be the valuation used for the gross income that you declared.  I showed an example above.  It would never be zero.  I agree the IRS is being inconsistent here but there would be no double taxation.

This is not good

The real reason this is bad is for miners is that it could greatly increase the risk.  The IRS just said you are taxed at the rate when you receive the coin.  What happens if the coin loses value from the point when it's mined to the point when you sell it?  

Lets say I mine 1 btc on a pool and the pool sends me the BTC.  I have a record of the transaction being sent to my wallet.  I can then look up the value on bitstamp at the time I received the BTC, lets say it's worth $580.  The IRS says I'm taxed on the $580 as "income" minus any expenses such as cost of miner and electricity.  Now I wait 6 months and the coin I mined is only worth $200 and I sell.  The question becomes, have I just realized a $380 capital loss to adjust income?  This is the big question I have from reading the IRS FAQ.  

It would be so much simpler if mining income was calculated when you actually sell the bitcoin.  It's the same way for individuals that mine gold, the only difference here is that bitcoin has a public ledger and gold does not.

I don't see that it's quite as clear cut as you indicate.  For instance, the pool I use has a 0% fee, and so is pretty much an agreement between users to split the value of mined coins equally according to work done.  I can't really think of an exact analog in the pre-bitcoin world.

So exactly which part of the system is "property"? Did the gurus at the IRS define that precisely?

Is it the private keys, or the blockchain entry, both, either, niether or something else entirely?

And if it is the private keys, what if they have been destroyed because all I have now is a brain wallet?

I just do not see how they could successfully legally define any part of the system as "property", in the usual context of "property law". Awaiting the court cases with popcorn ready.

Well, they just freakin' did it, so you are going to take them to court over the matter, right?

It's all very simple. The value of any property you receive is taxed. It could be labeled as a 'gift' from someone else, or gotten through some other means.

I just do not see how they could successfully legally define any part of the system as "property", in the usual context of "property law". Awaiting the court cases with popcorn ready.

A solo miner isn't given those bitcoins - he creates them, analogous to a painter creating a painting.  Again, the painter isn't taxed on her creation until (if) she sells it.

Setting aside the consistency or fairness of this ruling, let's consider practicality. Does a miner mining for a pool "receive" those bitcoins when they're credited to his account at the pool, or when he transfers them to another wallet?  If the latter, he can avoid taxes year after year until he withdraws them?  If the former, note that many pools continuously credit accounts based on each block of work received.  This means the potential for many thousands of transactions per day, each of which conceivably needs an individual fair market value.  Not to mention the complete lack of historical data for either of these figures.

And if it is the private keys, what if they have been destroyed because all I have now is a brain wallet?

On the other hand, the day the IRS can tell me how much wealth I have in my (vastly larger quantity) brain wallet is the day I pay taxes on my true wealth.

Spoiler: This day will never come.

Well, they just freakin' did it, so you are going to take them to court over the matter, right?

That's what I thought.

Thank you for your input.

My $.02.

;)

The ruling is very narrow in scope and only applies to tax law.   Bitcoin earned is taxed at the current value when you receive them as normal income.  The profit from Bitcoin that you hold onto will be taxed at lower capital gains rates when you trade them or sell them later.

A solo miner isn't given those bitcoins - he creates them, analogous to a painter creating a painting.  Again, the painter isn't taxed on her creation until (if) she sells it.

So when you say "hold onto" bitcoins ... what exactly are you referring to? The private keys, or a password to a Coinbase account, (or god forbid Goxx account), or something else?

So when you say "hold onto" bitcoins ... what exactly are you referring to? The private keys, or a password to a Coinbase account, (or god forbid Goxx account), or something else?

It is just not clear what it means to be in possession of the thing you are referring to ...

The handling of mined coins seems inconsistent and problematic.  A painter is not taxed the value of her painting as she paints. She's taxed when she sells her creation.  A closer analogy is a team of software engineers creating a game. They're not taxed as they code; they're taxed on the income from the sale of the game.

Unless you mined those coins in your brain wallet yourself, the IRS doesn't really care what you have in it until you convert it back to fiat.  That's when you calculate your capital gains.

An IRS-tax-compliant entity has to reports trades of "property" worth more than $600 in a year under threat of penalty (this is how they enforce tax compliance on a bartering system)

Your tax accounting should match up to these reports if you get audited.

If a famous painter hires a team of brush-strokers to do the tedious work, these bush-strokers are employees and would be effectively "taxed as the paint."  Similarly, most software engineers are effectively "taxed as they code" via income tax withholding.  

Independent innovators--be it engineers or artists--pursuing their own ideas would be taxed if these ideas eventually generate a financial reward.

In my opinion, the logical ruling would be that hashers are liable for taxes incurred as they are awarded payment, while miners are liable for taxes should they realize a financial reward.  But I think the guidance was fair, as expecting the IRS to understand the subtly between hashers and miners would be expecting a lot at this stage.

I'm not sure I understand the difference!

Please enlighten us!

Well, they just freakin' did it, so you are going to take them to court over the matter, right?

That's what I thought.

Thank you for your input.

My $.02.

;)

this is all great and fine with everyones examples of 1 BTC...but what about the other 99% of us who mine like .1/.2/.3  btc/day for example.

We're now supposed to keep track on every fraction of BTC we receive as well as the current price we receive that at? that's almost impossible.

Look at your receiving address(es) that you use for mining on blockchain.info.   It will show all of the time and amounts of received btc.   I'm pretty sure that the blockchain.info api has a function to show what it was worth at the time of the transaction, since my android blockchain wallet will tell me the "now" and "then" values in USD on each transaction.

Not impossible if you have a computer connected to the internet and your receiving address(es).

Unless you mined those coins in your brain wallet yourself, the IRS doesn't really care what you have in it until you convert it back to fiat.  That's when you calculate your capital gains.

Tell you a secret...

By the time I would actually need to convert my brain wallet wealth back to fiat, there will be no fiat left to convert back to.

The IRS will soon be as irrelevant as Blockbuster Video, and there is nothing anyone can do to change that.

If they are going to treat it as property, how would mined coins by a company set up as a corporation be treated?  My impression is that per the IRS's position, bitcoins mined would be the same as a the creation of a product you create/produce for sale but does not sell. It becomes on the shelf inventory, and there is no taxable event until it sells. This applies to all companies that make products through a process, hard materials or digital.  If you own a software application, or a script (plugin) you developed, and sell it for $50 per copy, and make 1000 copies on CDROM, you don't owe the IRS taxes on the copies until they sell. It's all 1s and 0s, so what difference is there between using computers to create scripts or plugins or software, or bitcoins? All property right? You just have to view it from a manufacturing standpoint.  And the fact that they have ruled it is property, the manufacturing stance would in my opinion apply. Manufacturing being the creation of something tangible "property" from the use of labor, machines, raw materials, and energy resources.  So you mine the coins, put them on paper wallets as inventory to sell. But hold them... For sale at a later date, which would be taxable.  You'd have to set up an s-corp to do this, or is my thinking way off??

They are essentially saying that mining is more like receiving in trade than creating it yourself.

It's a rule they made, in some sense doesn't have to be logical (as long as they can defend it in court), but if you want a logical basis for it, that's it right there.

You could argue that any product you produce or manufacture, digital or hard goods, has value... Whether you are making copies of a script or software package, selling music CDs, DVDs of movies you produce, or you make widgets that have real value in the marketplace... Unless you sell them, there is no taxable event. Mining is a process in which something is made.  The bitcoin does not exist before you mine it. The block ledger is not prewritten. If it was, their ruling would apply as it would be a transfer of something that is already in existence.

But Bitcoins don't exist before they are mined. Not in any way shape or form. Otherwise people would make them before the block got that far ahead.  They are manufactured through a process. After which, they are a product. Shelve them.

You could argue that any product you produce or manufacture, digital or hard goods, has value... Whether you are making copies of a script or software package, selling music CDs, DVDs of movies you produce, or you make widgets that have real value in the marketplace... Unless you sell them, there is no taxable event. Mining is a process in which something is made.  The bitcoin does not exist before you mine it. The block ledger is not prewritten. If it was, their ruling would apply as it would be a transfer of something that is already in existence.

But Bitcoins don't exist before they are mined. Not in any way shape or form. Otherwise people would make them before the block got that far ahead.  They are manufactured through a process. After which, they are a product. Shelve them.

Except there is a "transaction" that mines the block. That transaction has counterparties (the rest of the network). If you manufacture a CD and put it on a shelf, it is true you don't pay taxes on it. But if you sell that CD to a warehouse and the warehouse puts it on a shelf, you do pay taxes on it.  Think of the blockchain as a warehouse.

Again, this is not the only rule they could have written (and not the rule I would have written) and there are ways of looking at it that make sense and other ways of looking at it that don't. That likely could be said for any rule.

So what happens when you sell? You have accumulated coins over the months, but how do you know which particular coins you are selling? Maybe you're selling 5% of the coins you mined at $600, 2% of the coins mined at $630, 6% of the coins you mined at $510

Do you see where I'm going with this?

No. But someone certainly will. All the way up to the Supreme Court I would bet.

Wrong.

Read the ruling.

My $.02.

;)

Except there is a "transaction" that mines the block. That transaction has counterparties (the rest of the network). If you manufacture a CD and put it on a shelf, it is true you don't pay taxes on it. But if you sell that CD to a warehouse and the warehouse puts it on a shelf, you do pay taxes on it.  Think of the blockchain as a warehouse.

Again, this is not the only rule they could have written (and not the rule I would have written) and there are ways of looking at it that make sense and other ways of looking at it that don't. That likely could be said for any rule.

And you will be right there, carrying a placard outside, right?

My $.02.

;)

Those amounts are regular income taxed at regular income rates.  Your mining pool, if complying with US law, is required to report these transactions to the IRS if they exceed $600 during the year.

http://www.forbes.com/sites/kellyphillipserb/2014/03/25/irs-says-bitcoin-other-convertible-virtual-currency-to-be-taxed-like-stock/
For those buying and selling Bitcoin as an investment, calculating gains and losses are figured the same as buying and selling stock. The basis, the holding period and even the triggering event (the sale of the asset) are all very clear.

I have stocks and I don't pay any tax on them until I sell those stocks.  My understanding is that it works the same way with conversion of btc to fiat.  This is what I assumed before this IRS guidance even.  But maybe I'm misunderstanding.

Those amounts are regular income taxed at regular income rates.  Your mining pool, if complying with US law, is required to report these transactions to the IRS if they exceed $600 during the year.

The profits that you gain on holding onto them are taxed at a lower capital gain rate.   Your exchange, if complying with US law, will have to report the sale of your of your bitcoin if it exceeds $600 during the year.

If the IRS audits you, you will have to come up with documentation that explains the reported transactions.

No.  Nice eyepatch btw.

"Q-

8: Does a taxpayer who “mines” virtual currency (for example, uses computer
resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities? A-8:
 
Yes, when a taxpayer successfully “mines” virtual currency, the fair market value

of the virtual currency as of the date of receipt is includible in gross income. See Publication 525,
Taxable and Nontaxable Income
, for more information on taxable income."

Not me, THEM!

Have a nice day!

My $.02.

;)

You're right when mining things are different.  Maybe I didn't specify that clearly.  I was only speaking to people that purchased BTC as an investment.

That doesn't really tackle my point regarding that you don't know what your gains are, because you don't know which coins you are exactly selling. If they are all fractional-mined at different values, you are getting profits or losses depending on WHEN they were mined. There is no way to track that information.

That doesn't really tackle my point regarding that you don't know what your gains are, because you don't know which coins you are exactly selling. If they are all fractional-mined at different values, you are getting profits or losses depending on WHEN they were mined. There is no way to track that information.

This isn't like stocks where you get a nice report from your broker for the exact shares you owned, and which block you sold at EOY.

It would be pretty easy to write a script, using the blockchain API to iterate all the mining receive transactions during the tax year on the receiving address(es) and to get a historical exchange values from the same API.  The databases exist for free of charge, and you most likely have a computer that could run such a script.

It would be pretty easy to write a script, using the blockchain API to iterate all the mining receive transactions during the tax year on the receiving address(es) and to get a historical exchange values from the same API.  The databases exist for free of charge, and you most likely have a computer that could run such a script.

Thanks!

Just funnin' ya on the replies!

We are all awash in new regs and trying to stay afloat!

My $.02.

;)

Agreed.  If there is a demand and especially if people are willing to put up a little BTC for it then I'm sure programs will pop up to pull the exchange rates and help do the needed calculations.

A capital gain is a capital gain.  I don't think the IRS much cares if it is a pain in the ass for you to calculate.

please re-read my posts regarding the question remaining, how do you know which cashed out BTC, are from which exact mined BTC.
It helps zero to know, you received x btc at x price.

You need to know, that xyz bitcoin was recieved at xx price, and those same xyz bitcoin fraction was sold at yy price.

please re-read my posts regarding the question remaining, how do you know which cashed out BTC, are from which exact mined BTC.
It helps zero to know, you received x btc at x price.

You need to know, that xyz bitcoin was recieved at xx price, and those same xyz bitcoin fraction was sold at yy price.

Your exchange keeps that information.   If they are required to report it to the IRS, they will.

If you don't want to pay your taxes, then using poor record keeping isn't an excuse for not paying your taxes.   Men with guns from the IRS can still come after you and demand payment of taxes using a worst case scenario (on your part) .

please re-read my posts regarding the question remaining, how do you know which cashed out BTC, are from which exact mined BTC.
It helps zero to know, you received x btc at x price.

You need to know, that xyz bitcoin was recieved at xx price, and those same xyz bitcoin fraction was sold at yy price.

I believe you can use FIFO, LIFO, or pick yourself the associations.  Same as with stocks.

I imagine they care about as much as I care that their tax laws will soon be virtually impossible to effectively enforce.

IRS agents don't carry guns.

FIFO requires a ruling from the IRS for your company... It would put you on the radar.

what?

All I'm saying is that you can pick yourself which BTC purchases match up to which BTC sales, just like with stock.

No you can't. It's LIFO.

With stocks it is LIFO unless you identify specific shares when you sell. I haven't seen anything to say that bitcoin will be different that stocks, but who knows what is coming next.

No you can't. It's LIFO.

For large transactions, they might be able to find them, but honestly, how can the IRS find out how much you mine?

Of course you can pick if you are using a wallet with coin control.

Fine and good.

I trust that you will be the one to argue this before a court?

right

My $.02.

;)

And another thing ... can all the people (IRS agents) who are fond of saying things like "if you don't count your coins carefully the men with guns are going throw you in jail where you'll get ass-raped!!", FUD, etc, etc just leave all the scary govt. rhetoric at the door?

We're all just trying to figure out a way to live peaceably and all these threats and innuendo is polluting the discussion, thnx.

please re-read my posts regarding the question remaining, how do you know which cashed out BTC, are from which exact mined BTC.
It helps zero to know, you received x btc at x price.

You need to know, that xyz bitcoin was recieved at xx price, and those same xyz bitcoin fraction was sold at yy price.

With BTC there isn't a broker so I assume you simply need to document your decision but I'm not a tax lawyer so I'm not really sure.

The blockchain is the most perfect broker record you could hope for.

With coin control you could sell exactly the coins you wanted to at exact the basis you wanted to at any time.  

D&T: what do you think about the legal implications of my zero-gain/loss-for-tax-purposes wallet idea.  It uses coin control to select a suitable linear combination of coins such that each and every day-to-day purchase you make has a gain/loss for tax purposes of identically zero.  

https://bitcointalk.org/index.php?topic=531135.0

The blockchain is the most perfect broker record you could hope for.

With coin control you could sell exactly the coins you wanted to at exact the basis you wanted to at any time.  

You can if your wallet software supports coin control.

I don't know, I haven't used it. Of course, there is always Armory!

Is it the same coin control from Armory? Because it only let me choose which address to spend from. Not tx....

Please share if i miss something

Sounds perfect as long as you don't reuse addresses.

so i'm curious if bitcoins a property.. why is the owner of silkroad being charged for transmitting money without a license??

So what happens when you sell? You have accumulated coins over the months, but how do you know which particular coins you are selling? Maybe you're selling 5% of the coins you mined at $600, 2% of the coins mined at $630, 6% of the coins you mined at $510

Do you see where I'm going with this?

so i'm curious if bitcoins a property.. why is the owner of silkroad being charged for transmitting money without a license??

I agree with Dissonance and Holliday....   I saw the NYT article last night and have been reading posts here.  It is shocking what some people have said haha.  But yeah I have no problem paying taxes on money I earn mining.  I can easily export my wallet right there from inside the wallet into a CSV file so I don't see the problem with tracking dates.  And I think it's also good for Bitcoin.  I have been worried my credit union will eventually say, what are all these deposits?  We've all been wondering that I'm sure and I am glad it's going to be implemented into the ecosystem and I can mine for a living now and relax :)

so i'm curious if bitcoins a property.. why is the owner of silkroad being charged for transmitting money without a license??

I hope you guys know it is only in USA

So what happens when you sell? You have accumulated coins over the months, but how do you know which particular coins you are selling? Maybe you're selling 5% of the coins you mined at $600, 2% of the coins mined at $630, 6% of the coins you mined at $510

Do you see where I'm going with this?

Thank you IRS!

That was the nail in the coffin for speculation in bitcoin.
Instead we can use colored bitcoins to issue USDollar IOUs, which implies a fixed price between the colored coin and USD, therefore no profit will be possible.
And no volatility will occur when the coin is pegged to US dollar.

the U.S dollar is doomed to fail, having lost 97% of it's original value since 1913...No one should want to be pegged to the U.S Dollar.

Here is what I don't get. Someone said if you mine then you pay taxes based on the value of the coins at the time you mined them. That seems borderline impossible to calculate since there is no central body in charge of prices and they change rapidly. You could be mining doge and it could be worth 120 sat on mintpal and 115 sat on cryptsy at the same moment. Also, the value changes constantly even throughout one single day. Are you supposed to valuate each payment from the pool individually?

And, are they saying that if you mined and held the coins and they dropped in value you would owe taxes based on what they were worth when you mined them? So for example if you were mining doge when it was worth 300 sat, and you have held them, and end up selling them when they are worth 125 sat, then you owe taxes based on the 300 sat figure? That seems absurd...

Bitcoins are no different than any other commodity. You are 'given' 10 live chickens. Find a reasonable market value for the chickens. There are thousands of different farmers markets selling chickens in the world. Pick a reasonable middle.

If you find that each chicken is worth $5, then when you sell them at $2 each...

You owe ($5 x 10) $50 minus your loss of  ($3 x 10) $30 for the 'loss sale', so you have $20 in taxable income. This is the same as $2 x 10 = $20, the price you sold them for.

So in your version, where you mined them at 300 and sold them for 125, you'd just pay taxes on the price you sold them for - as long as this is in the SAME YEAR.

If you mined the bitcoins on Dec 31, 2014, and they were worth $5 each that day, you'd have a taxable income addition of ($5 x 10) = $50, then SOLD them on Jan 1, 2015 for $2 each, you'd report a LOSS of $30 that year.

the U.S dollar is doomed to fail, having lost 97% of it's original value since 1913...No one should want to be pegged to the U.S Dollar.

law doesn't work backwards.

You could argue that any product you produce or manufacture, digital or hard goods, has value... Whether you are making copies of a script or software package, selling music CDs, DVDs of movies you produce, or you make widgets that have real value in the marketplace... Unless you sell them, there is no taxable event. Mining is a process in which something is made.  The bitcoin does not exist before you mine it. The block ledger is not prewritten. If it was, their ruling would apply as it would be a transfer of something that is already in existence.

But Bitcoins don't exist before they are mined. Not in any way shape or form. Otherwise people would make them before the block got that far ahead.  They are manufactured through a process. After which, they are a product. Shelve them.

Question, How is the IRS going to go after all who are mining BTC and how will the IRS go after all of us who purchase goods with BTC. And how will the IRS go after the ones who gamble and receive earnings with BTC  ???

What if we all refuse to give any information to the IRS regarding our BTC trades?

I say we End The IRS and EndTheFed!!

This does bring up a existential question on what property really means.  Afterall what does it mean to own a bitcoin?  In the technical sense it just means knowing the private key to a wallet that has bitcoins;  In the literally sense ownership means knowledge.  If I were to share my private key with 10 people are they now owners of that wallet or is the wallet still mine ?  What if I loose my private key and the bitcoins are lost forever do I still own that wallet , did I ever own that wallet ? I think bitcoin is going to force a fundamental chance on how property is viewed in the world.  Its certainly going to be interesting.

Question, How is the IRS going to go after all who are mining BTC and how will the IRS go after all of us who purchase goods with BTC. And how will the IRS go after the ones who gamble and receive earnings with BTC  ???

What if we all refuse to give any information to the IRS regarding our BTC trades?

I say we End The IRS and EndTheFed!!

What if this property is moved oversea and never exchanged at home country? If people avoid centralized exchanges where all the bitcoins can be traced to person, then there is no way to properly identify the ownership of each coin

I don't think that is what they are saying though. If that is what they are saying then why bother telling us to base the value on what they were worth at the time they were mined? If what you are saying is accurate then there would be no point in worrying about what they were worth when MINED, only what they were worth when SOLD.

This does bring up a existential question on what property really means.  Afterall what does it mean to own a bitcoin?  In the technical sense it just means knowing the private key to a wallet that has bitcoins;  In the literally sense ownership means knowledge.  If I were to share my private key with 10 people are they now owners of that wallet or is the wallet still mine ?  What if I loose my private key and the bitcoins are lost forever do I still own that wallet , did I ever own that wallet ? I think bitcoin is going to force a fundamental chance on how property is viewed in the world.  Its certainly going to be interesting.

If I sell btc on a exchange I will report it. I will not be reporting any capitol gains from anything I buy with btc.  As far as the IRS will know my bitcoins will remain forever in cold storage.  They simply can't monitor this..

What if this property is moved oversea and never exchanged at home country? If people avoid centralized exchanges where all the bitcoins can be traced to person, then there is no way to properly identify the ownership of each coin

There are lots of ways to cheat on your taxes.  It is called tax evasion.  There are also lots of ways to legitimately reduce your tax liability.  It is called tax avoidance.  How difficult it would be for the IRS to catch you cheating is a completely different topic than the tax liability.

Tracking cash is also hard.  An employer could pay all his employees in cash, keep fake books, and cheat on his taxes that way.   It doesn't make the tax liability go away.  So keep in mind when you are asking a question, which question are you asking.

A US citizen (and in most cases residents) owes US taxes regardless of where the taxable event occurs.  It doesn't matter if you leave the US and NEVER come back.  The only way to avoid US taxation is to renounce your citizenship (which generally requires you to already have citizenship in another country).  Now if you are asking if you could "get away" with traveling to russia to do cash deals for rubbles and then laundering those funds though a bunch of offshore accounts?   Maybe but that is asking "will I get caught", not "is this legal".  Honestly if it is a small amount of money it probably isn't worth the trouble and if it is a huge amount of money speak to a good offshore lawyer and CPA.  Tax avoidance not tax evasion. 

they will make an example of a few people who will be audited comprehensively.
once you hear on the news some guy got 20 years in jail for tax fraud because he didn't report his bitcoin capital gains properly you will think twice before attempting this.
if you refuse to give the IRS any information they will throw you in jail obviously...
 

Interestingly the markets still don't seem to care...

A US citizen (and in most cases residents) owes US taxes regardless of where the taxable event occurs.  It doesn't matter if you leave the US and NEVER come back.  The only way to avoid US taxation is to renounce your citizenship (which generally requires you to already have citizenship in another country).  Now if you are asking if you could "get away" with traveling to russia to do cash deals for rubbles and then laundering those funds though a bunch of offshore accounts?   Maybe but that is asking "will I get caught", not "is this legal".  Honestly if it is a small amount of money it probably isn't worth the trouble and if it is a huge amount of money speak to a good offshore lawyer and CPA.  Tax avoidance not tax evasion. 

Are you people retarted? "I won't pay my taxes" Har har har... Good luck with that you silly sausages.

Actually i was told that i can still keep my citizenship and only pay tax to the primary country if i only stay in US for less than xx days.

Many dual citizens do this.

Are you people retarted? "I won't pay my taxes" Har har har... Good luck with that you stupid cunts.

Won't this affect Bitcoin's fungibility ?

One Bitcoin won't be the same as another Bitcoin.. since there will be tax to pay on the capital gain.

If you bought a BTC at $10 and another at $100, and now you wanted to spend one to buy a $100 shirt, when the price is 100$/btc.

The 2 bitcoins have different value now..  

Is that what they are saying ?

Won't this affect Bitcoin's fungibility ?

One Bitcoin won't be the same as another Bitcoin.. since there will be tax to pay on the capital gain.

If you bought a BTC at $10 and another at $100, and now you wanted to spend one to buy a $100 shirt, when the price is 100$/btc.

The 2 bitcoins have different value now.. 

Is that what they are saying ?

No. It's an accounting problem.

If you bought 1 BTC at $10 and another at $100 and the bitcoin price is $100 when you buy a $200 shirt with 2 BTC then you have a capital gain of $90 which is now realized. If that $10 BTC was kept for a year before the shirt was bought the $90 profit would be taxed at an income tax rate, perhaps 40%, otherwise it would be more like 20%.

So who is going to have fun with the IRS by sending one satoshi back and forth between wallets millions of times and then reporting all those transactions on their taxes?

:D Can you guys base those earnings on MtGox rates, $122 wasn't it when last traded.

Or do you have to base it on the price of an US Exchange  ;)

Now what if there was only one US Exchange and it was like a fraction of the real price (no buy orders obviously).

Are those coins Earned oversea's ? or in the clouds ?

So much to go wrong here.. :o

If you buy a bitcoin for $100 and trade it for a bitcoin bought by someone else for $1000 then buy something with it for $550, what is your net gain/loss?

Are you people retarted? "I won't pay my taxes" Har har har... Good luck with that you stupid cunts.

really? Holding longer means a higher tax rate? Normally it is the other way around. In Germany Bitcoin is a currency and you pay 25% as a capital gain in the first year and after one year you pay nothing (like with every currency. Under one year is considered as speculation, trading).
..

For extra fun, lets say

A block was mined from the US pool,
whilst I was visiting England,
and my pool was pointed to Mtgox in Japan,
but my miners where in Australia.

For tax purpose where did I receive my property, who do I pay the tax too ?

For extra fun, lets say

A block was mined from the US pool,
whilst I was visiting England,
and my pool was pointed to Mtgox in Japan,
but my miners where in Australia.

For tax purpose where did I receive my property, who do I pay the tax too ?

Nexus will reside in the last place the coins landed.

My $.02.

;)

A-8:
 
Yes, when a taxpayer successfully “mines” virtual currency, the fair market value
of the virtual currency as of the date of receipt is includible in gross income.

really? Holding longer means a higher tax rate? Normally it is the other way around. In Germany Bitcoin is a currency and you pay 25% as a capital gain in the first year and after one year you pay nothing (like with every currency. Under one year is considered as speculation, trading).
Now on assets we pay 25% flat on every gain, no matter how long you hold it. This is new since 2008. Before that it was 30% tax within the first year and nothing with more than one year - if you are a individual private saver.

When and where was it received ? The pool is in the US but virtually its outside US Territory, I received no real property until it hits a bank.  

My tax form goes something like

Have you received property in (origin country),   - no
Have you received property overseas,  - no

There is not a question :-

Have you received property in a virtual location ?

Just out of curiosity, do you have a short cut for your

My $0.02.

;)

or do you type it each time ?

I do appreciate your $0.02. most of the time thou.  ;D

Actually i was told that i can still keep my citizenship and only pay tax to the primary country if i only stay in US for less than xx days.

Many dual citizens do this.

Hmmmmmmmmmmm............good questions and it is problems like the ones you have suggested which are going to lead to all sorts of mischeif and headaches in the near future.  I don;'t have the answers but I'll bet the IRS doesn't either!

If you mined a coin at $1200 then you technically received property worth $1200 that is now worth $600.

When can you realize the loss?

This is hurting my head.

Either you "own" the private keys which control the address or you don't.

Either you have documentation from an exchange or you don't.

No one pointed out the big purple elephant thats staring down its big trunk at bitcoin taxation, how can any of us including the IRS prove one way or another that the owner of an address that transacted years ago for a sum of bitcoin was in fact you? Perhaps if you were on an exchange in which you identified yourself, they would report this and it would be tied to you, but for all the other exchange methods that do not require or have no way of proving ones identity, what proof could any of us offer?

Now lets say instead of wanting to be taxed at the 25%-40% short-term capital gains rates you wanted to be taxed at the 15% long-term capital gains rates, instead of pointing to the addresses holding the coins you bought 6 months ago you could point way back in the blockchain (provided the purported gains did not offset the tax savings) and claim those were your bitcoins you bought from a guy on a forum. They demand proof, what proof? There is no proof, no way of proving that those coins were owned by you, does that mean they will then tax you at whatever rate they wish because there is no way to prove something? I dont know, do we all face maximum taxation unless we register our identities on an exchange?

No, this means you are making choices / taking actions which could have a negative impact on your financial situation by increasing the amount of taxes you may have to pay.

I would suggest you start making new choices / taking different actions which would have a positive impact on your financial situation by decreasing the amount of taxes you may have to pay.

I'm confused. Do you want to remain anonymous or do you want to file your taxes with the IRS? You are correct, you can't do both, but this has nothing to do with Bitcoin. These are choices you must make as an individual.

Im not anti-government, nor am i trying to dodge paying my dues, but i dont like to trade on an exchange, you know how much money i lost on mt-gox? $0. Do you know how much i will lose on bitstamp when it gets hacked? $0. Now the IRS is in effect saying, you had better use those services or else we will hit you with a full-taxable amount, that is not fair, nor is it reasonable to presume a small time speculator like myself would have the ability to produce solid evidence of a p2p trade. In fact, its not reasonable to presume anyone has the ability to provide evidence of a p2p trade, this is no more possible than if you sold something on craigslist to a stranger for cash and then get audited and asked the details of the transaction, who was the buyer? prove that you sold the item in question and not illegal drugs or stolen property. This is no different, they arent taxing bitcoin, they are effective threatening the entire bitcoin community with fines and jailtime for doing anything that isnt registered with the government. This is what i mean when i say deanonymized, its not hiding, its having nothing to hide from.

The Internal Revenue Service’s tea party targeting program is still withholding approval of 19 organizations’ nonprofit status, nearly a year after the scandal was revealed, the agency’s commissioner testified Wednesday to Congress — where he faced fierce criticism from lawmakers who said he is stonewalling.

John Koskinen, the man President Obama tapped to clean up the embattled agency, also said it will take years to respond to all of the document requests from Congress.

If you mine a coin at $1200 then you have $1200 in income on that day, minus any expenses used to produce that income (electricity, equipment cost depreciation, etc). The "bias" for you coin is now $1200.

Then if the price drops to $600 or goes to $10K nothing happens until you sell.

If on the day you sell the price of BTC is $600, then you would have a $600 loss ($600 - $1200 =  $-600).

If on the day you sell the price of BTC is $10K then you would have a $8800 gain ($10000 - $1200 = $8800).

To figure short or long term capital gains you just use the length of time you held the coin after mining it. If you sell it less than 1 year after mining it you pay short term capital gains, if you sell after holding for more than 1 year you pay long term.

If you made a ton of micro payments over say the course of a year when the bitcoin price was rising relative to usd, what are you supposed to do, go back and find the exact capital gains of each micropayment and total them? That's what they are implying and few people are going to do that.

If you made a ton of micro payments over say the course of a year when the bitcoin price was rising relative to usd, what are you supposed to do, go back and find the exact capital gains of each micropayment and total them? That's what they are implying and few people are going to do that.

If you made a ton of micro payments over say the course of a year when the bitcoin price was rising relative to usd, what are you supposed to do, go back and find the exact capital gains of each micropayment and total them? That's what they are implying and few people are going to do that.

This is EXACTLY what day traders of stocks do. They have to calculate each buy and sell (which they do hundreds of times a day) and report it all at the end of the year.

If you made a ton of micro payments over say the course of a year when the bitcoin price was rising relative to usd, what are you supposed to do, go back and find the exact capital gains of each micropayment and total them? That's what they are implying and few people are going to do that.

The bigger problem (in my opinion) is that even if people WANT to comply, it may be difficult or impossible to do so.

Documentation of your trades exist in the block chain, cost basis is easy enough to add (I expect software for that will soon exist).

Exchange users should start demanding that their exchange provides them with this information.

Many are acting like it's impossible to keep decent records when it's not. Bitcoin makes it easier than most things thanks to the block chain. It's an unalterable record ffs!

How does the IRS establish ownership of the Wallets ?  If I transfer BTC from one Wallet to another (both mine) does that reset the ownership clock?  How about online wallets and third party providers that pool their btc?

Get receipts for your face to face transactions. Problem solved. I really think you are making this out to be much more difficult than it needs to be.

http://www.billofsale-form.com/blank-bill-of-sale/

Does someone hold your hand when you pee?

The bigger problem (in my opinion) is that even if people WANT to comply, it may be difficult or impossible to do so.

I agree, this is a big problem, but the real problem here is that reporting any transaction where both parties havent identified themselves and are being monitored by a 3rd party may open onself up to being charged with tax evasion.

Receipts are proof of nothing though, i could fabricate them all day, are simple unprovable records all auditors are looking for, or do they require proof, and if so what proof could you possibly give them that you sold your tv for $200 and not $800, or that you sold your tv and not an ounce of weed?

If the IRS thinks all your receipts look legit, they won't investigate further. But if anything looks suspicious, they will investigate a few items and see if your story is true.

For example, if you write on your taxes that you gave $1,000 in charity to your church (a tax write-off)... if the IRS audits you, they will ask you for your receipts. You tell them you gave cash, you have none. They will then ask for the name of your church. They'll follow up to see if you go there regularly. If the pastor knows you, they might think your donations are legit. They won't trace further than this, they'll trust you.

However, if they ask your friends about your church, and they say you don't go, and the pastor never heard of you.... well the IRS will get upset, and charge you with fraud and fine you.  They will then investigate deeper everything on your taxes, and audit you for previous years, and also audit you repeatedly in the future. YOU have to prove that you gave $1,000 in charity to your church, not the other way around. If the IRS is just suspicious, that's enough for them to charge you.

(If you wrote that you gave $50 to your church, however, they won't even think of pursuing it, so how MUCH money matters a lot)

If the IRS thinks all your receipts look legit, they won't investigate further. But if anything looks suspicious, they will investigate a few items and see if your story is true.

For example, if you write on your taxes that you gave $1,000 in charity to your church (a tax write-off)... if the IRS audits you, they will ask you for your receipts. You tell them you gave cash, you have none. They will then ask for the name of your church. They'll follow up to see if you go there regularly. If the pastor knows you, they might think your donations are legit. They won't trace further than this, they'll trust you.

However, if they ask your friends about your church, and they say you don't go, and the pastor never heard of you.... well the IRS will get upset, and charge you with fraud and fine you.  They will then investigate deeper everything on your taxes, and audit you for previous years, and also audit you repeatedly in the future. YOU have to prove that you gave $1,000 in charity to your church, not the other way around. If the IRS is just suspicious, that's enough for them to charge you.

(If you wrote that you gave $50 to your church, however, they won't even think of pursuing it, so how MUCH money matters a lot)

In your example you gave the name of a church, that is simple to investigate, but if i tell them i sold my coin to an anonymous person over the internet who made a cash deposit and they ask for proof of that, then what do i tell them? I can give them the amount i sold for (hey there it is in my bank account), the amount of coin, the price per coin, the difference in value from when i obtained it, etc.... but i can never give them proof that the coin was in fact mine and that im not just pointing to some arbritrary address on the blockchain. They suspect that i was selling coin for a favorable longterm capital gains rate and not the newer coin i just purchased recently, i can only point to the address i have given them, then what happens?

This could be a good thing ya know?

If the IRS is suspicious, they might ask who did you buy it from. If you don't know, but you can show that when you bought the $500 btc earlier in the year, that was the going rate for 1 btc, then later about $1200 was the going rate for 1 btc, they will probably accept that. I doubt they will ever care about a 'blockchain' or anything like that.

Oh, well, please tell us just how!

Here's the funny thing though. Rulings are merely administrative interpretations of the Regulations as encoded in the CFR. The Regulations, in turn, are the Commissioner's best effort at interpreting the Statutes as encoded within the USC. The USC is the best effort attempt at harmonizing all the bills that the Legislature passes. IOW, Rulings are not Law. They are three indirections removed from Law.

Further, Rulings are not binding - not even upon Inspectors, Auditors, nor the US Tax Court. And the US Tax Court is not really a court, as it is not a body according to Article III of the Constitution. US Tax Court is really an administrative tribunal. All decisions of the US Tax Court are appeal-able to a real Article III Federal Court.

I guess the last three paragraphs are just a long-winded way of saying that I expect the mining ruling to be overturned.

This could be a good thing ya know?

+1

 

My interpretation of the laws is that "hashers" are required to recognize mined coins as income at the time of mining, and miners when a "gain" has been realized.  
 

A federal judge in Texas has declared that Bitcoin is a currency and should therefore be regulated just like U.S. dollars

The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.

Get receipts for your face to face transactions. Problem solved.

What would be the consequences if a government made Bitcoin its official currency?  Would a native american tribe qualify?  Or possibly Nauru, Tuvalu, or Palau.

https://en.wikipedia.org/wiki/Nauru
https://en.wikipedia.org/wiki/Tuvalu
https://en.wikipedia.org/wiki/Palau
https://en.wikipedia.org/wiki/Tribe_%28Native_American%29

The Battle of Little Bitcoin: Native American Tribe Launches Its Own Cryptocurrency
http://www.forbes.com/sites/jasperhamill/2014/02/27/the-battle-of-little-bitcoin-native-american-tribe-launches-its-own-cryptocurrency/

http://www.theverge.com/2014/3/5/5469510/native-americans-assert-their-independence-through-cryptocurrency-mazacoin

Some governments have more than one currency.
https://en.wikipedia.org/wiki/List_of_circulating_currencies

So,  does anyone have or know of an application or program that can look-up the value of a Bitcoin for a specified date and time?

I have a spreadsheet with lots of small transactions and I'm dreading manually querying bitcoin charts to record the average daily value.


thanks

So,  does anyone have or know of an application or program that can look-up the value of a Bitcoin for a specified date and time?

I have a spreadsheet with lots of small transactions and I'm dreading manually querying bitcoin charts to record the average daily value.


thanks

What would be the consequences if a government made Bitcoin its official currency?  Would a native american tribe qualify?  Or possibly Nauru, Tuvalu, or Palau.

When calculating your taxes, don't forget the roughly 13% self employment tax which the IRS also says is due............................

My $.02.

;)

In the October 2000 issue of the JofA, t wo tax articles discussed day traders and day trading. One, “Being a Trader in Securities”(page 118), was an excerpt from a longer Tax Adviser article, “Securities Trader Reporting Requirements,” by Thomas Rolfe Pudner. It said a “trader’s activity is not subject to self-employment tax.” The second article, “Paying the Piper: Some Tax Rules for Day Traders” (page 115), by Marc I. Lebow and P. Michael McLain, said day trading is subject to self-employment taxes. The JofA and the authors received many inquiries asking for clarification. Below is a second article by Lebow and McLain (joined by Wayne Schell, an associate professor at Newport University) that explains why they believe the tax law in this area is ambiguous and why a day trader may want to pay self-employment tax.

In the October 2000 JofA, we argued that taxpayers whose trade or business is trading marketable securities (a.k.a day traders) should report gains and losses from their business on schedule C, form 1040, so they can ignore the $3,000 capital loss limitation. However, another alternative is for the taxpayer to report business expenses on schedule C while reporting gains and losses on schedule D. In this instance, the $3,000 capital loss limitation applies. If the taxpayer elects to use schedule C for both expenses and gains, the net gains are subject to self-employment taxes.

We have received several requests for a clarification of our position. Most concerns related to the practitioners’ interpretation of IRC section 1401, which says, “The 1998 act provides that the rule treating gain or loss as ordinary by reason of the taxpayer’s election to apply mark-to-market rules does not apply for purposes of applying IRC section 1402 (rules relating to the self-employment tax).” In other words, gains or losses caused by the mark-to-market election do not affect self-employment tax expense and liability.

Tax practitioners have told us that many accountants advise clients they are not liable for any self-employment tax on their day-trading activities. This position comes from a misunderstanding of the mark-to-market concept. In its explanation of mark-to-market, the code says, “In the case of a person who is engaged in a trade or business as a trader in securities and who elects to have this paragraph (mark-to-market) apply to the trade or business:

“Such person recognizes gain or loss on any security held in connection with the trade or business at the close of any tax year as if the security were sold for its fair market value on the last business day of such taxable year, and

“Any gain or loss is taken into account for such taxable year. (IRC section 475(f)(1)(A).)”

The code then explains that gains and losses from applying the mark-to-market provision, while they may be ordinary income or loss, they are not subject to self-employment taxes (IRC section 475(f)(1)(D)). That is, the ability to avoid self-employment taxes from this section does not apply to realized gains or losses; it merely applies to the revaluation of a portfolio of securities from cost to market value occurring at the end of a tax year.

The argument that day traders are liable for self-employment taxes follows a different path. First, we argued the day trader will want to report business transactions using schedule C to avoid the $3,000 limitation on capital losses. The courts ruled that individuals whose main business was gambling on fluctuations in the value of securities were in a trade or business and thus subject to the self-employment tax. For example, in Groetzinger v. Commissioner, (480 U.S. 23; 107 S. Ct. 980 (1987)), a person involved in a trade or business was identified as one whose activities were regular, frequent, active and substantial. The case involved a gambler who was recording his income and losses on schedule C. In a footnote, the U.S. Supreme Court cited Barrish v. Commissioner (49 TCM 115 (1984)) and Baxter v. United States (633 F.Supp 912 (1986)), and determined that there was no distinction between a gambler and an active market trader (a day trader). The Court also said “the courts have properly assumed that the term includes all means of gaining a livelihood by work, even those which would scarcely be so characterized in common speech.”

In Trent v. Commissioner (291 F.2d 669, 671 (CA2 1961)), the courts ruled that gamblers involved in trade or business are subject to self-employment taxes. An example of this relationship can also be found in the court ruling in Groetzinger :

“If a taxpayer, as Groetzinger is stipulated to have done in 1978, devotes his full-time activity to gambling, and it is his intended livelihood source, it would seem that basic concepts of fairness (if there be much of that in the income tax law) demand that his activity be regarded as a trade or business just as any other readily accepted activity, such as being a retail store proprietor, or, to come closer categorically, as being a casino operator or as being an active trader on the exchanges.”

In another case, Meredith v. Commissioner (TC Memo 1984-651), an active trader of securities was also defined as a gambler. To quote the ruling, “one may gamble in stocks while another may gamble in dogs.” Finally, citing Fuld v. Commissioner (139 F.2d 465 (1943)), 26 section 1236 USCS Interpretive Notes and Decisions says, “Taxpayers purchasing and selling securities for themselves for speculation may constitute a ‘trade or business’ for reporting taxes on profits derived from such dealings.”

A taxpayer who follows the logic of the gambling and similar cases, knows that gains and losses should be reported on schedule C, and therefore be subject to self-employment taxes and not be subject to the $3,000 loss limitation.

This is not to say the courts were unanimous in their rulings. In King v. Commissioner, (89 TC 445, 458 (1987)), for example, the Tax Court found traders “occupy an unusual position under the tax law because they engage in a trade or business [that] produces capital gains and losses.”

Using the logic of King , the gains from the sale of capital assets (marketable securities) should be treated as capital gains and not be subject to self-employment taxes. The argument here is that day trading is a unique business that generates capital gains and losses. Logically, the $3,000 loss limitation would apply. This position is strengthened if the taxpayer is not considered to be in a trade or business but is instead merely an investor.

The difficulty lies in determining whether the taxpayer is in a trade or business. In King , the court ruled that “a trader’s activities must seek profit from short-term market swings, unlike those of an investor who seeks capital appreciation and income and who is usually not concerned with short-term developments that would influence prices on the daily market.”

In Paoli v. Commissioner (TC Memo 1991-351 (1991)), the court found 326 trades during the year did not make the taxpayer a trader. If the taxpayer had other employment or other sources of income in a taxable year, he or she might not be able to report gains and losses on schedule C. It was also noted in King that not every individual who trades in securities is considered to be participating in a trade or business. In Beals v. Commissioner (TC Memo 1987-171 (1987)), the IRS initially took the position that someone who managed investments was subject to self-employment taxes but later said that its initial position was in error—that one who merely managed investments was not subject to the tax. In a response to a September 1999 taxpayer inquiry on this subject, the IRS said, “Self-employment tax does not apply since the sale of a capital asset is involved and the profit or loss is ordinary only because of the mark-to-market election.”

Whether or not a day trader is subject to self-employment tax is ambiguous. If the taxpayer is in trade or business and elects to report both expenses and gains and losses on schedule C, there is significant case law supporting that position. As a matter of consistency, the taxpayer would be subject to self-employment taxes and not subject to the $3,000 capital loss limitation. If the taxpayer follows King and similar cases, gains and losses may be reported on schedule D and self-employment taxes are not relevant. Here, the $3,000 capital loss limitation applies. An interesting solution to this problem has been proposed by several tax practitioners. The taxpayer elects to report income on Form 4797, Sales of Business Property, and expenses on schedule C. This will allow him or her to maximize both trading losses and business expenses. The appropriateness of reporting gains and losses on the sale of marketable securities on form 4797, however, is not addressed in this article.

—Marc I. Lebow, CPA, PhD, and Wayne Schell, CPA, PhD,
associate professors of accounting at Christopher Newport University
in Newport News, Virginia, and P. Michael McLain, CPA, DBA,
assistant professor of accounting at Hampton University, Hampton, Virginia.

For capital gains?

I encourage all who reas this thread to also very closely read the most recnet IRS ruling, posted here:

http://www.irs.gov/pub/irs-drop/n-14-21.pdf?utm_source=3.31.2014+Tax+Alert&utm_campaign=3.31.14+Tax+Alert&utm_medium=email

Regarding self employmjent tax for miners; from the ruling:

"Q-8: Does a taxpayer who “mines” virt
ual currency (for example, uses computer
resources to validate Bitcoin transactions
and maintain the public Bitcoin
transaction ledger) realize gross income
upon receipt of the virtual currency
resulting from those activities?

A-8:
Yes, when a taxpayer successfully “mines”
virtual currency, the fair market value
of the virtual currency as of
the date of receipt is includible in gross income. See
Publication 525,
Taxable and Nontaxable Income
, for more information on taxable
income."

A veritable minefield of problems for all!

My $.02.

;)

I am 99.9% sure the IRS has no system in place for crawling the blockchain, linking addresses to real people, or linking transaction times / amounts to bitcoin prices at that time.  Hell i doubt they even have a division formed for this.  In fact, given their reticence with virtual currencies as a whole, they are at basement level at best.

If the IRS has no clue how much bitcoin i am "succesfully mining" and at what market rate that bitcoin was at when it got mined out, how exactly are they going to challenge an income declaration based on evasion claims?  

Am I missing something?

I'm just thinking out loud here, but wouldn't it go something like this:
...
Am I missing something?

They don't really don't care about your bitcoins and your wallet on your computer.

1) IRS receives a reports from your bank that you received incoming cash from your bitcoin exchange.
2) IRS examines your return and wonders why the 1099's from your bank aren't included with your return.
3) IRS sends you a bill for the tax on this gross income including penalties.

They don't really don't care about your bitcoins and your wallet on your computer.

Now that I highly, highly doubt.

If you guys are thinking you're "safe" as long as you never convert between fiat and btc, you are being naive.

reusing an earlier post from a different thread:

The issue is one of administrative law, and I'm not sure how to reconcile the different treatment by two executive branch agencies. Both the IRS and FinCEN's definitions were promulgated in the form of a guidance document, which has no binding legal effect. Guidance documents are neither rules (which would require the agencies to comport with the rule-making requirements enumerated in the Administrative Procedures Act, 5 U.S.C. §§ 551-559), nor are they adjudications the substance of which can be appealed and reviewed by federal courts.

I see two ways forward, one short term and one long term:

Short term way forward: The IRS guidance document requests "comments from the public regarding other types or aspects of virtual currency transactions that should be addressed in future guidance." You can mail your comments to:

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2014-21)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

I think taxing virtual currencies as property ignores the fact that they are indeed designed to be used as a medium of exchange. The IRS's definition treats BTC as property (and taxing according to capital gains), which means they perceive BTC as something that is purchased to appreciate in value. This perception is probably driven in part by how much BTC can fluctuate relative to fiat and the fact that some people are purchasing and selling for purely speculative purposes: the IRS wants to tax realized gains as income. The most significant problem with this guidance is that it discourages the use of BTC as a medium of exchange by imposing a substantial record keeping burden. It would be helpful if future guidance distinguished between the manner in which BTC was used, and in particular differentiating between using BTC to buy and sell goods and services (BTC as a medium of exchange) from purchasing and selling BTC for the purpose of making money from speculation (BTC as a traded commodity).

Long term way forward: Petition various agencies to initiate the rule-making process for actual rules regarding the treatment of virtual currencies (http://www.reginfo.gov/public/reginfo/Regmap/regmap.pdf). The most obvious candidates are the Department of Treasury, the IRS and/or FinCEN, but it would probably not be effective to simply ask these agencies for a rule. Rather, before petitioning for rule-making to be initiated, some groundwork is required: (1) what person or association of persons will petition for the rule; (2) clear statement of purpose of the proposed rule-making; (3) clear language of the proposed rule; (4) clear explanation of why the proposed rule would be in the public interest; (5) relevant information assembled in easily digestible form; and (6) a clear and compelling explanation of why the rule is necessary.

A decentralized way to move forward would be to announce that we need this information, and call upon the BTC community to start submitting it to a designated repository. A committee of curators of that repository could cull the best and most relevant information and assemble a draft proposal of the petition for rule-making. The proposal would be announced for an additional comment period before the community approves the petition in its final form. The committee of curators would then submit the petition to the agency or agencies.

Thoughts?

Bitcoin is indeed not a currency.