Bitcoin Forum

Because Bitcoin is so young, it could still go to zero. Many mainstream economists argue just this. And many opponents are trying to make this a reality.

It is still a speculative investment.

If this is true then the following shouldn't be subject to capital gains taxes until they are either spent or sold:

1.  Pay in Bitcoin
2.  Mining rewards

Edit:

The premise of this post is actually incorrect. Risk alone isn't necessarily reason to avoid ordinary income tax.

A better way to make this argument is that payment in stock options (also property)
 can be structured to avoid ordinary income tax while Bitcoin pay and mining cannot

The IRS seems too want to have it both ways here. Tax it as money when paid (unlike other property like stocks options as I've demonstrated) AND tax it as capital gains when spent or sold

http://finance.yahoo.com/news/taxing-stock-options-other-equity-070055008.html

If Bitcoin wasn't something to be taken seriously, then the IRS wouldn't bother.

True. Bitcoin went a long way from the currency of computer enthusiasts, to a widely acceptable form of payment, recognized by world banking and regulated by the same institutions as paper money. 

Updated op

When you buy bitcoins from an exchange or broker, you don't actually take possession until they are sent to your wallet. The exchange has them and therefor the price they were purchased at is irrelevant. By the time you take possession of them the price will have changed. This is similar to how a stock option works. The value of the bitcoins when you take possession of them is more important, but there is no guidance how this is to be done. You could use a monthly or yearly average for convenience sake.

yep, but less efficient is too kind.

it'll be tax overburdened.  imagine a world when Bitcoin expands further and becomes a true bonafide currency.  and the US has no mining operations.

The IRS made no mistake, they purposely made it legally harder to use bitcoin to slow down its adoption.

If the government starts to treat BTC and implements the laws accordingly ( stealing them, abusing them and so on ) that know knows what can happen...

Hey Guys, what did you expect the IRS to do?  Did you expect this:

"We, the IRS, tax everything one can make a profit on, except bitcoin, because..., because..., it's bitcoin!  And we love bitcoin and bitcoin users!"

It was never going to happen, not even a possibility.  Banning bitcoin was a possibility and it's off the table.  That's actually great news.

Now, in reality, people will pay taxes on bitcoin when they are provided a 1099 from somebody like coinbase.  I doubt anybody will get 1099's for small bitcoin purchases and so won't pay taxes nor get caught for it.  It's not unlike selling your car for more than you paid for it.  Very few people report that profit to the IRS and yet, by law, they are supposed to.  Nobody gets caught for this either.  The IRS looks the other way unless the person is a car dealer or running some other business.  How about barter.  Do you pay taxes on things you barter?  You are supposed to but not very many people do and not very many people get caught either.  And so it will be with bitcoin.

It's not a mistake.  If someone pays you $100 in bitcoin, you've earned $100 of income.  That won't change.  If you continue to hold the bitcoin, that's your risk.

So if bitcoin then goes to zero, you pay $100 worth of tax, but you get $100 of capital loss deduction.  That doesn't equate to zero tax, because the capital loss deduction is less than the tax on your income.  But it reflects that you did.  You earned income, and you speculated on bitcoin.

Also, the rules released by IRS are nothing new.  Those have always been the rules, they just haven't said so.  Replace the word bitcoin with any other tangible asset other than a government-issued currency, and it's the same.

When someone pays you in bitcoin, pretend they paid you in cash and you used that cash to instantly buy bitcoin.  Then there won't be any confusion.

I will ignore the IRS and their laws just as easily as I have been ignoring copyright holders and their laws for years. *shrug*

The day they send some armed men to my door to extract wealth at the point of a gun, is the day I make the news as a patriot who defended his inalienable rights from tyrants.

Income tax is unconstitutional, so is the Fed. Also, we Americans have this old idea.. "no taxation without representation".

I'll start paying taxes again when my government starts representing me, for the first time in my young life.

If you're an American citizen, standing up to a corrupt, tyrannical government is not your right, it is your sworn duty as a citizen of this nation.

Replace the word unicorn with any other tangible asset and you are delusional, and it's the same. Bitcoin doesn't work that way.

It seems to me that there are two debates:

A. Is our tax system "good as is" or does it "need improvement"?
B. Did the IRS's guidance properly reflect existing laws?  

1. I think this thread is about debate "B."  In that case, I don't see how you could argue that if you received payment for employment-type work in BTC that you didn't also receive income at the time equal to the market price in USD of those bitcoin.  What is the logic?  If I am paid in stocks (at least here in Canada), I am required to pay tax on the income I received in stocks by calculating their fair-market value in dollars.  If the stocks go up and I later sell them for a gain, then this becomes a second taxable event.  Bitcoin is treated the same way.  

2i. On the other hand, I think the IRS guidance did not properly reflect existing tax laws when it comes to mining.  "Hashers" receive income for the service they provided to mining pools, and the guidance was correct in my opinion that they realize income at the moment they receive coins for their effort.  They are akin to the employees and contractors in gold mining: they are in it for the income.    

2ii. Miners are independent and create coins similar to the way a gold mining company creates gold inventory.  This is not income--they are mining property for the property, not for the income in dollars.  In my opinion, miners are not legally obligated to pay taxes on mined coins; I believe a challenge here would win in court.  I believe the IRS guidance was flawed simply due to their lack of understanding of Bitcoin.  Perhaps a large US mining company can move this forward…


Once again to readers, I am not debating whether the present tax system is just.  I am debating whether the recent IRS guidance properly reflects the actual laws.  

The above opinions are mine and should not be construed as legal advice.  IANAL.  

You could address it in court, and you'd probably win, yes.

Or you could just ignore the law like everyone already does with copyright.

If you think they will have the resources to go after you, you're wrong. There will be WAY too many people using this currency (without any government permission) in the near future.

The law will be unenforceable, and the IRS + their fiat currency will both go the way of Blockbuster video.

The US government has swallowed the whole stock/derivative market technology and throw away good money after bad to save their too big to fail system. I don't care that they don't understand Bitcoin, because they can't regulate it. They should be embracing it and realize that they will never have to bail it out.

What the IRS issued was not laws; it was their interpretation of existing laws based on their present understanding of what a bitcoin is.  Some will ignore aspects of this guidance (rightly so IMO), others will work to change perception so that future guidance more accurately reflects reality.  

This is the bitcoin honey-badger process...

...

Yeah, like I'm a tax lawyer or something...

I have others prepare our taxes, it is too complicate for me to do.

Here is what I am going to do about BTC:

When I spend BTC on something (like when I bought the the only thing I have using BTC: the 0.25 oz Gold Eagle), I will THEN use the value of my BTC spent vs. the average price I paid until then for them as my cost basis.  Alas, I lost a little bit as the value of my BTC went down a bit after buying them before I bought the gold.  So, I will take THAT as a Cap Gains loss, fishez!

I have also been donating BTC here and there as I have seen fit.  On another thread here at bitcointalk, "bitcoin" (aka "El Capo") won a contest (0.05 BTC, congratulations!) I offered up (WHAT was so unusual about a QR Code I took a picture of in Peru).

If you Google "dochenrollingbearing, blog", it will come up as Numero Uno, the last picture is the QR Code for anyone interested.  The winner commented at my blog, which was in the rulez, fishez.  Other pictures from Peru are there, as well as Peru mining (Au and Cu, not BTC, although I have an idea I am working on..., smile,,, a BIG IDEA!).

i mine not for income but as an investment. 

i trade my USD for equipment hoping to get BTC in return which i then hold longterm.  b/c there are some who sell BTC immediately for USD, unlike me, i think a rule that treats the subsequent event of selling or spending of mined BTC as a capital gain is more uniform and appropriate.

I agree and that is what I am saying cypherdoc, assuming one is a miner and not a "hasher."

yes you did.

but the other point i'm trying to make is that ppl who accept pay in btc should not be taxed ordinary income if they decide to hold it for over one year thus qualifying it as capital gains.  accepting pay can also be an investment or property as the IRS has defined it.  stock options as pay are structured in this way.

remember that i'm using the IRS's recent decision to not classify Bitcoin as money but instead as property to make this argument.

Doesn't that rule only apply if you are paid in stock options?  If you were paid directly in stock, I think the tax treatment would be the same as what they are proposing for bitcoin.

The stock option trick has never really made sense to me, so perhaps I am missing something.  

EDIT: All this discussion on tax over the last few days really shows how complex and burdensome the existing system is!!  Our combined efforts discussing and studying these issues has probably already consumed millions of dollars of our time. 

with all the trolling going on, those guys must be worth millions.

Hey Cypher, good to see you're still around.  I agree with you that taxes shouldn't be incurred until gains are realized.  It's pretty common for businesses to keep account of unrealized gains/losses so it really should be no different with Bitcoin. 

thanks for dropping in once a year to say hi.

yep, Bitcoin isn't going anywhere so neither am i.  ;)

the problem is the result of what they've done.

the IRS may be technically correct by jamming round Bitcoin into the square hole of their regulatory structure.  but the result will be pushing the real Bitcoin economy overseas while encouraging speculation here domestically.  do we really want to encourage that trend which we've been on for the last 3 decades anyways?

but maybe that's what they want.  i for one think it will backfire on them.

Just thinking out loud: it may be convenient if a willing 14-year old turned up who's been mining on P2P pool for years, technically has a decent-sized tax liability (due to the erroneous guidance regarding miners), and is unable to sell bitcoins for dollars because he cannot legally register for an account on an exchange.  

If the 14-year old reported his tax liability and was unable to pay it, what would happen?

Good point. They should allow payment in Bitcoin.

But that doesn't address my more fundamental question.

You make it sound like it's double taxation, when it is not.

I do some work for somebody, and they give me a collectible baseball card in compensation.    I am obligated to pay tax on the income, based on the value of the card when it was given to me.
If I choose to hold onto the card, and realize a capital gain when it sold later at a higher price, then I am obligated to pay taxes on that gain.

It appears so ....

Federal Judge Rules Bitcoin is a currency ... suck on that fat one IRS!!

http://techcrunch.com/2013/08/07/bitcoin-clampdown-continues-as-federal-judge-says-its-a-currency/ (http://techcrunch.com/2013/08/07/bitcoin-clampdown-continues-as-federal-judge-says-its-a-currency/)



This  a Federal court ruling. It couldn't get any clearer, the IRS has made a huge mistake!

Best I can tell (law not being my vocation) the IRS formalized things such that not only are winnings taxed as capital gains, but losses are also a factor.

This is key because it allows people with real money to put some of it on the table and enjoy at least some tax advantage if Bitcoin experiences some sort of a failure or collapse.  I would expect more speculation from those with deep pockets for that reason.

This isn't the only reason why the formal guidance from the IRS as it came down delights me, but it is one of them.

The broker is your agent.  From the moment you buy the BTC,  the broker "owes" you Bitcoins.
So the cost basis is fixed at that point in time;  it is not necessary to take delivery, before the basis is set.

You usually don't take immediate possession of stock you purchase either.
Most people keep all their stocks in street name the whole time, so they can sell easily.

You do know that the IRS ruling and the federal judge's ruling are two different things, applied to narrow scopes in the law.  The case you cited applies to AML/Money Transfer laws, while the IRS ruling allows bitcoin holders with long term capital gains to be taxed at a lower capital gains rate.

no, that wasn't my point.

it's the stepped up tax rate of ordinary income at time of pay or mining that i'm not happy about.  b/c the IRS defines it as "property" i'm arguing that if i'm paid for services in bitcoin i should be able to make the choice of deferring taxes out one year and making them capital gains just like one might do with stock options.

anyways, it's not a huge deal.  i'll pay the tax for now and hope they reverse the decision later.

No. How about you describe in detail to us idiots how screwed up and schizophrenic the Federal government really is? It's quite clear the Federal Judge is saying it is legally to be treated as money. Are you saying the IRS is basically a criminal organisation that can use its very own legal definitions to extort wealth from the USA citizenry? How does that work?

Umm, ya.   They even have their own court in which to sue you for your unpaid taxes.   I never advocated or endorsed the system, I just want to stay out of jail and be able to live a public life without having to go underground as a criminal.

The federal judge ruling is a framework that applies to a different area of the law, for money laundering, not taxes.

[edit]
You seem to be arguing base issues to which the rulings apply:
1) The government demands a tax on your income
2) The government demands that you don't transfer money without their supervision

The invention of bitcoin never invalidated these laws.   It's just the government clarifying how bitcoin applies to these laws.

Best I can tell (law not being my vocation) the IRS formalized things such that not only are winnings taxed as capital gains, but losses are also a factor.

This is key because it allows people with real money to put some of it on the table and enjoy at least some tax advantage if Bitcoin experiences some sort of a failure or collapse.  I would expect more speculation from those with deep pockets for that reason.

This isn't the only reason why the formal guidance from the IRS as it came down delights me, but it is one of them.

Coward. You disagree with a corrupt system but state you'll do nothing to change or stand up to it.

 ::)

The guy said he doesn't want to go to jail and I don't blame him.  There are other ways to show your protest that doesn't involve getting locked up. 

Besides he's right, the judge ruling has nothing to do with the IRS, they are two separate issues, which you fail to comprehend.

Proud to remain a coward.   Smart criminals don't get caught.  Dumb criminals get caught.  Really dumb criminals don't require a confidential informant to inform the government of their activities.

The most effective way to change things is to remain free and with enough resources to apply toward efforts which have some chance of making things change.  Having one's property confiscated and getting thrown in jail may impress a handful of fringe observers (and relatively inconsequential ones at that) but ultimately it is going to be a relatively ineffective way to address the very real issues of dis-empowerment of ordinary citizens through a variety of rather ugly means.  I'd go so far as to say that we are probably close enough to an event of significance that it makes sense to 'keep one's powder dry', but only time will tell on that one.

You seem suspiciously well-versed in the conniving (covertly criminal ways) of the government agents, and their informants ... coward government agent?

I've got nothing to do with you, other than having a philosophical argument on a public forum.   I'm just saying that if you plan to break the laws of the USA, then telegraphing your intent in public to do so is not the smartest thing to do.   If I hypothetically were to want to evade taxes, then I would not choose to publicly declare myself a sovereign citizen, print my own license plate for the car I drive in public, and then eventually be taken to court then jail.  You can be angry and upset all you want, but you would be really dumb to think that it wouldn't happen.   I would more likely be want to have a good understanding of the laws and methods that the government uses to investigate the breaking of its laws, and how to avoid them, because declaring ignorance of them won't help you in court.

BTW, your use of the word "criminal" above is as it applies to a violation of your personal philosophy, not in relation to the government's laws.

Look, I may or may not be sympathetic to your cause, and I may or may not be a government agent or an informant.   You should regard anybody as a possible informant when you actively break the government's laws.   In fact, you should be most suspicious of those that appear to completely agree with you.   Just because I don't pick up an assault rifle and march along side you to overthrow the government, doesn't mean I'm not partially sympathetic to your views.