Bitcoin Forum

Hi everyone

A few questions regarding the IRS ruling.

1. Is is final? i.e., when they ask for comments/questions does that mean they are seeking feedback on their initial view?

2. Where is the technical analysis to support the position that it is property and not a currency? The paper itself is cursory and contains almost no legal analysis to support the conclusion.

3. Can US taxpayers take a position it is currency and fight it out in the courts? i.e., I would think the IRS is not the arbiter of whether virtual currencies are property or not. It is a legal question rather than a decision to be made by the IRS?

I am a tax professional (outside the US) and would be very willing to assist in making submissions regarding this. The ruling is obviously not a good outcome and without seeing any legal analysis seems contrived to argue this is "property".

We would pay more taxes if it was considered a currency.  No need to help welfare/social security any more than necessary.

Here is a relevant quote from Business Insider:

http://www.businessinsider.com/irs-bitcoin-is-property-not-currency-full-release-2014-3

'


yep i was told it was ....so.....me i only have 16k gross profit from btc from last year on 1 blockchain that is linked to bitstamp and coindesk and also
them nice forms i signed when i sent knc $$$ wire xfer over 10k saying i was not doing so for tax evading purpposes etc (i remember that line) of
course since cancelled the knc orders...but still one heck of a paper trail with the 2 fails at 1 bank the 1st time around

so yeah paying the tax folks in usa i am.....should never have registered stuff with bitstamp they also said when i registered it was to conform with
usa banking laws....so the fact i've thrown around 20-30k of bank wire xfers to knc (and since refunded this year) and the above

i'd be easy pickings imho for the IRS

yep...paying my taxes...but supposedly with equip etc home business etc i'll break even

with only mining and holding of all the btc coin i've ever made on one linked blockchain....and the wire xfers etc...i'd be dead meat in an audit

for the 25% taxes at worse on a 16k profit? i'll expense it out put it on taxes

got too much other real $$$ I could lose (or jail time) by playing the opposite

also imho this won't be fixed till after fall 2014 elections in the usa....the gov't is split on how to treat bitcoins

again imho



Searing

I don't know what planet you live on but here on Earth (in the Solar System, Milky Way, uptown Virgo Supercluster) there is no such thing as a final rule made by governments.

Governments here always change the rules by which to play whenever they feel like. That is an integral part of their nature and that's why it is not reasonable to worry about their rulings too much.

Joe

How true!

Thank you for your insightful and well-thought-out post!

My $.02.

;)

Final yes. Also powerless and impossible to effectively enforce.

Enforcement lies at the bank account level.

My $.02.

;)

things to remember

when a friend gives you $10, no one claims it on their tax return.
when a friend gives you a coffee or a sandwich, no one claims it on their tax return.

point being, dont sweat the small stuff.

as for purchasing large products. (over $600 threshold) then read the IRS details about how to log it. or go speak to an accountant. i have read many threads where people are going nuts worrying about logging the little things like buying a starbucks coffee, which i find very amusing whilst face palming them

oh and another point. you dont pay tax until the point you have FIAT in your hand. so dont think that if bitcoin rose from $450 to $470 in one day that you need to send a payment to IRS at every price movement, simply because your holding coin instead of spending..
point being... its not a gain or loss until its FIAT!!

There is a petition to get the attention of the White House to get it looked at.  As it stands now miners will likely pay over 40% of mining rewards unless it's fixed.
http://www.cryptocoinsnews.com/news/white-house-petition-amend-irs-notice-2014-2-taxing-virtual-currencybitcoin/2014/03/29 (http://www.cryptocoinsnews.com/news/white-house-petition-amend-irs-notice-2014-2-taxing-virtual-currencybitcoin/2014/03/29)

the guy that first promoted the petition and wrote it out. is not a tax expert and from reading what he wrote, he probably has never made a self assessment tax return in his life. there are flaws to his petition and congress would simply laugh at it, and put the petition in the round filing container.. known as a bin.

if there is to be a petition. then whomever wants to do it. should research the IRS wording, check  with an accountant and get someone with good understanding to write a proper petition..

the current petition seems to be just cries and whimpers about hypotheticals. and not intellectual facts. anyone that owns a business or has been self employed, doing their own tax returns can plainly she the lack of experience the petition writer has. i think that he is just trying to get 15 minutes of fame, where nothing gets changed..

True, yet so far the person who started the petition is the only one who has made and effort.
Your mining earnings are going to be taxed as currency and property both and the tracking is burdensome to say the least.

When you trade a piece of 'personal property' for another, like say you traded a skateboard for a bike, would you ever document it or ask the other person for their soc#?  In IRS eyes its not MONEY!  Just a tactical way of them saying we 'can' tax it.  But can they enforce it?

wrong. and try not to quote or use media as yor source.. as they are proven to mislead..
instead fond the source
https://bitcointalk.org/index.php?topic=555188.0
https://petitions.whitehouse.gov/petition/amend-irs-notice-2014-2taxing-virtual-currencybitcoin-property-stifles-new-technologycreates/z7WtKZGY

here is a quote that made me laugh

... every transaction.... lol serious failings..misunderstandings and .. well just wrong..

you Don't pay tax:
when bitcoin prices change.
when you swap bitcoin for an altcoin.
swapped for other property.

you do pay tax when you receive FIAT.

EG miner gets 1btc when the price is $460(a). the price rises whilst hoarding coins to $500(b) he then trades it for an equal value of litecoins(c). he hoards the litecoins and the price of litecoins rises(d). he sells the litecoins for bitcoins(e). after a while he then buys a laptop using the bitcoins(f) and then sells the laptop for $1200 fiat(g).

no one would pay tax at each point (a through f) only at (g) would someone show they have received $1200 which was worth $460 months prior.
simple maths G minus A = gain

its the same as you getting a computer from your work and they let you keep it to sell.. you dont pay tax when they give you the laptop initially, you dont pay tax while using the laptop as it depreciates in value.. you only pay tax when you sell it.

imagine if people stupidly paid tax at point (b), where the price rose purely due to hoarding.
day one pay tax on $40 gain
day two request refund on a price crash
day three pay tax on a rise.
and so on.

i can give you other examples.. but instead, go speak to an accountant


+1 also to note the skateboard for bike would be considered a fair value swap. meaning no gain or loss.. but (if you were that anal about tax returns) if you sold the bike for $$$$$ later on, then you would show the original price you paid for skateboard and minus that number against the $$$$ you sold the bike.. not worrying about fair market value of the bike or skateboard when swapping in the middle. just the beginning and end numbers are important.

(please note i have excluded some loopholes and tax exemptions so dont knit pick the small stuff below certain thresholds)

For miners, the bitcoins mined are now taxed as income using the market price at the time of mining as the basis.  Even if you never sell the bitcoins.

^ this is the only part that seems frightening. And retarded. It's paying tax on speculation unless you cash out immediately.

So let's say you mine some bitcoins. You are supposed to pay tax the day it was mined and then if you cash out in the future you are supposed to pay tax again on the gains? Insanity?

wow.. i see you havnt spoken to an accountant.

you pay tax when you get your FIAT for that coin.. you work out the gain/profit or loss by looking at the fiat value of the bitcoin when mined and the fiat you receive when selling.

imagine you mined 1 bitcoin and you paid tax on todays valuation of $450. the tax is paid. what about when the price moves tomorrow. do you pay tax again on a rise. and ask for a refund on a drop. NO no no

now then. when you mine a bitcoin you wait until you have sold the bitcoin for coldhard fiat in your bank, then you look at the price value at the time of the fiat sale and you calculate that against the initial price at the time of mining..

you dont have to keep a log of every $ movement whilst hoarding,  because the maths of adding and subtracting every movement would end up with the same total as just taking the numbers at the start and the end..

i seriously dont know why people are too lazy to speak to an accountant. but then think they have to do lots of work suddenly, when its not needed.

the mind boggles

All you need is for one federal judge to overrule this "opinion" and a legal precedent will be set that others will look toward for guidance.  They can make anything a rule.  But a good legal argument will turn that rule into a useless unenforceable document. Problem is, getting a solid enough legal argument.  Property definition is a beginning.  At least they recognize the existence.  Now, the burden is shifted into making Bitcoin a legal tender.  This is the conundrum (and raising the bar from property considerably).  This is a hell of a start if you ask my slightly informed opinion.

why would anyone consider making bitcoin legal tender as being a good thing??!

legal tender means government controlled, managed, and empowered currency.. bitcoin will and should never be a government currency.

governments can only tax people on the FIAT people receive because FIAT is the governments copyrighted product.
the amount of tax to be taken is based on fiat prices of when the property first became owned by you. calculated against the fiat received at the sell.

what happens inbetween is irrelevant and out of governments jurisdiction.

if you think its a good idea to hand control of bitcoin to government.. atleast let them have grumpycoin instead (randomly picked useless altcoin).

I think that morepeople should actually READ the most recent IRS ruling because there is a lot of misunderstanding!

Go 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

A few relavant quotes from the document:

"Q-1: How is virtual currency
treated for federal tax purposes?

A-1:
For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.

Q-2: Is virtual currency treated as currency for purposes of determining whether
a transaction results in foreign currency gain or loss under U.S. federal tax laws?

A-2:
No. Under currently applicable law, virtual currency is not
treated as currency that could generate foreign currency gain or
loss for U.S. federal tax purposes.

Q-3: Must a taxpayer who receives
virtual currency as payment for goods or
services include in computing gross income
the fair market value of the virtual currency?

A-3:
Yes. A taxpayer who receives virtual
currency as payment for goods or services
must, in computing gross income, include the fair market value of
the virtual currency measured in U.S. dollars, as of the date that the virtual currency was received."

"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.

Q-9: Is an individual wh
o “mines” virtual currency as
a trade or business subject
to self-employment tax on the income derived from those activities?

A-9:
If a taxpayer’s “mining” of
virtual currency constitutes a trade or business, and the
“mining” activity is not underta
ken by the taxpayer as an employee, the net earnings
from self-employment (generally, gross in
come derived from carrying on a trade or
business less allowable deductions) resulting from those activities constitute self-
employment income and are subject to the
self-employment tax."

Not at all the way things are being discussed.

This is a barrel of snakes and really endangers a lot of people.

My $.02.

;)

From IRS Notice 2014-21 (that LostDutchman linked to):


I don't need an accountant to understand that.  I'm not an accountant or a tax professional, but the IRS notice was written in plain english and as someone who does their own taxes, it seems straightforward.

There's two separate things, as I understand it:

1) an income generated when the bitcoin is mined based on the market value at the time it was mined (regardless of whether it's ever sold).  This gets reported and taxed as income (could be business or hobby income, but that's a separate question)
2) a capital gain or loss when the bitcoin is sold or spent.  If it was mined, then the cost/basis is the market value at the time it was mined that was already taxed as income.

If you're not selling the bitcoins that you're mining, you still have to come up with the USD to pay tax on the income.

No, you don't have to keep tracking every rise and drop.  You just have to track it at the time it was mined (cost/basis, reported as income), and the time it was finally sold (to calculate a capital gain or loss).

Legal tender is not what you think.
Legal tender means that everyone is forced by law to accept it.
it is bad law. It is used for junk currencies and should not be needed for bitcoin.

Don't forget this part:

Q-9: Is an individual wh
o “mines” virtual currency as
a trade or business subject
to self-employment tax on the income derived from those activities?

A-9:
If a taxpayer’s “mining” of
virtual currency constitutes a trade or business, and the
“mining” activity is not underta
ken by the taxpayer as an employee, the net earnings
from self-employment (generally, gross in
come derived from carrying on a trade or
business less allowable deductions) resulting from those activities constitute self-
employment income and are subject to the
self-employment tax."

Bad news.

My $.02.

;)

Bad news only for [edit: law abiding] US citizens.

Good news for everybody else as it makes mining in the US less profitable thus takes the American mining competitors off the market. Cheap second hand mining rigs ahead for Europeans and Asians I guess.

So go IRS, go! ;)

Joe

There are indeed alternatives and I have some in mind.

My $.02.

;)

Being a fellow tax professional, I think you know the answers to your questions, but it's good to illuminate the masses on this forum who are not familiar. 

This is what will happen...

In a few years, the IRS will audit a taxpayer for under reporting income. This taxpayer will be claiming he only has 5k of income, yet he lives in a million dollar apartment and drives a tesla, without any discernible sources of salary wage income. The IRS field agents have heard of these people, they are called bitcoiners. Under pressure, the taxpayer will admit he has been mining bitcoins, trading bitcoins, spending bitcoins. The IRS will impose capital gains rules on this income, according to n-14-21. The taxpayer realizes he might have a better tax treatment if he took another supportable position (google that term boys and learn something). The IRS stands by n-14-21 and we go to tax court. Tax court is not like a regular court where lawyers grandstand and try evidence and facts. Tax court is much more analogous to arbitration where each side presents their argument and a federal tax court magistrate decides the best solution. Perhaps the taxpayer hires me, and I make a convincing argument in front of the tax court and this taxpayer will then receive the beneficial tax treatment that all the silly bitcoiners are trying to get with a petition to the IRS. FYI, no where in the IRM is there a chapter regarding online petitions to change IRS rulings. The IRS will have to abide by the tax court ruling in this case only. Tax court does not set precedent for any other taxpayers. So the next bitcoiner hears about the tax court victory of yours truly, and decides he wants to take the same supportable position. The IRS once again goes to tax court against the second bitcoiner and we win again. Now the IRS has suffered two defeats in tax court. Eventually a revenue manager will see all these defeats and decide it isn't worth it for the service to fight these cases again and again and lose again and again...to me.

So that my friends is how to change this ruling. You go to tax court and look for a favorable ruling from a magistrate. Then you do it again and again and eventually the IRS figures out this bitcoin thing is a money loser for them and then they will go after some other thing for revenue. There's also another venue you can pursue, federal appeals court. But that's a story for another night.

I don't do my own heart surgery or program my own computer so you should stop doing your own taxes.

This sounds good and all, but what if the case(s) are lost against the IRS? Then the IRS has won and they have gained from doing it, and they will do it again and again...

I don't see how the IRS would lose that case if the tax avoiding citizen didn't pay their taxes. That makes the citizen guilty doesn't it?

What makes you feel so confident that they would lose as you portray in your example?

Is it because it will be unprovable how much the citizen owes due to the anonymous nature of the blockchain? (In the future, I expect FULL anonymity features)

all is fair in love and tax court. if the IRS wins, then they win fair and square and the taxpayer pays the tax assessment. most people won't go to tax court unless they have a semi strong argument. the IRS loses or settles the majority of tax court cases.

you want to find out my tax court strategies? My retainer is $50K, bitcoin accepted here. SE taxes paid. then capital G/L calculated

The question is...  "If a taxpayer’s “mining” of virtual currency constitutes a trade or business ..."

It's the business vs. hobby thing.  If it's a business, it's easier to deduct expenses, but you need to pay self-employment tax.  If it's a hobby, the deductions can't exceed the hobby's profits during the year, and can only be taken if you itemize.

But the question of whether it's a business or a hobby doesn't seem clear cut to me.  At least for a small miner, you could argue either way.

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 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?

Ain't gonna work.

My $.02.

;)

Personally I'd just like to see them change the view on mining activity, that the cost basis for all mined coins is $0 and you realize a capital gain when selling them. Thus you have far less record keeping issues. For example, what if you mine an alt coin on p2pool and receive dozens of payments per day? The paperwork to report each one of those on your tax return is madness. Better to just gather it all up, and report a gain when you eventually sell the coins or exchange them for property of some value.

This method has been used to combat unpopular agency actions since the Administrative Procedure Act was passed in 1946...

Oh, yeah?

Please show us how; citations, etc..

My $.02.

;)

Really? One recent example is when the Electronic Privacy Information Center got a ruling from the D.C. Circuit that DHS violated the Administrative Procedure Act by implementing body scanners as a primary screening method without first undertaking public notice and comment rule-making.

http://www.cadc.uscourts.gov/internet/opinions.nsf/B3100471112A40DE852578CE004FE42C/$file/10-1157-1318805.pdf (http://www.cadc.uscourts.gov/internet/opinions.nsf/B3100471112A40DE852578CE004FE42C/$file/10-1157-1318805.pdf)

Don't know if you boys have discussed the concept of constructive receipt when talking about business income derived from mining. I see alot of chatter here about having to keep track of every coin when you mine it and receive it from your pool. Since none of you ever pay an accountant, I suggest you google constructive receipt and learn about this accounting concept and think how you can apply it to the actual receipt of value for your mining activities. I'll give you a hint, you're going to have to make the argument that you actually can't use the coins you receive as a mining reward until you convert them to fiat because, well you know digital currencies are worthless and cannot be used in real life...

Thank you for this post I agree and its a good way to move forward.

If you are right and the IRS are taking into account how people are behaving in respect of virtual currencies instead of solely focusing on what the currencies in fact represent then that is wrong. Its quite possible given the conclusion that they could be considered "property".

In my view, where they cannot be considered as "currency", being a medium of exchange, then virtual currencies should be viewed as "services" rather than "goods" or "property".

I will look into drafting a legal opinion and posting it here for comment.

Here in New Zealand we have quite established laws around what are goods or services. We have a GST (goods and services tax) which is the same as VAT.

I can leverage off established rules and case law here. There is in fact quite detailed views issued by the authorities here around software and intangible property and what should properly be considered goods/property and services.

IMHO, now is not the time to try to start a tax revolt with bitcoin as its foundation.

the only thing the general public knows about bitcoin is what they have read in the headlines; Silk road, Gox; various thefts and scams and the use of bitcoin as a tax evasion tool.

There are legal ways to deal with the IRS matter.

My $.02.

;

The IRS ruling is not final, it will only get worse however. That's tyranny...

If you are correct, as you may well be, it becomes incumbent on users to find legal ways around the IRS policy.

My $.02.

;)

Which works fine, so long as you also aren't a US citizen.

Unfortunately, US citizens pay taxes whether they are in the US or not, according to the "law".  :(

Your tax liability depends on what vehicle you use to set up your business.

Here is an article I found helpful. I am trying to follow this stuff as much as possible. Not very cut-and-dry...

http://www.coindesk.com/bitcoin-regulation-lessons-early-days-skype/

The bitcoin industry seems to be adamant that bitcoin is a currency and bitcoin companies are financial institutions. This was very much in evidence at Bitcoin2014, where all major actors were describing their progress to ‘regulatory compliance’. But is this necessary?

From the inception of Skype, we could have said that the firm is a telco (telecommunications company). We could have decided to apply for telecoms licences all around the world and customize the product to both match and support the vagaries of different rules and directives.

It would have been the logical thing to do and it is similar to the route many bitcoin actors are taking today. However, if Skype had done so, it would have been the worst strategic mistake it ever made.

Nothing is every final. Congress could easily (in theory) pass a budget/law that would essentially change this ruling.

And Congress is not going to do shit so it is up to every Bitcoiner to figure it out for him/herself.

There are ways.

Congress has gotten some legislation passed. Granted it has not been much due to extreme polarization but bills have passed.

You will end up needing me and guys like me but remember, I was here first.................

Can you get congress to pass a law to reverse the IRS ruling?