Bitcoin Forum

So, about 2 months ago I went to H&R Block to get my taxes prepared.  I explained to the lady, who apparently was very experienced and had worked there for many years, about Bitcoin.  At the time, she told me that she was unsure of how to treat Bitcoin with regards to taxation -- is it a business?  Is it a hobby?  Is it an investment?

Well, 2 days ago I finally got my answer.  After asking the 5 longest-working members at that particular H&R Block location AND after calling the IRS, the lady said that Bitcoin is a hobby.  She knows that I buy precious metals with Bitcoin, knows that I have money in accounts all over the globe, and knows that I have conducted business deals and have provided services specifically dealing in Bitcoin.  I even showed her an old TradeHill check of some of my profits.

Long story short, I don't need to file any taxes this year  ;D  But then again, I was kinda hoping to write off some of my computer equipment as a business expense.

I think in the UK it would come under "capital gains tax" I reckon so you only pay ~18% after £10,600.00 or about of capital gains.  So you would have to make more than £10,600.00 to offset your tax.

Yes the UK the land of 50% tax for top earners but only 18% for the 1%.

Edit:  In the US you have even more loopholes for the rich than the UK so you should all be laughing?

hobby income still requires taxes be paid on it

Yes, you can pour loads of money into your "hobby" and not be allowed to deduct one red cent, but Caesar wants a piece of your first nickle of income.

So if you made 100 BTC last year and it's sitting in your wallet.dat, how much do you send to the IRS?  Do they even have a receiving address for BTC?

Just want to clarify here because the words you are using don't necessarily back your conclusion.

A person whose income is below certain levels is not required to file taxes.  That doesn't mean their income, from whatever source, isn't considered taxable income.  Did you intend to say that you don't need to report any Bitcoin-related income this year instead?

And related:
 - http://www.bankrate.com/finance/money-guides/turning-hobby-into-business-means-tax-breaks.aspx

[edited for clarity]

No, seriously.  H&R block said don't even bother coming in, that I have NO income.

well I believe Caesar has a minimum of $200 or so before needing to file, but for the most part, yes :D

If by "cash" you mean fiat notes, then they are already much more anonymous and untaxable than bitcoins.  Converting said cash into bitcoins will only be creating a paper/electronic trail and setting off alarm bells among caesar's compromised tax collectors.   

The only thing I found interesting was that you have NO income lol
How much was that TradeHill cheque? $5?

I believe they will be treating bitcoins as a commodity like gold.

I have yet to find someone who has actually declared mining income or capital gains (and paid taxes) for the tax return due today April 17, 2012.

 https://bitcointalk.org/index.php?topic=54645.0;all

I personally haven't made it into the green yet, but hope to cut Uncle Sam. Check next year after I make some dough this year :D

I agree with the commodity approach.

Haha!!  That made me lol.

Here's one interpretation:

We need some more data, so let's assume the 100 BTC was earned by mining two bitcoin blocks.  One on June 30, 2011 and the other on November 1, 2011.

Record this as ordinary income of

50 BTC * $17 (price of bitcoins on June 30, 2011)   = $850
50 BTC * $3.10 (price of bitcoins on June 30, 2011) = $155
                                                               Total $1,005

So whatever your tax bracket is (let's assume 25%), then your tax line would include $251 of tax.

Now if you want to offset the $1,005 with hardware & electricity costs, I think that's reasonable (and why I haven't declared any income yet).  I'm not sure if you'll need to setup some sort of LLC to do that or not.

Disclaimer: I'm not a tax accountant, and do not rely on these estimates or interpretations as they are a brainstorm of thought and have not been verified by a qualified source.

I think you will only be taxed via capital gains tax for any bitcoins that you convert to cash as there is no tax on bitcoins (or gold in the EU just capital gains of the cash made from selling gold)

Your statements and conclusion don't match. 

If the IRS considers your action a hobby they STILL want a cut of any profits BUT you can't deduct any losses, depreciate hardware, carry forward losses, etc like you can with a business.  Essentially it is a worst case scenario.

I have my mining operation filed as an LLC (to depreciate hardware, account for my labor costs, etc).  We will see if IRS rejects my tax return. :)

Once again just because you are broke it doesn't mean that Bitcoin ventures being considered a hobby are a good thing.  It isn't surprising, the IRS is generally very conservative and often requires "convincing" to see non-traditional ventures as businesses.

However "a hobby" doesn't erase your tax liability.  If you made $100K from this "hobby" the IRS would want a cut (a very big cut) and the bad news is the hobby declaration would limit your ability to reduce the liability  (things like carry forward prior year losses, use losses from your Bitcoin ventures to reduce taxes on other income, depreciate hardware, etc).  

That being said I would take H&R Blocks universal proclamation with a grain of salt.

There is no universal rule.  The IRS considers hobby vs business on a case by case basis.
http://www.irs.gov/newsroom/article/0,,id=169490,00.html

One person's hobby is another persons business.

Someone who uses gaming computer to mine some coins part time, has no records of expenses, and uses the same hardware, building, and internet connection for non Bitcoin uses = likely a hobby.

Someone who invested $100K in mining hardware has them in a dedicated building, has filed as a LLC to limit personal liability, runs the rigs 24/7 in a dedicated fashion, keeps detailed profit and loss statements, and has a seperate business checking account = likely a business.

Note the above two are intended to be extreme examples there are not "hard lines".


If someone has a token amount of Bitcoin "income" (common definition not IRS definition) then it likely doesn't matter.  However if you have a significant amount it would be a good idea to consult with an accountant and tax professional.

The above post should be considered informational and not relied upon as tax advice.

There's no system in place to audit Bitcoin transactions. The IRS can't do squat in regards to Bitcoin.

Don't bother filing. Don't ever bother filing if you just put your Bitcoins through any service. There's nothing to hold you accountable.

all well and good unless your converting to fiat.  the second you do that, you have to explain where the money came from.

my recommendation, if anyone has 10k+ of bitcoin income, talk to a good accountant.  less than 10k, still a good idea, but the IRS probably won't be as interested compared to larger amounts of money.

I think this would apply only if you sold BTC for fiat - and in that case, the exchange rate at the time of sale would apply. If you simply hold on to your mined coins, there is no tax involved.

I think Bitcoin is considered a commodity for income tax purposes in the US. See IRS Publication 550 for details.

Total profits exceeded 4 figures.  I showed all this to them.  They concluded I have "no income."

So say you cultivated 10,000 bushels of corn on June 30, 2011, someone said this is considered a "taxable event" and you would need to pay taxes on the market value of that corn.

~do not use this as tax advice~

Anyone who has any income or deductions that are BitCoin related should really consider getting A Lawyer's Take On BitCoin And Taxes (http://www.howtovanish.com/bitcoin/index.php#bitcoinandtaxes) which is 31 pages with 108 footnotes to statutes, cases, etc. The legal landscape is murkier than you may think and there are several reasonable approaches that can be taken and they can all lead to a different outcome having a massive effect on tax liability (or the opposite if you have other income to offset).

Huh a pay wall? Anyway I don't take gold bugs seriously. Anyways lawyers are usually completely clueless about tax laws, you need an accountant.

Hell with calling it a hobby! Call it research and that you're writing an in-depth white paper on Bitcoin: Yes, at the moment my position is positive, but I'm hoping to experience negativity, thus giving my paper cred. If I fail, and my position continues to spiral upwards--beyond my control--I will claim my ill gotten gains the next time I choose to file my taxes.

~Bruno~

And when you finish you can show them the result of your research: A true white paper!
http://thebuzzstopshear.com/wp-content/uploads/2011/03/white-paper.jpg

You could count footnotes and pay for something. Or you could support CLAG.
https://bitcointalk.org/index.php?topic=76216.0
www.theclag.org

Loooool  :D

Don't laugh... I got confused, sorry! That's not Phinn's white paper, that's Bitcoin Magazine April Edition.

If you are simply mining bitcoins and don't sell them or trade  them for anything, then there are zero tax implications.

It is like digging up shiny rocks (or gold) in your back garden and storing it in a safe place inside the house. But even more nebulous, you are finding special digital patterns on the network, that may or may not be valuable to others, and storing the output on your electronic equipment.

Say you came up with a patentable and marketable idea, and kept it to yourself. Is this a taxable event?  Ich don't think so. Say you painted a painting, even framed it, but never took it to the gallery for sale; instead, you kept it at home. Taxable event?  Not in my country of residence.

A related thought: If Bitcoin is treated as a commodity, then in most jurisdictions each and every BTC transaction will include sales tax or VAT.

I think you are wrong.  If u r in a baseball game and happen to catch the 3,000th hit for a most valuable player and the ball is valued @ $1,000,000, Uncle Sam considers that a taxable event & charges u taxes on the fair market value of that ball.

The rocks you dig up would already be yours if they were in your back garden.  However, if someone realized your house was on a gold mine, your property taxes would be reassessed on the increased value of your property (which happens to have gold that no one ever found yet)

http://product-images.wantist.com/photos/2049/Invisible_Magazine_Rack_1-sixhundred.jpg?1316380876
Line 42a: Hobby Income: Ad and subscription revenue derived from Bitcon Magazine.

Um, you just listed a bunch of things that don't have a large market to determine a price.  The handling of commodities in a coopperative share group works in a different manner.

Why wouldn't transactions involving bitcoins include sales tax?  If I buy something off of you and pay you in corn, you still need to give Uncle Sam sales tax...

You'll be taken aback if you knew my gross sales, none of which include sales tax.

But to give you an idea, pick out any board on the side this barn (below). I get no less than $2 USD be linear foot. I get more for any floor boards as well as for the beams. Close to 90% of my clients--pass, present and future--ask me do I want to be paid in cash or check. Guess which one I state. My total tax liability for the past three years was...wait for it...$0.

http://www.donnan.com/images/barn_1.jpg

Oh yeah, I forgot to add the conditional about what kind of fucked up country you might live in ..... I'm sure Zimbabwe govt. considers anything that happens in your house a taxable event ... hell they probably charge you for breathing in some less freedom loving countries ...

This forum is discussing US taxes & laws...

What's so fucked up about property tax?  It's kinda a bit part of how roads & firefighters & police are funded...

I like my "fucked up country" that "forces" police & fire protection upon me and doesn't make me build my own roads.  Thank you Uncle Sam!

Didn't see the big, fat "USA" sign in the discussion topic title ..... you got me there.

Also, I notice you omitted to mention the $700 billion bankster bailout (and other much large wasteful spendings) along with the warm, fuzzy "roads, firefighters & police" catch-all phrase?

You keep on shovelling your bitcoins into county roads or whatever it is you think you are doing ... no-one's complaining. You shouldn't delude yourself about the lack of freedoms you exist under though.

Don't you understand that it really is the ideal world for 90% of the population?
A world where you have no responsability at all because since you were born you're used to have others decide on everything you do.
True bliss!

I didn't realize that the IRS and HR Block operate outside of the USA...

The bailout was paid by federal taxes.  We were discussing property taxes which are where police, firefighters & police receive much funding...

Didn't realize you were such the tax expert...

I also didn't realize how much freedom I was giving up by choosing to let others give me an economically effecient model rather than hiring my own personal fire dept & police dept.

I suppose you have built all the roads you use as well?  Or do you stick to 100% toll roads?

Seen what happened to police and firefighter pension funds on Wall St. .... wiped out. Keep on paying those property taxes buddy they are lining to go on forever ... hope that makes you feel warm and fuzzy.

Property taxes are an odious way to raise money for community projects. Ever thought about passing the hat around before bonding others into mad schemes that run for eternity? (Like pension funds siphoning off to Wall St.)

I don't agree. If it's a business, you have business losses (equipment depreciation, electricity, and so on). If nothing else, you can file them and carry them over in case you make a profit in the future. If it's a hobby, you'll have hobby losses. Again, if you don't file them, you can't use them to offset your (you hope!) future profits when you sell those Bitcoins.

If you have gains from other activities in the same category, you can usually use the losses to offsets gains from other activities. For example, if you are a self-employed consultant and mine Bitcoins in the reasonable hope of making a profit, every dollar you spent mining is effectively one dollar you didn't earn consulting. (Not counting capital expenses which you have to depreciate, but that's still better than nothing.)

Exactly, and it costs you money to do this -- costs you have every right to offset against future profits .. *if* you report them.

"Hobby losses" wtf?

I guess it all depends on how far, as a society, you are willing to go down the tax rabbit hole? Ever swapped fruit, veges, cakes, jams, pickles with your family and friends and never thought one whit about taxes? It's fun, try it sometime ... or forever be a slave to the beast.

http://www.zerohedge.com/news/guest-post-all-transactions-be-conducted-presence-tax-collector (http://www.zerohedge.com/news/guest-post-all-transactions-be-conducted-presence-tax-collector)

"All Transactions To Be Conducted In The Presence Of A Tax Collector

In the terminal collapse of the Roman Empire, there was perhaps no greater burden to the average citizen than the extreme taxes they were forced to pay.

The tax 'reforms' of Emperor Diocletian in the 3rd century were so rigid and unwavering that many people were driven to starvation and bankruptcy. The state went so far as to chase around widows and children to collect taxes owed.

By the 4th century, the Roman economy and tax structure were so dismal that many farmers abandoned their lands in order to receive public entitlements.

At this point, the imperial government was spending the majority of the funds it collected on either the military or public entitlements. For a time, according to historian Joseph Tainter, "those who lived off the treasury were more numerous than those paying into it."

The basic idea is that hobbies are generally money losing operations. If they were money makers, they'd be businesses, not hobbies.

But hobby profits are taxable. For example, if you raise show cows as a hobby, and sell a prize winner for $15,000, you have a $15,000 taxable gain. It wouldn't be fair to tax you fully on that gain and not allow you to deduct any of your expenses. Imagine if it cost you $20,000 last year to buy food and supplies for that cow. Is it fair to charge you a $15,000 taxable gain next year when you sell it?

But it's also not fair to let you deduct the $20,000 when you incur it. What if you never sell that cow? Hobbies are one of the ways we spend money; if they were always deductible, everything would be deductible. (My hobby is driving expensive sports cars. Maybe one day I'll make a profit at it, but until then, I need to deduct the costs of all my sports cars.)

Hence .. hobby losses. When you have hobby losses, you can use them to offset hobby profits (either in that same year or carried over). So if you spend, say, $20,000 buying food and supplies for your cow, you can report that as a hobby loss. Then, next year when you sell the cow, you can use the carried over loss to offset the $15,000 taxable sale and thus not pay any taxes as it would be a loss overall.

If you mine Bitcoins and it's not a business, it's a hobby. If you have losses (electricity, equipment) you should be able to carry them over as hobby losses and use them to offset an eventual profit when you sell your Bitcoins. However, I think you're okay even if you don't report them because you should be able to deduct them anyway as a cost basis. (When you sell something, you can generally deduct what it cost you to acquire it.)

http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_183

This forum is discussing US taxes & laws...

What's so fucked up about property tax?  It's kinda a bit part of how roads & firefighters & police are funded...

I like my "fucked up country" that "forces" police & fire protection upon me and doesn't make me build my own roads.  Thank you Uncle Sam!
[/quote]

if roads, police, firefighters, the post office and schools combined even made up half of what my taxes were spent on, i would 1) be paying a hell of a lot less in tax, 2) not be nearly as dissatisfied with my tax bill.

Well it is confusing because your examples are 100% wrong for US tax code.

Catching a baseball which might be worth $1M isn't a taxable event.
Painting a painting which someday might be sold at auction for $1M isn't a taxable event.
Digging up some shiny rocks that some culture someday may consider worth $1M isn't a taxable event.
Your house going up in value isn't a taxable event (for the purposes of income tax).

Selling the baseball, painting, gold, or your house ARE taxable events.

Only suckers pay tax

Says the guy living at home with mom.

When you actually have something to lose it kinda changes the risk vs reward dynamic.

Pray tell me how you managed to not pay real estate taxes on your property?

If you print your bitcoins on paper is it considered art ?

I will also only pay tax when its not spent on invading other countries.

I've seen someone end up on the pointy end of the IRS recently.  Trust me, you don't want to end up there.  Their power to collect from you is pretty awesome, and extremely disruptive if they get aggressive about it.

That's because the income tax in part stems from one's use of the private credit of the Federal Reserve.

The income tax was never constitutional.... until the private Federal Reserve came along and people started circulating their debt notes as "money".

Don't use their private credit, and suddenly the income tax is not nearly as much of a problem.