Bitcoin Forum

Bitcoin as property = 0% tax most of the time, sometimes up to 20%

Bitcoin as currency = 25% tax most of the time, sometimes up to 39.6%

Also you will realize that the record keeping hassle for using it as currency is identical, if you stop to think about it.  Plus wallet software will take care of this soon enough.

There is no practical advantage to it being treated as currency.

An individual who "mines" has to pay TAX on receipt of the virtual currency / property at the time it is mined and then again when they actually realize a gain  and use it in a transaction, as stated in the IRS guidance.

Do you think this is going to be good for the network long term?

This would be the case whether bitcoin was classified as property or foreign currency.  There really isn't a classification where mining would not be taxed as income.


If you tax something, you get less of it.  So taxing the people who secure the network means that the network will be less secure.

Correct so TAXing as currency treats miners and investors equally badly.

 

Yes, which is why the idea of treating it as a currency is a horrible idea.  Wait a second... are you arguing in favor of higher taxes?  Out of spite?

It depends on how it is used.   In the US currency gains of less than $200 on transactions involving the purchase of goods or service by an individual (sorry for profit businesses this doesn't apply) are exempt from any taxes.

This is why if you go on vacation to Mexico for example and exchange $100 for pesos, and before you buy a beer the next day, it doesn't matter if the exchange rate rises slightly.  If the pesos you now spend are worth $101.20 you don't have to keep a record of each transaction, amount, time, corresponding exchange rate, and then load all that into your tax software to compute a currency gain of $1.20.  For exempt transactions, it is considered a de-minimis gain and you are not required to report it or pay taxes on it.  

As an example lets look at a consumer who buys 4 BTC from coinbase at $500 ea and later spending those to buy a $1,500 computer from tigerdirect for 2.9 BTC ($517 exchange rate).  Today under IRS guidance there is a $49.30 gain and it would need to be reported as a capital gain tax.  The problem isn't so much the tax but all the complex of the recording and computing of that tax.  The time, exchange rate, and amount of each purchase and spend needs to be recorded and the capital gain schedule filed out, the gains have to be categorized as long vs short and the applicable rates applied.  If it was treated as a currency then the transaction would simple be exempt.  Not only does the taxpayer pay nothing they don't need to file anything. 

Of course right now Bitcoin is appreciating (or at least has the potential to appreciate) and the gains may be more than $200 so it may not make much difference, however in a decade or two if/when Bitcoin is much larger and the growth rate much slower it would be much simpler for most average user of the currency if it was treated as a currency. 

Regardless of it one wants it to be treated as property, there is no logical reason for it:
* You exchange $100 for pesos and spend them.  Treated as a currency (and in most cases is exempt).
* You exchange $100 for euros and spend them.  Treated as a currency (and in most cases is exempt).
* You exchange $100 for pounds and spend them.  Treated as a currency (and in most cases is exempt).
* You exchange $100 for yuan and spend them.  Treated as a currency (and in most cases is exempt).
* You exchange $100 for yean and spend them.  Treated as a currency (and in most cases is exempt).
* You exchange $100 for Bitcoin and spend them.  Magically it is "property" and capital gains need to be computed. WTF?



Think about it for a second.  Have you ever traveled overseas on vacation or business?  If so did you exchange USD for foreign currency and use it to pay for goods or services?  Did you then track the exchange rate at the time of the exchange and at the time of each purchase, record all that in a log, and compute the total gain if any ad at the end of the year take that log plus the logs for all other trips and add it to your tax return?  I am guessing not. :)

Thanks for the clear answer (as usual!)

But - if bitcoin is taxed as a currency it would be possible to make a multitude of small purchases to avoid paying tax on the appreciation. For example, if I bought a bitcoin in 2013 for $10, and by 2015 it's worth $10,000, I could make a lot of $200 purchases and avoid getting taxed on the gains. I could see why the IRS would not favor that result.

I am not a tax attorney or CPA I don't know all the limits and caveats of the foreign currency rules.  I would imagine there probably are some annual caps to the exemption and if there isn't (because most currents are inflationary so you are just jumping from one sinking ship to another one) then I would imagine Congress would put some limits in quick if people are using it to exempt huge sums of wealth.

On edit:
Well you got me curious so I looked it up.  At the current time there doesn't appear to be an annual cap only a limit of $200 gain per transaction.  It is important to note this is an all or nothing exemption.  If the gain is $200.00 (or less) no taxes are due.  If it is $200.01 or more then taxes are due on the entire $200.01 (not just the portion over $200).  Of course an annual cap or limit could be imposed in the future (Congress is good about doing stuff like that).

This shouldn't be considered financial or legal advice, one should always consult with an attorney or accountant for professional advice.

I agree with the complexity being an issue, but it is also a solvable one.  If that same consumer who bought 4 BTC from coinbase also had coins with a higher cost basis, then they are able to match gains vs losses to avoid creating a taxable event. 

There is even no record keeping hassle, since all transactions are stored in the blockchain. E.g. blockchain.info allows to export all transactions for any bitcoin address into a csv file. Historical fiat prices are  downloadable from different exchanges. A simple script would do the rest and from there you can import it into a tax software.
 

Now look at it from a home miners perspective, who also mines script and converts to btc, to use for transactions and never holds btc long term. It soon becomes more of a hassle then it is worth to use btc.
The current IRS rules will drive these individual miners away, and or they will not spend the btc as the mining and transaction record keeping burden and the idea you have to pay TAX on property before you have realized a gain on it is crazy. To me BTC is not worth anything at all until you transact with it, so how can you charge tax on mining it.

If you are an investor and want to hold btc long term then yes this is the best thing that could have happened. A smaller number of individuals or institutions could benefit a great deal.

And you are smoking just what?

My $.02.

;)

How do you know that your gain was $49.30 instead of $249.30?  You have to calculate it, which means that you have to record how much you paid for those particular bitcoins.  Since you don't know which bitcoins you will spend on large purchases (which may result in a tax) vs small purchases (which won't) you are left recording how much you paid for each bitcoin, which means that you are tracking everything, presumably through software.

Keep in mind that over time the value of the dollar drops, and so this $200 exemption will start to feel like a $20 exemption.

Let's also be a bit more realistic about whether the IRS cares whether or not you report capital gains on the bitcoins that you used to buy groceries with.  No one is going to report that, and no one is going to get in trouble.


Yep.  Pretty much everyone on this forum is going to be able to buy a house with their current stash of bitcoin.  Newbies don't seem to realize that bitcoins are going to be worth tens of thousands of dollars soonish (three years?  fifteen?).


Bitcoins are "mined" instead of being produced by governments.  What else is like that?  ...gold, silver, platinum, etc...   Bitcoin is a precious metal.  Precious metals are classified as property, not currency.

...gold, silver, platinum, etc...

To my knowledge these are not taxed when you dig them out the ground.

Of course they are taxed when you dig them out of the ground.  They are taxed as income, exactly the same way that mined BTC are taxed.

Mined BTC will be taxed as income whether BTC is taxed as property or currency.  There is no scenario where mined BTC won't be taxed as income.  This thread is talking about how to tax gains rather than production.

I had already pointed this out when the IRS ruling first came. But in many nations (don't know the situation in the US), short-term caps gain is just added with the annual income, and income tax is paid over it.

Don't believe you are correct.  If I go out to my backyard and mine or find 10 ounces of gold, this is not a taxable event.  I do believe when you sell it you are subject to taxation.

It is the same in the US.  The number in the OP are incorrect.

It is more like this:

Bitcoin Taxed as Property
Coins held 365+ days = taxed at long term capital gain rates (reduced rate of 0% to 20%)
Coins held 364 or less days = taxed at short term capital gain rates (same as ordinary income)

Bitcoin Taxed as Currency
Gains are taxed at regular income.
Gains of up to $200 per transaction involving the purchase of goods or services are exempt.
Exempt transactions do not need to be reported they are just "de minimis".

Then your numbers are incorrect, because the numbers that I presented were a subset of the ones that you presented.  You agree with me and if I am wrong then you are wrong.  We're not wrong though.

Did you mean to have both headers as property?

No. I fixed it.  Thanks.

That is my understanding too. Your gold would have a 0$ cost base and you pay gains only when you sell or trade it. BTC should be treated the same way. For me this is the biggest issue with the IRS rules which as they stand would seem to be an attempt to steer people away from mining BTC and penalize them if they do.

Let me check the consequences. Well... it might encourage people to hold Bitcoins longer, and there by reducing short-selling. This might add to the stability of exchange rates by reducing the volatility.  ;D

Nope, I looked it up.  Miners pay income tax on what they dig up, not capital gains.  Am I the only person with access to google?  Why aren't you guys looking this stuff up?  It is all publicly available from the IRS.

Doing research and coming up with the correct information would pretty much kill off all the speculation that is going on in this thread.

You are correct; the IRS rules are clear for the most part regarding the method by which crypto is taxed.

All you have to do is read the ruling.  There is a certain complexity to the method of calculation of value buth after all, this is the IRS we're talking about.

Fin-CEN rules are perfectly clear as well, which rules are going to shake up the mining industry right down to its toes.

My $.02.

;)

Pay income tax if they sell within 365 days??

Please post a link for where you found this, I have been looking but have not been able to find it. The only info I have been able to find for individuals is you pay tax when it is sold. There is a lot more to it for gold mining company's.

thanks

Read it and weep:

http://www.irs.gov/pub/irs-drop/n-14-21.pdf

I have only posted this ruling about nine places on this forum.

Jesus.

My $.02.

;)

This covers placer mining (similar to small-scale bitcoin mining): www.irs.gov/pub/irs-mssp/placer.pdf‎

Larger scale mining falls under the corporate tax rate and so you have to look at business as a whole, allowing deductions for equipment and other expenses, exactly the same way that the IRS allows professional bitcoin miners to handle it.

Of course talking about mining is a complete distraction, as the number of miners is small and shrinking.

Mining is only a distraction if you are not mining. I know this is off topic and do apologize for the side track, but it is part of why I feel the classification as it is defined is not correct.

Thank you posting the link I have read this. As everyone has their own point of view I would very much like to see what everyone else finds in this document.

The below are extracts from the document and indicate that tax is payed by a gold miner when the gold is sold, used as collateral or barter.
-------------------
Chapter 2
Mining Income

Gold refiners are generally the primary market for miners. Raw gold is usually delivered to the
refiner where it is purchased from the miner, processed, and refined. At the point of sale, funds
received are considered income to the miner.

If gold was used as collateral, verify the
value placed upon it by the bank or other lender. If the gold is used as collateral for a loan, it
becomes income to the taxpayer and should be reported.

Income information may be obtained in examination of the Affidavits of Annual Labor. The
affidavit will list the names and addresses of those individuals who performed labor on the claim.
It is often the case that an owner will pay for labor in gold. Verification of the amount of
payment for labor performed may also indicate income to the miner.
----------------------

That document assumes that you are selling the gold fairly soon, and it doesn't say what happens if a miner keeps the gold for a substantial amount of time.

My interpretation is that mined gold = income, gains on gold sold within a year = income.    So added together it makes sense that the miner is going to pay income tax.  For a miner who sells all of his gold within a year it it is practical to simply calculate the tax when he sells the gold to a processor, or when he uses the gold to pay his workers.  Either way he's going to pay tax at the income tax rate.  So it doesn't matter how that tax breaks down to income vs short-term gains vs foreign currency.  They all use the same rate in short-term situations.

How would the IRS handle a situation where, every month, the miner sells part of his gold and keeps part of it?  My interpretation (I'm speculating here) is that when he sells for the month he has to pay income tax on all of the gold that he mined that month, both the gold that he is selling and the gold that he is keeping.  The gold that he keeps would then become property with a basis equal to the current price.

I think you are correct.  It wouldn't make sense to be taxed immediately on things you haven't sold yet.  Whatever, anyway..

Well, that taxing on reception is exactly what the IRS is doing.

Read the damned ruling.

I have posted it many times on this very forum, so go look for it this time.

My $.02.

;)

Yes we all understand the IRS rules for btc mining, which could mean an end to small time mining in the usa. My opinion on BTC as property only benefits those who want to buy and or hold, and penalizes everyone else to some degree, which is not what BTC was supposed to be used for, so my vote is still the IRS classification and rules are bad, but not all bad. Yes some people will benefit and some will not, I just hope this is not the final tax code.

Regarding gold mining, I was able to ask retired accountant and a coin collector who both told me the simple answer is that a gold miner pays tax on his/her gold when it is sold or used in a transaction for gain and only for the amount in the transaction. The accountant did say there was a lot more to it regarding claiming expense, losses etc. I will try ask another working accountant about this too.

You people just don't get it, do you?

My $.02.

;)

Yes, There is a lot I don't understand about this subject and am trying to learn more about it.

This is the case whether bitcoin is taxed as property or currency.  Think about it for a minute.  When you buy something that costs $200+ you need to know the basis of the coins used to pay for it.  In order to do this you need to track the basis for all of your coins, which means that you need to track every single purchase, even those of negligible value.

So the required record keeping is identical.  Just in case you didn't get it the second time (I already mentioned this in my original post) I'm going to mention it a few more times:

The required record keeping is identical whether bitcoin is classified as property or currency.

The required record keeping is identical whether bitcoin is classified as property or currency.

The required record keeping is identical whether bitcoin is classified as property or currency.

The problem I see when playing this game is that the feds are always making up crazy loop holes that don't make any sense down the line and screwing people that is just how they operate all the time.

Very true so the only thing that you can do is to utilize legal tax avoidance methods.

My $.02.

;)