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!!!ALERT!!! New IRS guidance on virtual currency (VC) released 3/25/14 http://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidance For most purposes, IRS requires a property approach (Schedule D gain/loss) not a foreign currency approach. VC is taxable when mined by miners. VC transactions are reportable. See the IRS document for details and FAQ. If you have been doing it differently, consult a tax professional. Regarding the scope of IRS rules, they only apply to US taxes. Although the IRS might wish to be the top tax authority in the US they are not. They are beneath the constitution, the revenue code (written by lawyers in congress and constantly changing), court case law, and the treasury department. However in the absence of guidance from these other authorities, IRS rules should be followed. Here is my circular 230 disclaimer. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.
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!!!ALERT!!! New IRS guidance on virtual currency (VC) released 3/25/14 http://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidance For most purposes, IRS requires a property approach (Schedule D gain/loss) not a foreign currency approach. VC is taxable when mined by miners. VC transactions are reportable. See the IRS document for details and FAQ. If you have been doing it differently, consult a tax professional. Regarding the scope of IRS rules, they only apply to US taxes. Although the IRS might wish to be the top tax authority in the US they are not. They are beneath the constitution, the revenue code (written by lawyers in congress and constantly changing), court case law, and the treasury department. However in the absence of guidance from these other authorities, IRS rules should be followed. Here is my circular 230 disclaimer. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.
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Well, after reading through all of this I'm going to throw out there that I'm going with capital gains (long term in my case) for 2013. The IRS is still "researching cryptocurrencies" so until they provide guidance I'm taking the 'report and be consistent' approach. For me personally the cap gains is essentially tax free because I had losses in a start-up I invested in, so it's going to net to below 0, and had I gone with the bitcoin-as-a-currency classification (income) I would owe a high tax rate and not capture the cap gains netting benefit. If the IRS doesn't like it they can provide guidance or re-calculate it for me I guess.
steverabincpa what do you think?
Chris, I can't specifically bless tax returns or strategies I don't look at in specific detail, but what your paragraph sounds generally reasonable. Among the other things I look at when advising clients include: operating loss carryforwards, eligibility for research credit, use of retirement plans (SEP IRA etc.), full use of self employment business deductions, use of rental income, use of living trusts, interfamily tax strategies, and charitable gifting of appreciated assets. Here is my circular 230 disclaimer. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.
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For US Tax purposes, would it not be appropriate to divide mining income between the bitcoin 'reward' and the 'transaction fee' associated with the accepted block. The former involves a very unique economic transaction that we all feel is open for interpretation. The transaction fee we receive is another matter. Those generating a transaction either intentionally or there mining software allocates the fee to prompt inclusion in the block when it is constructed.
thougths?
How is the 'reward' different from lottery winnings or a treasure trove (both taxable eg: Cesarini v. United States, 296 F.Supp. 3 (N.D. Ohio 1969)? In particular, if a US based lottery pool were involved, with the pool as a counterparty, how would the counterparty record (and report) the transaction?
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Well the reason with option1 is a problem is that many of the exchanges (at least altcoins) do not track full history of trades. Many are < 50. For many micro-transfers many traders easily bypass the 50 amount. This is why I think option2 is the only option for most people. Basically track all profits at point of sale - costs, and treat either as a capital gain or income. In this case would declaring it as a capital gain be fair, or taxing as an income be more accurate?
What are the holding periods and how much of a difference are you talking about? There is a general cost-benefit principle in accounting that we should not spend $10 to accurately measure $1, and in tax enforcement in general the tax authorities spend $1 to collect $10, not the other way around. Certainly reasonable estimation methods can be used to avoid individual measurement of micro amounts when exchange information is limited. I encourage you to consult a licensed tax professional about the details of your situation. I am a USA CPA licensed in CA and IL, and I can be found on LinkedIn or by Google. Here is my circular 230 disclaimer. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.
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I've been asked (in private) for more technical support for the capital vs. ordinary treatment of bitcoin gain and loss. I will share my research on this with you all. Beware, it is somewhat technical. A) "Is bitcoin a capital asset? ... I don't mind doing some reading "It depends. This is a grey area raising a lot of issues depending on the details of the situation. I don't have a general answer at this time. If we believe Bitcoin is currency then, since an individual taxpayer's functional currency is the US dollar, the foreign currency rules IRC988 apply:"Code Sec. 988. Treatment of certain foreign currency transactions (a) General rule Notwithstanding any other provision of this chapter -(1) Treatment as ordinary income or loss (A) In general. Except as otherwise provided in this section, any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss (as the case may be)." This is powerful language and "notwithstanding other provisions of this chapter" means that it potentially trumps the IRC1221 rules on capital assets and capital loss. Section 988 goes on to say: "(C) Special rules for disposition of nonfunctional currency (i) In general. In the case of any disposition of any nonfunctional currency - (I) such disposition shall be treated as a section 988 transaction, and (II) any gain or loss from such transaction shall be treated as foreign currency gain or loss (as the case may be). (ii) Nonfunctional currency. For purposes of this section, the term "nonfunctional currency" includes coin or currency, and nonfunctional currency denominated demand or time deposits or similar instruments issued by a bank or other financial institution." However, see Rev. Rul. 74-7 where traveler foreign currency reconversion gain/loss not associated with a trade or business was determined to be capital gain/loss. See also (1985) National Standard Company v. Commissioner: Will the Real Character of Foreign Currency Exchange Gains and Losses Connected with the Disposition of Foreign Debt Please Stand Up? John F. Lyons http://digitalcommons.pace.edu/cgi/viewcontent.cgi?article=1580&context=plr Section 1221 defines the term "capital asset" as property held by the taxpayer, regardless of whether it is connected with the taxpayer's trade or business, unless the property meets one of eight listed exceptions: (1) inventory; (2) property of a character which is subject to the allowance for depreciation provided in section 167, or real property used in a trade or business; (3) certain intangible property; (4) accounts receivable acquired in the ordinary course of a trade or business; (5) certain publications of the United States Government; (6) certain commodities financial derivatives; (7) certain hedging transactions; and ( 8 ) supplies of a type regularly consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer. (0) Is bitcoin property? Perhaps. "Foreign currency is recognized as "property" as that term is used in the internal revenue laws. Such property meets the literal definition of a capital asset as set forth in section 1221.2" (International Flavors & Fragrances Inc.; 62 T.C. 232 (1974)) (1) Is bitcoin inventory? Probably not. "In the manufacturing context, goods subject to inventory are tangible, movable objects." - Cf. Jim Turin & Sons, Inc. v. Comm’r , 219 F.3d 1103, 1107 (9th Cir. 2000), (although the IRS commissioner has broad power, in the future to require inventory accounting in designated industries; eg see IRS Letter Ruling 9523001 and 9527003). Also note that property cannot be classified as inventory unless it is held by the taxpayer primarily for sale to customers in the ordinary course of his or her trade or business (Van Suetendael v. Comm'r, 152 F.2d 654 (2d Cir. 1945)) (3) Is bitcoin certain intangible property? Copyrights, a literary, musical, or artistic compositions, and similar property. Probably not. (7) Is bitcoin certain hedging transactions in the course of trade or business. This is a complex grey area, as hedging in the course of a trade or business is not well defined. See Lyons cit. above. However transactions entered into for speculative purposes will not qualify as hedging transactions. See S. Rep. No. 201, 106th Cong., 1st Sess. 24 (1999). B) Redacted. C) " prefer to do things right"I assume that most of us want to do the right thing, not just to avoid penalties and to sleep well at night, but to set a good example to others and to have a functioning society and government that relies on trust not just on enforcement. Call me an idealist. ![Smiley](https://bitcointalk.org/Smileys/default/smiley.gif) As you can see Bitcoin is a grey area in the tax law, and we are best served by not preparing the tax return ourselves, but hiring a (another) licensed professional who will research the specific situation efficiently and accurately and perhaps with less bias than the taxpayer doing it themself. When we (tax professionals like me) make mistakes it is perhaps from error or miscommunication vs. from deliberate deceit/fraud, whereas with a self-prepared return the taxpayer is more likely to be considered 100% responsible and perhaps the taxpayer intent is more likely to be questioned. Having a respected preparer signature on the return is also particularly important if the tax return is to be credible documentation of income for loan or loan refinance. Here is my circular 230 disclaimer. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.
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Can I sell through a corporation then pay myself a salary to avoid capital gains, giant bracket and se tax?
This is possible, but you would be well advised to retain a tax adviser to help you execute your plans. Can I retain you? You are likely better off paying capital gain tax as an individual, rather than income+payroll tax, particularly if the holding period might be over a year and the capital gain is long term. In general corporations are like lobster traps, it is easy to put stuff in but expect to pay tax when taking it out. Try to find a licensed tax advisor in your state (each state has its own tax rules and licensing peculiarities) who is up to speed on virtual currency issues. I am taking qualified California bitcoin clients this 2013 tax season and am even accepting payment in Bitcoin. I can be found through google or linkedin. Here is my circular 230 disclaimer. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.
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I'm impressed you got your certification but I'm puzzled by your position. I mean, most CPAs err on the side of caution so that might explain; and I mean no disrespect by that, it's not a bad thing. My problem with your position is that there is no "taxable event" happening. It's not currency, yet, and we honestly don't know if it ever really will be in the eyes of our Uncle Sam.
I wasn't trying to give the CPA guy a hard time or pretend I'm the expert, apologies if I came off that way, seriously to the guy I originally quoted no disrespect. I just think there is more than one way to handle it right now, and just because someone is a CPA doesn't mean they've filed BTC on a return yet, reasonable doubt- this is the internet afterall... Unless they set clear guidance there's no way I'll be reporting my toy bitcoins on my income taxes, just not gonna happen, at all. I love this shit, seriously, BTC is the coolest and I have a ton of fun setting up my miners, reading about it, chatting about it, the community is great, I truly believe in it: BUT, right now only a small amount of people (most users here) view it as a "currency". Personally, I view it as a collectible right now; and just like all the other collectibles (if) sold at a profit there is a request that you claim it (when/if you SELL it) using purchase price as cost basis and sale proceeds as gross. No disrespect taken, nor intended by me. This is a grey area of tax in which multiple approaches have reasonable support, and I am not the only tax preparer sometimes active here. Hopefully discussion here is improving the quality of the accounting we are all involved with and I am very interested in other perspectives, from preparers or taxpayers, particularly things I might have missed. I also hope these discussions and my comments give insight to those whose past tax experience has been in less controversial areas. I am licensed and have helped clients resolve tax litigation and enforcement matters ranging from USD 10K to 100M. Every tax return is to some extent a conflict between the interests of the taxpayer and the interests of the government, and my guide in this is the IRC, court cases, treasury regulations, private letter rulings etc. (but not Pub17 which is not as authoritative). I have duty to clients, to the authorities, and to my profession, and I try not to "err" on either side, though sometimes the rules are grey and judgment is needed to find the rules on which to hang our hats. Consider tax on stock options ("property" in IRC83 below). Usually a stock option option is granted at the money, but if it is in the money we pay tax on when we receive the rights, not just when the stock is finally exercised or sold. This rule is Code Sec. 83. on "Property transferred in connection with performance of services (a) General rule If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of - (1) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over (2) the amount (if any) paid for such property, shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm's length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture. " While I am not convinced that Bitcoin would fall into this rule on "services", many of the other theories I have looked at (and briefly mentioned in a previous post) also involve paying tax when rights are received. I think that when the dust settles 6 years from now (the statute of limitations on foreign currency returns), tax will be due at the time of mining, not just at time of sale, and people who have 2013 returns deducting expenses but with zero taxable income will be at risk for audit, interest and penalties.
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Approach1: a) at the time of mining any bitcoins acquired should be tax as income at the fair price for those coins at the end of business day (or week - depending on the accuracy of the coins) b) at the time of selling, any appreciation of the bitcoin capital should be taxed as a capital asset with regular short-/long-term rules applied. This also would apply with any bitcoin that we purchased/sold for a profit > any equipment costs can be subtracted from the overall profit, I believe this only applies to (1)
I'm inclined to follow approach1 but it's going to be a huge problem accurately tracking what was made at the time of mining given the fluctuating prices. Also an interesting side question is how do we declare taxes on items that we purchased with BTC that were acquired with (1b) ??
In general, the approach you describe sounds reasonable to me. I do not think the problem of tracking is quite so "huge". Eventually when you sell or exchange the coin you will have paid tax on 100% of your realized amount, so the amount recognized at the mining date is just a matter of timing. Adopt a method that is reasonable and simple to apply and be consistent. For example you trade primarily on one exchange during a period you might use published trades from that exchange if available to value mined coins in that period (last, w. avg, (high+low)/2 - any would probably be considered reasonable). Whichever method and periods are appropriate for your situation and volume, write it down and be consistent. By paying some tax at time of mining you are demonstrating good faith effort to comply in a grey area of tax law. Where people get in trouble is when they exhibit the attitudes like "I will pay zero tax" or "I will arbitrarily change my methods from day to day or using hindsight to pay the absolutely least amount of tax possible". Don't do that. These are the people tax authorities tend to select for enforcement and to set precedents. I am a USA CPA licensed in CA and IL, and I can be found on LinkedIn or by Google. Here is my circular 230 disclaimer. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.
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If you mine bitcoins it is counted as income based on the value of the bitcoins at the time you mine them. Yes, it's a huge pain to keep those kinds of records, but it is the legal way to do it.
It should be "0" when you mine it. At least this is certainly the case with speculative altcoins. After that it should just be treated as a commodity with capital gain applications, where you're initial cost was "0" and anything after that is pure profit. A tax lawyer may tell you that the cost will include all the costs of the mining equipment (depreciated on a schedule) the monthly electricity, rent, and support costs. Some people lose money mining. You don't pay tax on a loss. Agreed, it is income at the time of mining. I am not convinced that BTC mining is like creating artwork for several reasons. Artwork does not have active markets that can be used to determine price at the date of creation. While art involves assembling supplies previously owned by the artist, bitcoin mining involves a point in time when the miner has control over something they did not previously possess. And, perhaps most telling is the matching principle in accounting that income and related expenses should be recognized together. So I doubt that deducting electric and equipment expenses now, while deferring recognition of revenue will be considered to be consistent. Then there is IRC83 which requires that deferred compensation (such as stock and options) be recognized at the fair market value when title transfers to the taxpayer, not when the investment is sold. And IRC988 requires income to be recognized when foreign currency is received for goods or services. Regarding depreciation, in general for federal taxes, most miner expenses get deducted immediately not depreciated, because the business sets a $2,500 capitalization threshold, expensing anything below this threshold, and then accelerating depreciation of expenses over $2,500 up to IRC179 limits (often $500K). For state taxes it is possible that some expenses may need to be capitalized and depreciated. Don't forget to deduct telecomm expenses, training, reasonable business travel and home office expenses. I am a USA CPA licensed in CA and IL, and I can be found on LinkedIn or by Google. Here is my circular 230 disclaimer. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.
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Sorry for the late reply. Tax season and all... How can I tell how much $ to pay in taxes when I receive a bitcoin and all the exchanges say something different?
What if there's an exchange trading at $0.01 (that nobody sells on lol) and another trading at $100, can I calculate the tax from the $0.01 one?
Why not just pay taxes from the income you made by selling the bitcoin?
The IRS accepts fair market value. The exchange that displays a price quote of $0.01 is neither fair nor market value. The fair value of anything is the value that two knowledgeable and willing counterparties are able to trade without being forced to trade. There have been no IRS precedents on BTC, but I'm sure the first BTC audit, whenever that happens, the IRS will use the MTgox price on the date of your trade as the fair market value of your trade. While the IRS has not given specific guidance on BTC as of today, they likely will do so in the next 6 years, and there may be significant advances in forensic technology in this period. If a taxpayer gets an audit notice 6 years from now, and has a tax position that is overly aggressive there can be substantial interest and penalties, even exceeding the disputed amount. I am not convinced that BTC mining is like creating artwork for several reasons. Artwork does not have active markets that can be used to determine price at the date of creation. While art involves assembling supplies previously owned by the artist, bitcoin mining involves a point in time when the miner has control over something they did not previously possess. And, perhaps most telling, there is a matching principle in accounting that income and related expenses should be recognized together. So I doubt that deducting electric and equipment expenses now while deferring recognition of revenue will be considered to be consistent. Then there is IRC83 which requires that deferred compensation (such as stock and options) be recognized at the fair market value when title transfers, not when the investment is sold. And IRC988 requires income to be recognized when foreign currency is received for goods or services. Regarding fair market value, I think revenue ruling 59-60 allows consideration of exchanges other than MtGox, as long as the exchange is active, the valuation method is used consistently and satisfies all other applicable rules. I am a USA CPA licensed in CA and IL, and I can be found on LinkedIn or by Google. Here is my circular 230 disclaimer. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.
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Regarding mining, there is a matching principle in accounting that suggests that income should be recognized at roughly the same time as related expenses. So deducting expenses when incurred or paid, but capitalizing the value of mined coins and not recognizing income until the coins are sold would, in my opinion, not likely be upheld in tax audit or litigation. By far the safest position is to recognize income at the FMV when mined. Determining FMV is not completely clear cut, given as much as 10% spread in dollar values between exchanges. Whatever valuation method is used should be used consistently, and it is probably worth seeking valuation advice if the mining revenues are large. The income recognized becomes the tax basis and then additional gain or loss is recognized based on the change from basis when the coins are sold. Several methods including LIFO and specific identification may be used to decide which coins were sold. Whichever method is chosen should be used consistently.
I am a USA CPA licensed in CA and IL, and a certified valuation analyst, and I can be found on LinkedIn or by Google. Here is my circular 230 disclaimer. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.
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Folks, at this time the distinction between currency and investment is a grey area to me and both approaches have some support in tax law. I'm repeating the court case citations I am aware of that lend some support to either approach. There is no right and wrong here yet until the lawyers in congress, or the lawyers who are now judges give us stronger guidance on what to do with coins that are not associated with countries. As described in my earlier post each approach has advantages and disadvantages. Pick one or be consistent with previous years. Consider seeking advice from a tax expert before changing approaches.
Supporting the currency approach: In SEC vs. Trendon T. Shavers and BTCST Judge Mazzant writes “It is clear that Bitcoin can be used as money,” “It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses.” Also see IRC 988(c )(1)(C )(ii) “Nonfunctional currency. For purposes of this section, the term "nonfunctional currency" includes coin or currency, and nonfunctional currency denominated demand or time deposits or similar instruments issued by a bank or other financial institution.”
Supporting the investment approach: In California Bankers Assn. v. Shulttz “‘Currency’ is defined in the Secretary’s regulations as the coin and currency of the United States or of any other country, which circulate in and are customarily used and accepted as money in the country in which issued.” Some other jurisdictions may be taking this investment approach.
I am a USA CPA licensed in CA and IL, and I can be found on LinkedIn or by Google. Here is my circular 230 disclaimer. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.
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Thank you for the response/explanation. Let's reverse the scenario, though, just in case it makes a difference. Obviously this is much less likely, but if Juan withdrew $500 CAD and it debited his account $450 USD and then he was able to exchage the $500 CAD for $500 USD upon his return at his local branch, would that $50 gain be reportable as income (and where)? I ask because it's still not "incurred" in a trade or business, and it's still not from a transaction entered into for profit. That having been said, if this wouldn't be reportable, would it be because it wasn't a transaction entered into for profit, or would it be because the dollar amount was below a certain threshold?
Reversing the scenario does make a difference. Although losses are only deductible in one of those three categories, all gains, including those outside these categories are usually taxable. In your case above however, IRC988(e)( 2 )(B) sets a $200 threshold below which the currency exchange gain on personal transactions are ignored. From a practical standpoint, a taxpayer is unlikely to get audited over the taxes on a single $50 unreported gain. Common things that do cause taxpayers to get audited are tips from ex-wives and ex-employees. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.
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In contrast the currency approach more readily realizes gains at ordinary income rates, but any losses are ordinary and easier to realize and carryforward as NOL. I really want to know how currency exchange works for a typical individual, can you tell me how one would deal with the following scenario, on a federal income tax level? 1) Juan drives up to Canada 2) Juan withdraws $500 CAD from an ATM using a US/USD-based debit card 3) Juan's checking account balance is reduced by $625 USD 4) Juan's need for the cash vaporizes and he drives back to the US with it 5) Juan goes to his local bank branch and exchanges the $500 CAD for $575 USD Obviously Juan lost $50 in these transactions. It sounds like you are suggesting that would be a claimable loss. If that is correct, I would love to know how Juan would claim this loss. If it is incorrect, please refer to my prior posts in this thread and help me understand or find a document that indicates when/how to know one can claim such a loss. If the rules for losses are different than gains, please point me toward information affirming that as well. The000Dustin, unfortunately the situation described above sounds similar to the example in IRS Rev. Ruling 74-276 where exchange loss of an overseas employee was not deductible because it was not "(1) losses incurred in a trade or business, (2) losses incurred in a transaction entered into for profit, though not connected with a trade or business. and (3) certain casualty and theft losses." (see also IRC165( c ) and Treas Reg 1.165-1(e)( 2 ) ) Business expenses ideally are reimbursed by the employer who deducts them on their business return, or as an unreimbursed employee expense on Sch A. Unincorporated nonemployee businesses deduct exchange loss on Schedule C or E or F of the owner. "Losses incurred in any transaction entered into for profit, though not connected with a trade or business;" I would report as a negative component on 1040 line 21 OTHER INCOME. And of course investment losses go on Sch D. Be careful with travel related exchange losses however, as other travel specific limitations may apply. I hope these comments were helpful. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.
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"It's strange to start out the comment with "the rules seem pretty clear," because I was thinking just the opposite. " - Yes, agreed, it is still murky.
Why file anything at all? Because it starts the clock on the statute of limitations, limiting the ability of tax authorities, in the indefinite future, from targeting you with future forensic technologies, for many years worth of compound interest and penalties, or taking even stronger measures against you. And because it is the right thing to do. IRC 6501(c)( 1) False return. In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time. See also 6501(c)( 2) Willful attempt to evade tax ; and 6501(c)( 8 ) Failure to notify Secretary of certain foreign transfers.
"And then there's the question to file anything on a schedule D in the first place. One approach may be to just file it under "other income" and pay income rates. " Given the lack of standards for presentation of bitcoin income, I would be much more concerned that numbers are reasonably accurate than to presentation.
The investment approach has the advantages of lower long term capital gain rates and perhaps deferred realization of gains in some exchanges, but losses are capital losses which are harder to utilize. In contrast the currency approach more readily realizes gains at ordinary income rates, but any losses are ordinary and easier to realize and carryforward as NOL.
If the dollar difference between the two approaches is large, the taxpayer (or their advisor) may want to pay to obtain a private letter ruling from the IRS on this issue. I have searched but am not aware of any such rulings to date. I would not recommend changing between methods without consulting a CPA or tax attorney, and I also recommend professional advice when choosing between LIFO, specific identification, or other methods of timing trading.
Supporting the currency approach: In SEC vs. Trendon T. Shavers and BTCST Judge Mazzant writes “It is clear that Bitcoin can be used as money,” “It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses.” Also see IRC 988(c )(1)(C )(ii) “Nonfunctional currency. For purposes of this section, the term "nonfunctional currency" includes coin or currency, and nonfunctional currency denominated demand or time deposits or similar instruments issued by a bank or other financial institution.”
Supporting the investment approach: In California Bankers Assn. v. Shulttz “‘Currency’ is defined in the Secretary’s regulations as the coin and currency of the United States or of any other country, which circulate in and are customarily used and accepted as money in the country in which issued.” Some other jurisdictions may be taking this investment approach.
So far I have been writing about BTC for individuals, not for businesses. If you have a Bitcoin based mining or trading business then your tax basis may not be cash and your functional currency may not be the dollar, and your situation becomes MUCH more complicated.
There are several other compliance reporting issues US taxpayers with bitcoins should be aware of, particularly if you transact bitcoins outside a brokered exchange: FATCA, FBAR, Forms 8300 and 1042-S.
I am a USA CPA licensed in CA and IL, and I can be found on LinkedIn or by Google. Here is my circular 230 disclaimer. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.
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Hmm, I tried posting two days ago and now I don't see my post. Am trying again here and now.
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