In-person cash to btc purchases tax document requirements?

[smoothie]

Please give me your take on the following scenario...

(This is assuming everything in red below is true for person A as well as:

person A sends bitcoins to ->  licensed bitcoin exchange

person A has an exchange account in person A's name and sells for USD and sends USD to a bank account in their name as well.)

DIAGRAM for simplicity:

                        CASH
PERSON A gives ---------> Person B in person

                          BTC
PERSON B sends --------> Person A's BTC address (personal wallet or exchange address)

                               BTC
PERSON A converts ---------> at a profit or loss to USD on licensed exchange

                            USD
PERSON A sends ----------> to PERSON A's bank account


Question: What documentation would person A be required to have for tax purposes for capital gains losses aside from exchange transactions for person A's account with said exchange and bank statements showing incoming ACH/wire transactions?

Moreso...Are there any MSB registering requirements for the Person A?


Here is something FINCEN posted in Jan 2014.

LINK: http://www.fincen.gov/news_room/nr/html/20140130.html

The second states that a company purchasing and selling convertible virtual currency as an investment exclusively for the company’s benefit is not a money transmitter. The rulings further interpret FinCEN’s March 18, 2013 Guidance to address these business models.

Any input?

[Bitcoin CPA]

Ok let's say you paid Mr. Jones $1,000 in cash.  Are you using localbitcoins.com?

* if you are being super-conservative, you would get a cash receipt from Mr. Jones for $1,000.  But I would recommend keeping a record of the date, person's name (in this case, Mr. Jones), and an accounting entry debiting "Bitcoin Receivable" and crediting "Cash" for $1,000.  This is where good bookkeeping comes in which is another service that I offer


Mr. Jones sends 4 BTC to your wallet.  So your cost basis for each BTC is $250, what you paid.

scenario (A)   accounting entries would be a debit to "Bitcoins" and a credit to "Bitcoin Recievable" for $1,000

scenario (B) as you and I both know, BTC prices change fast ... so if by the time you receive the 4 Bitcoin and the price dropped to $225 then you debit "loss on Bitcoin trades" for $100 and "Bitcoins" for $900 ... then a credit to "Bitcoin Receivable" for $1,000


Smoothie converts the BTC to cash on BTCe at $275 a BTC for a total of $1,100
 (A) you would debit "Cash" for $1,100 and credit "gain on Bitcoin trades" for $100 and "Bitcoins" for $1,000
(B) you would debit "Cash" for $1,100 and credit "gain on Bitcoin trades" for $200 and "Bitcoins" for $900


Smoothie sends $1,100 cash to his/her bank account.
in both scenarios, debit to your "bank account" for $1,100 and credit to "cash on BTCe" for $1,100


The documentation that I would recommend is your accounting or bookkeeping entries (if audited explain that obtaining a cash receipt from Mr. Jones was impractical), hard-copies of the transactions on your exchange showing the prices of the BTC when received and converted, and a copy of the deposit to your bank account .... where most people screw up is they only have documentation of the bank deposit and count the entire $1,100 as a gain which is incorrect.  You have to keep track of the cost basis of your Bitcoins.  In both scenarios above, you only had a $100 gain, not $1,100. 


I would strongly argue that "No" you are not a Bitcoin Exchange.  Bitcoin Exchanges do thousands of transactions a day.  Also, if challenged by IRS, you could argue that you are a Bitcoin investor.  The tax and legal rules on Bitcoin are very gray.  Lastly, I would advise that you discontinue person-to-person transactions. They are too risky and you might be dealing with an undercover law enforcement agent.  Sell and buy on-line using Western Union on LocalBitcoins.com

Hope that this helps.  If you have more questions, call me at 410-209-9365.