New to speculation, how do i report losses/gains for income tax?

[don giovanni]

Hi all, i'd like to get into speculation but im a bit confused as to how i go about reporting my dealings in the market if i have no verifiable paper trail? I plan on buying my coins in cash and then cashing out through an exchanger into my bank account. I'm afraid that the IRS is going to look at my incoming funds and call it "profit" just because i have no way of proving how many coins i bought (or that i even bought coins at all), and how much those coins changed in value since i bought them. Could someone please explain how this works to a newbie?

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[21after2]

I don't believe there are any cases that have set a precedent for Bitcoin as of yet, but there are two ways you could pursue reporting BTC income (assuming you're in the US):

1. You could report your profit as a line 21 entry on your 1040 (line 21 is a sort of catch all for other income). This would simply add the dollar value of the Bitcoin to your taxable income, raising your tax liability accordingly. This would also be the easiest way to report BTC earnings.

2. You could report BTC earnings on a schedule D as capital gains. You would report the dollar price you paid for the BTC, the dollar price you sold them for, and how long you held them. Long term capital gains tend to have preferential tax treatment, but reporting your earnings in this manner may be a bit more confusing if you're not familiar with tax law.

Either way you report it, the IRS may send you a notice simply because of the unknown nature of Bitcoin. However, the IRS will probably work with you over the matter: the fact that you'd be reporting it at all shows a lot of good faith on your part (for example, the IRS will sometimes look the other way for dealers who report earnings from drug sales as line 21 entries without listing what they are since they're actually reporting the income in the first place).

[ciphermonk]

I'm sorry if I'm not answering directly the question. But I just wouldn't report it. Don't volunteer information to the government if they didn't ask for it specifically. That's my opinion only, but I don't believe the government(s) have my best interests in mind, especially not if they threaten me with jail time if I don't report it. "Good Faith" on my part just sounds very naive. Good faith would apply if taxes were on a volunteer basis, like charities, without aggression. But it's not.

[cedivad]

You certainly cannot report losses and ask to pay less taxes for that.

[jerfelix]

You certainly cannot report losses and ask to pay less taxes for that.

I completely disagree with this.

You can report gambling losses, stock trading losses, currency trading losses, bond trading losses.  There's no reason you shouldn't be able to report Bitcoin trading losses.

Of course, they would be used to offset gains first.

...I'm not an accountant...   seek professional advice.

[Chief Satangkai]

Don't volunteer information to the government if they didn't ask for it specifically.

So true! Always tell the truth but don’t make a case against yourself by volunteering information...  

[notig]

yeah but what if you end up funneling money from bitcoin gains back into your bank? wouldn't the IRS know about it? btw isn't capital gains tax cheaper than income?

[Stephen Gornick]

Could someone please explain how this works to a newbie?

You'll want to maintain accurate records yourself.

More info:
 - http://en.bitcoin.it/wiki/Tax_compliance

[sunnankar]

Could someone please explain how this works to a newbie?

Have you considered getting a copy of A Lawyer's Take On Bitcoin And Taxes? Should help give you a good understanding of the lay of the land.

[21after2]

yeah but what if you end up funneling money from bitcoin gains back into your bank? wouldn't the IRS know about it? btw isn't capital gains tax cheaper than income?

In most cases, yes: capital gains tax is preferable. The capital gains tax rate on long-term gains for 2011 returns in the US was 15%; this is being increased to 20% in tax years after 2012 (however, it will be 0% for taxpayers in the 10-15% tax brackets). Short-term capital gains are generally taxed at the ordinary tax rate of the taxpayer.

The IRS doesn't monitor the bank accounts of taxpayers, so they wouldn't know whether or not the taxpayer is funneling money back and forth. However, the IRS will require documentation of trading activities in the event of an audit. In that situation, the IRS can request bank statements for income verification (I have two clients now who are in a similar situation).

Generally speaking and in theory, you can claim whatever the hell you want on your taxes: you just need to be able to back it up when the IRS starts poking at it. And the more "extreme" (or for a more accurate term, questionable) your claims are, the more likely the IRS is going to grab the pokin' stick.

And it's important to remember this too: when the IRS audits a return, they audit the full return. So if the IRS looks at one thing on a return and they feel it's a questionable claim, they could audit the return and find out about something else entirely.

For example: a delivery driver has $2,000 in cash tips that he doesn't claim on his return, but he does claim mortgage interest reported on a 1098 in the amount of $10,000. The IRS reviews the return and they think the mortgage interest claimed is more than it should be. They audit the full return and notice the $2,000 worth of deposits to discover that the taxpayer didn't claim those tips. The taxpayer will end up owing more taxes, and possibly a tax penalty.

With cash and coins (both US and Bit), it's up to the individual on whether or not to report them. The IRS may not notice them since it's hard to prove, but they may find out about them if they noticed something else.

The difficulty with Bitcoin is knowing what it should be classified as. As I said before, there are no definitive tax laws regarding them at this point. If someone wants to play it safe, I would recommend they report Bitcoins received as payment for goods or services converted to USD as other income on line 21, and profit/loss from Bitcoin trading as capital gains and losses.

[notig]

yeah but what if you end up funneling money from bitcoin gains back into your bank? wouldn't the IRS know about it? btw isn't capital gains tax cheaper than income?

In most cases, yes: capital gains tax is preferable. The capital gains tax rate on long-term gains for 2011 returns in the US was 15%; this is being increased to 20% in tax years after 2012 (however, it will be 0% for taxpayers in the 10-15% tax brackets). Short-term capital gains are generally taxed at the ordinary tax rate of the taxpayer.

The IRS doesn't monitor the bank accounts of taxpayers, so they wouldn't know whether or not the taxpayer is funneling money back and forth. However, the IRS will require documentation of trading activities in the event of an audit. In that situation, the IRS can request bank statements for income verification (I have two clients now who are in a similar situation).

Generally speaking and in theory, you can claim whatever the hell you want on your taxes: you just need to be able to back it up when the IRS starts poking at it. And the more "extreme" (or for a more accurate term, questionable) your claims are, the more likely the IRS is going to grab the pokin' stick.

And it's important to remember this too: when the IRS audits a return, they audit the full return. So if the IRS looks at one thing on a return and they feel it's a questionable claim, they could audit the return and find out about something else entirely.

For example: a delivery driver has $2,000 in cash tips that he doesn't claim on his return, but he does claim mortgage interest reported on a 1098 in the amount of $10,000. The IRS reviews the return and they think the mortgage interest claimed is more than it should be. They audit the full return and notice the $2,000 worth of deposits to discover that the taxpayer didn't claim those tips. The taxpayer will end up owing more taxes, and possibly a tax penalty.

With cash and coins (both US and Bit), it's up to the individual on whether or not to report them. The IRS may not notice them since it's hard to prove, but they may find out about them if they noticed something else.

The difficulty with Bitcoin is knowing what it should be classified as. As I said before, there are no definitive tax laws regarding them at this point. If someone wants to play it safe, I would recommend they report Bitcoins received as payment for goods or services converted to USD as other income on line 21, and profit/loss from Bitcoin trading as capital gains and losses.

so basically all I have to do to get the 0% capital gains is make less than 36k or become unemeployed? technically capital gains wouldn't take effect till you actually exchanged btc back into dollars right?

[21after2]

yeah but what if you end up funneling money from bitcoin gains back into your bank? wouldn't the IRS know about it? btw isn't capital gains tax cheaper than income?

In most cases, yes: capital gains tax is preferable. The capital gains tax rate on long-term gains for 2011 returns in the US was 15%; this is being increased to 20% in tax years after 2012 (however, it will be 0% for taxpayers in the 10-15% tax brackets). Short-term capital gains are generally taxed at the ordinary tax rate of the taxpayer.

The IRS doesn't monitor the bank accounts of taxpayers, so they wouldn't know whether or not the taxpayer is funneling money back and forth. However, the IRS will require documentation of trading activities in the event of an audit. In that situation, the IRS can request bank statements for income verification (I have two clients now who are in a similar situation).

Generally speaking and in theory, you can claim whatever the hell you want on your taxes: you just need to be able to back it up when the IRS starts poking at it. And the more "extreme" (or for a more accurate term, questionable) your claims are, the more likely the IRS is going to grab the pokin' stick.

And it's important to remember this too: when the IRS audits a return, they audit the full return. So if the IRS looks at one thing on a return and they feel it's a questionable claim, they could audit the return and find out about something else entirely.

For example: a delivery driver has $2,000 in cash tips that he doesn't claim on his return, but he does claim mortgage interest reported on a 1098 in the amount of $10,000. The IRS reviews the return and they think the mortgage interest claimed is more than it should be. They audit the full return and notice the $2,000 worth of deposits to discover that the taxpayer didn't claim those tips. The taxpayer will end up owing more taxes, and possibly a tax penalty.

With cash and coins (both US and Bit), it's up to the individual on whether or not to report them. The IRS may not notice them since it's hard to prove, but they may find out about them if they noticed something else.

The difficulty with Bitcoin is knowing what it should be classified as. As I said before, there are no definitive tax laws regarding them at this point. If someone wants to play it safe, I would recommend they report Bitcoins received as payment for goods or services converted to USD as other income on line 21, and profit/loss from Bitcoin trading as capital gains and losses.

so basically all I have to do to get the 0% capital gains is make less than 36k or become unemeployed? technically capital gains wouldn't take effect till you actually exchanged btc back into dollars right?

If you're single and in the US, correct, but remember that your income level for that computation includes capital gain income.

A capital gain would not be recognized until you completed the sale. So if you bought BTC on, say, February 11th, 2012 and haven't sold it yet, you haven't recognized a gain. Also keep in mind that you'll need to know your basis in the BTC (what you paid for it) when you compute capital gains and losses.

[franky1]

in the UK bitcoins are a personal possession asset, such as art, antiques, cars etc. so look into that area of tax law.

heres a link to my topic on UK tax stuff
https://bitcointalk.org/index.php?topic=143425.0

and see which bits may be useful when asking the accountants in your native countries