Bitcoins and taxes when used directly to buy goods in the US

[mgio]

I've seen several places that you do not owe taxes if you buy bitcoins with dollars, then use those bitcoins to pay for goods or services directly, even if the value of the bitcoins has appreciated since you purchased them!

From "A Lawyer's take on bitcoin and taxes":

"If an individual buys a yacht directly with bitcoins that have appreviated in value $1 million since the were acquired, that gain is not taxable."

Some people seem to disagree though, believing that you would actually owe tax on the appreciated value of the bitcoins when you make the transaction.

Which is it?


This could be a away to not have to pay capital gains taxes for people who have speculated in bitcoins provided there are enough places you can spend bitcoins, or perhaps when that bitcoin debit card ever becomes available. Maybe I can convince my landlord to accept bitcoins as rent.

[Gator-hex]

If you mined the bitcoins there is no capital gain in $ value but if you sold them you report the $ ammount as income.

If you bought bitcoins with $ and they gain in value then you have a capital gain on an investment to report.

USA also made all barter trades taxable, so even if you don't use $, you are still subject to tax if you barter for goods and services.
So even if you mine Bitcoins and spend them as Bitcoins you're not going to escape US tax!

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Bartering-Tax-Center

[mgio]

If you mined the bitcoins there is no capital gain in $ value but if you sold them you report the $ ammount as income.

If you bought bitcoins with $ and they gain in value then you have a capital gain on an investment to report.

USA also made all barter trades taxable, so even if you don't use $, you are still subject to tax if you barter for goods and services.
So even if you mine Bitcoins and spend them as Bitcoins you're not going to escape US tax!

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Bartering-Tax-Center

Why would it matter if they are mined or not? Wouldn't you have to pay income tax on the value of the coins you mined plus capital gains on any gaiend value when you sell them? Or perhaps capitals gains on the whole thing. I don't think it is any different whether you mined or bought them.

[Mike Christ]

I don't think it is any different whether you mined or bought them.

FinCEN disagrees.

[mgio]

Anyways back to the original issue.

I think my original point stands if you treat bitcoins as a foreign currency rather than a good you barter with.

From "A Lawyers Take On Bitcoin and Taxes":

"Individuals do not need to report a gain when they use their appreciated foreign currency to purchase things directly."

The citation is treasury reg 1.988-1(a)(9)(ii)

I will post the text of the regulation later but basically I believe it is there to protect people who exchange dollars for another currency and then spend that currency from having to owe taxes because the foreign currency increased in value before they spent it. Otherwise, every time you traveled to a foreign country, you'd have to declare the value of everything you spent foreign money on and pay capital gains tax on the difference between the dollars you spent on the currency and the estimated value of the goods and services you received.

Now perhaps this argument is moot since finCEN is implying that bitcoins are not a foreign currency.

[BigJohn]

I don't think this stuff is well established at all. I would imagine you "should" pay capital gains on it. Each year you'd add up how many additional USD-value your Bitcoins have compared to last year, and that's how much you'd owe capital gains on. So if you bought $100 worth of Bitcoins at the beginning of the year, and come tax-time they're worth $300, then you'd owe capital gains tax on $200. If you mined them then it would be their current worth at the end of the year, minus your cost to mine them.

That said, Bitcoins are so discreet that you could basically just do whatever you want. There's no way anyone at the IRS could touch it. You'd start getting into trouble as soon as you start cashing them out. But I'm sure that's avoidable too.

[mgio]

I don't think this stuff is well established at all. I would imagine you "should" pay capital gains on it. Each year you'd add up how many additional USD-value your Bitcoins have compared to last year, and that's how much you'd owe capital gains on. So if you bought $100 worth of Bitcoins at the beginning of the year, and come tax-time they're worth $300, then you'd owe capital gains tax on $200. If you mined them then it would be their current worth at the end of the year, minus your cost to mine them.

That said, Bitcoins are so discreet that you could basically just do whatever you want. There's no way anyone at the IRS could touch it. You'd start getting into trouble as soon as you start cashing them out. But I'm sure that's avoidable too.

Actually you don't owe the taxes until you cash them out anyways. So even if you bought them at $100 and they are worth $300 now you don't owe taxes until you realize those gains, which occurs when you cash them out or otherwise spend them.

And yes, the IRS may never notice. Or you could get audited and they want to know where that $50,000 deposit in your checking account came from. You can try to avoid taxes and risk financial and possibly criminal penalties in the future if you are caught or you could at least show the IRS that you tried to pay what you believed to be the correct amount of taxes on your capitals gains. You might still owe more taxes and possibly penalties but you'll be better off than if you are caught deliberating avoiding taxes.

[zeroday]

Can anyone advise what taxes will apply (if any) in the following case:

1. in 2011 US resident bought 400 BTC for $1600 (1btc=$4)
2. in 2013 he spent these 400 BTC to buy a car, which was paid in bitcoins, without ever mentioning USD price in the deal (actual car's market price is approximately $42000)

[benjamindees]

Taxes are inherently a product of the fiat money system.  Don't ever pay taxes on Bitcoin transactions.

[TomUnderSea]

I would do what is right.

This is a concept lawyers struggle with. 

Simply put, if you invest in an activity (raising alpacas, mining bitcoins, teaching frogs to sing) and you manage to make a profit at that activity, Uncle Sam will want a portion of that profit for providing you with a safe place to do business.

Whether you chose to approach your activity as a proxy for barter transactions or attempt to claim that BTC is the currency of some "SeaLand" foreign entity, the end result is the IRS has a taxation methodology for you.

What you want to do is what is right.  Right in this case means that when your butt is hauled in front of a jury of your peers on tax evasion charges, you can show that you acted in good faith to meet the legal guidance provided by the IRS.

IMHO, the first step is to not look at BTC as a way to avoid taxes.  It already is avoiding the inflationary tax of the US Treasury printing press.  Do what is reasonable to be able to convince folks who don't "get" BTC that you _are_ paying your fair share of the cost for the society you are living in.

Just don't pay a penny more! 

BTW, YRMV, IANAL and finally TINLA.

[DannyHamilton]

This forum will give you a lot of really bad tax advice.  Do not rely on the advice of complete strangers on the internet to determine you tax liability.  That's a great way to end up in significant trouble with your tax collecting authority.

The only way you're going to get good advice is to get it from someone who is well versed in the specifics of the tax laws in your particular jurisdiction.  Every jurisdiction will have their own rules and requirements. Talk to a local tax accountant or tax attorney that has demonstrated a history of providing reliable advice to their clients.

[niner]

Render unto Caesar the things which are Caesar's, and unto me the things that are Satoshi's.

[Malawi]

I would do what is right.

This is a concept lawyers struggle with. 

Simply put, if you invest in an activity (raising alpacas, mining bitcoins, teaching frogs to sing) and you manage to make a profit at that activity, Uncle Sam will want a portion of that profit for providing you with a safe place to do business.

Whether you chose to approach your activity as a proxy for barter transactions or attempt to claim that BTC is the currency of some "SeaLand" foreign entity, the end result is the IRS has a taxation methodology for you.

What you want to do is what is right.  Right in this case means that when your butt is hauled in front of a jury of your peers on tax evasion charges, you can show that you acted in good faith to meet the legal guidance provided by the IRS.

IMHO, the first step is to not look at BTC as a way to avoid taxes.  It already is avoiding the inflationary tax of the US Treasury printing press.  Do what is reasonable to be able to convince folks who don't "get" BTC that you _are_ paying your fair share of the cost for the society you are living in.

Just don't pay a penny more! 

BTW, YRMV, IANAL and finally TINLA.

Sound advices.

BTC is no different than other assets - either it's shares, derivatives, currency or items.

[zeroday]

Hmm. It seems that since 2009, when bitcoin was born, and until now, nobody has ever completed a research about taxation of bitcoin purchases.
This makes bitcoin really dangerous for mainstream user as they simple don't know how to report it to IRS.