How to file your taxes with Bitcoin Income?

[Luckybit]

Go to HR Block with your blockchain screenshots and tell them to file your taxes accordingly. If you mined 100 BTC last year prepare to give Uncle Sam around 13 BTC. May vary depending on your state.

Maria 2.0

Does HR Block even know what Bitcoin is?

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[PachucoBro]

Does anyone do their own taxes on here?  Im asking because I don't have enough income, to get any return, so I can't justify using a tax accountant.  I'm a student claimed as a dependent, with minimal income yielding $0 tax.

How would I report bitcoin mining income that was transferred into cash?  Not bitcoin trading income (capital gains).

Is it possible to subtract hardware costs and monthly electricity costs, defining a net profit of 0.
Is it possible to depreciate hardware costs as not to deduct all of the possible savings in 1 tax year.

And the current estimated value of BTC has nothing to do with anything until its converted to fiat right?

You want a 1099 form and you fill out all income on that. You call yourself an independent contractor.

I've made money before as an independent contractor and it's fairly simple. Get a 1099.

I was pretty sure that 1099s are what other people give you when you are their contractor... if you are doing the work yourself and no one is paying directly (like mining) then it is revenue and you should treat yourself as a sole proprietorship. Part of my income each year as a sole proprietorship comes from Google Ads, which they send me a 1099 for and the other income is from people sending me checks for my service which I include as revenue.

Claim all that on a Schedule C included with your Form 1040.

[davidspitzer]

Go to HR Block with your blockchain screenshots and tell them to file your taxes accordingly. If you mined 100 BTC last year prepare to give Uncle Sam around 13 BTC. May vary depending on your state.

Maria 2.0

The tricky part and this is where a tax consultant would help, is that BTC mined would be valued at the current rate when they came into your possession and would likely be counted as income for reporting purposes (minus expenses incurred to aquire them). If you later sold that BTC you may also be liable for Capital Gains if the Profit is over a certain amount

from the IRS:
If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200.00. If the gain is more than $200.00, report it as a capital gain. Capital gains are reported on Schedule D, Capital Gains and Losses, and line 13 of the Form 1040, U.S. Individual Income Tax Return (2005). For more information, please refer to Publication 525, Taxable and Nontaxable Income.

[frankAcct366]

OK, so I've finally come up with something worthwhile I can "sell" for bitcoins based on this post.  I'm a licensed CPA who is willing to offer some suggestions on how to deal with specific situations that may arise from the sales or holding of Bitcoin or other crypto-currency.  I'm not specifically offering tax advice aimed at avoiding any penalties or amounts owed, nor am I offering to prepare a tax return.  For obvious reasons, I'm not going to disclose my license information on these forums.

However, if you're interested, I'm happy to have a conversation via PM and then you can pay what you think the information I provide is worth (in BTC or LTC of course).  If you ultimately decide I'm a phony, feel free to pay nothing.

Also, for any trolls out there, this is not a FUD post at all.  My guess is most of your have already decided whether you're going to follow the U.S. laws and tax code if applicable.  If you've decided not to concern yourself with it, that's your own business.  This is only an offering to people who are interested in real advice from somebody who understands both the technology and the financial ramifications of using it.


BitCoin: 1Lh5sAtxy4BqddMFu1Vu9dL5u4JfSnA1LE
LiteCoin: LTziohcPos9PRb3EM6EKQaxMHAQbrdiicq

[aantonop]

However, if you're interested, I'm happy to have a conversation via PM and then you can pay what you think the information I provide is worth (in BTC or LTC of course).  If you ultimately decide I'm a phony, feel free to pay nothing.

Do you feel comfortable advising corporate clients about running bitcoin payroll in the US,  paying payroll taxes at the right rate (in USD of course)., and accounting properly for cap-gains or mark-to-market valuation of "retained" earning or such issues?

I ask in public, because others may be interested in whether you can address these scenarios more specifically. I am *not* asking for answers here, if you say "yes I can do", we can take the rest of the discussion to PM.

Serious interest (funded, incorporated, already have 2 CPA on retainer, so have paid for this before - need BTC expertise or insight).

[frankAcct366]

However, if you're interested, I'm happy to have a conversation via PM and then you can pay what you think the information I provide is worth (in BTC or LTC of course).  If you ultimately decide I'm a phony, feel free to pay nothing.

Do you feel comfortable advising corporate clients about running bitcoin payroll in the US,  paying payroll taxes at the right rate (in USD of course)., and accounting properly for cap-gains or mark-to-market valuation of "retained" earning or such issues?

I ask in public, because others may be interested in whether you can address these scenarios more specifically. I am *not* asking for answers here, if you say "yes I can do", we can take the rest of the discussion to PM.

Serious interest (funded, incorporated, already have 2 CPA on retainer, so have paid for this before - need BTC expertise or insight).

I could certainly comment on those issues.  I'll even include a basic thought process here for the first question to provide some evidence of my qualifications.  Payment of payroll in Bitcoin would appear to require an immediate valuation of the compensation on the date paid.  The source of the valuation is probably a bit flexible, but consistency would likely be the rule that would be most important.  Thus if you valued with Mt.Gox once, you should probably do so every time (unless you can document a very specific reason why you change, such as the site is not available on the date).  Might make sense to build a formula that does a weighted average of multiple sources just to try and smooth out some volatility.

You would report the dollar-value estimate as compensation and withhold an amount of cash valued at the required tax table rate.  If you're trying to pay only in Bitcoin though (no cash portion of payment), you'd need essentially build an employment agreement that included an "employer buy back" of the right amount of Bitcoin to withhold for the tax.  I.e., employee is to be paid 10 bitcoin, withholding requirement is 1 BTC, you agree to buy (for cash) the one bitcoin back immediately at payroll, thus providing sufficient cash to cover the employee's withholding. 

The amounts granted as compensation and withheld would then feed directly into the appropriate W-2.  Of course, this is all assuming a W-2 employee, if you're looking at 1099s it would be far simpler.

[aantonop]

I could certainly comment on those issues.  I'll even include a basic thought process here for the first question to provide some evidence of my qualifications.  Payment of payroll in Bitcoin would appear to require an immediate valuation of the compensation on the date paid.  The source of the valuation is probably a bit flexible, but consistency would likely be the rule that would be most important.  Thus if you valued with Mt.Gox once, you should probably do so every time (unless you can document a very specific reason why you change, such as the site is not available on the date).  Might make sense to build a formula that does a weighted average of multiple sources just to try and smooth out some volatility.

You would report the dollar-value estimate as compensation and withhold an amount of cash valued at the required tax table rate.  If you're trying to pay only in Bitcoin though (no cash portion of payment), you'd need essentially build an employment agreement that included an "employer buy back" of the right amount of Bitcoin to withhold for the tax.  I.e., employee is to be paid 10 bitcoin, withholding requirement is 1 BTC, you agree to buy (for cash) the one bitcoin back immediately at payroll, thus providing sufficient cash to cover the employee's withholding. 

The amounts granted as compensation and withheld would then feed directly into the appropriate W-2.  Of course, this is all assuming a W-2 employee, if you're looking at 1099s it would be far simpler.

Great analysis, I'm persuaded enough to pursue further. Sending PM.

[Hal]

I sent a PM a couple of days ago to frankAcct366, and accompanied it with a bitcoin tip. No reply yet.

[hanwong]

I could certainly comment on those issues.  I'll even include a basic thought process here for the first question to provide some evidence of my qualifications.  Payment of payroll in Bitcoin would appear to require an immediate valuation of the compensation on the date paid.  The source of the valuation is probably a bit flexible, but consistency would likely be the rule that would be most important.  Thus if you valued with Mt.Gox once, you should probably do so every time (unless you can document a very specific reason why you change, such as the site is not available on the date).  Might make sense to build a formula that does a weighted average of multiple sources just to try and smooth out some volatility.

You would report the dollar-value estimate as compensation and withhold an amount of cash valued at the required tax table rate.  If you're trying to pay only in Bitcoin though (no cash portion of payment), you'd need essentially build an employment agreement that included an "employer buy back" of the right amount of Bitcoin to withhold for the tax.  I.e., employee is to be paid 10 bitcoin, withholding requirement is 1 BTC, you agree to buy (for cash) the one bitcoin back immediately at payroll, thus providing sufficient cash to cover the employee's withholding. 

The amounts granted as compensation and withheld would then feed directly into the appropriate W-2.  Of course, this is all assuming a W-2 employee, if you're looking at 1099s it would be far simpler.

Great analysis, I'm persuaded enough to pursue further. Sending PM.

As an E.A., I agree with the above analysis of the treatment and implementation of a bitcoin payroll system. I would add, make sure you have a record of your bitcoin payroll "checks." Since bitcoin is pseudo-anonymous and there is little evidence of bitcoin transfers, you would need to have a system where the employee and employer both sign some kind of statement on each pay date that states the amount paid in bitcoins paid, the salary rate, the amount of hours worked,the withholding amounts. Basically everything that is reflected in a regular W-2.

I'm not an expert in payroll taxes, so I would raise this question. Are there any special issues relating to your plan to pay employees in bitcoins when it comes to filing W-2 and form 941? Would you simply convert all bitcoin payments into USD, at the time of payment, and report all earnings and withholding as USD as usual?

[Zeke_Vermillion]

Salaries paid in bitcoin, mining rewards received in bitcoin, are probably taxable as ordinary income in the US. Bitcoins that you have purchased for dollars are probably taxable WHEN SOLD for dollars at long-term capital gains rate IF you have held them for the minimum holding period.

But here's a harder question. What happens if you buy some btc for dollars, then exchange those btc for litecoin after six months (before holding period ends), then sell the litecoin at a profit after 12 months (after the holding period is satisfied). Is the transaction taxable (a) at marginal income tax rate upon exchg of btc of ltc, at the appreciated value of the ltc received minus the dollars originally paid for the btc, then again upon sale of ltc for dollars; OR (b) not taxable until final sale of ltc for dollars, then at long-term cap gains rate of appreciated value of ltc?

One possible way we could get to (b) is by considering the exchange of btc for ltc as a like-kind exchange under IRC 1031 (http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031). Not entirely clear whether it qualifies. I would like to think that it does. Partly this is b/c of the difficulty of exiting a position to pay the tax at the intermediate step. The other reason is that it would be very difficult for the IRS to police intermediate exchanges of cryptocurrencies.

[ewitte]

You do understand that a Tax refund is a REFUND of money you already paid out of your paycheck. If you file taxes and you get nothing back... YOU DID A GOOD JOB! You paid what you were supposed to and don't need to pay any more.

Most thieves don't return anything so ...

[splnkr]

I'm not a CPA, but I do my best to understand the "shape" of unconventional assets and therefore how they fit in to the tax code. Talking US tax code here. I'm honestly trying to think this through, about halfway there I think.

I disagree, at least at this point in history, that bitcoin mining rewards should be taxed as ordinary income at the time they are generated. This is because they're as much commodity as currency right now. Consider this:

I have obtained BTC through exchanges. I have obtained BTC through mining as well. In both cases, I've been doing so to grow an investment position. I have decided that cryptocurrency is the most attractive high-risk investment for me at this time, so whatever liquid funds I don't need as "safety net" savings in USD, I want to put into this one way or another.

I decided to go with a substantial investment in mining hardware, because this not only allows me to profit off of increase in exchange rate, but also helps fortify the Bitcoin network itself, thereby reducing risk, however incrementally.

So, I tend to view the bitcoin rewards from my mining efforts as earnings for an age-unrestricted annuity.

This leads me to believe the best time to declare any holding at least for this use case (Bitcoin as an investment commodity) would be when exchanging it back to USD, valued at the current rate at time of exchange. This could be taxed partially as income, partially as capital gains, to reflect any increase in BTC/USD exchange rates since the inception of the mining 'annuity.'

The last italicized part would address the biggest challenge of all this in my view, which is determining average cost basis for the BTC holdings at USD conversion time.

CPA(s) in the room, any glaring problems with this?

[Chuck Finley]

I'm not an accountant by any means but here's my take:

You don't need to pay taxes on any crypto-currency until you convert it into an actual currency. Don't bother trying to value it for the government based on a random website somewhere in the world (gox, etc.). Until the government says "here's how we officially value this item" I'd value it at $0.

However if you sold x BTC and turned it into $100,000 USD you'd probably be wanting to inform uncle sam about it then. Would be hard to argue that you didn't make money then as you're not going to convince the US government that the USD is worthless.

[SamS]

Salaries paid in bitcoin, mining rewards received in bitcoin, are probably taxable as ordinary income in the US. Bitcoins that you have purchased for dollars are probably taxable WHEN SOLD for dollars at long-term capital gains rate IF you have held them for the minimum holding period.

But here's a harder question. What happens if you buy some btc for dollars, then exchange those btc for litecoin after six months (before holding period ends), then sell the litecoin at a profit after 12 months (after the holding period is satisfied). Is the transaction taxable (a) at marginal income tax rate upon exchg of btc of ltc, at the appreciated value of the ltc received minus the dollars originally paid for the btc, then again upon sale of ltc for dollars; OR (b) not taxable until final sale of ltc for dollars, then at long-term cap gains rate of appreciated value of ltc?

One possible way we could get to (b) is by considering the exchange of btc for ltc as a like-kind exchange under IRC 1031 (http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031). Not entirely clear whether it qualifies. I would like to think that it does. Partly this is b/c of the difficulty of exiting a position to pay the tax at the intermediate step. The other reason is that it would be very difficult for the IRS to police intermediate exchanges of crypto-currencies.

I agree with your take on salaries and mining rewards. As other's have noted you have to pay taxes on barter income as well and it is valued at the date of the transaction. So, in a parallel fashion, I'd imagine that at the date of the transaction you, the employer, have to value the salary paid in BTC and pay the payroll taxes in USD that corresponds to the USD value of the BTC on that date. By the same token, you (the employee) have to pay payroll taxes -- the employer would actually deduct this from your "salary" --  and ultimately Federal and State income taxes if due.  I'd argue that the same would be true of mining income with the exception that you could deduct related business expenses.

With respect to trading btc=>ltc=>USD case, I'd be inclined to think it was more similar to forex trading than a 1031 exchange. Consequently, you'd either calculate the gains/losses on a transaction by transaction basis or use the performance formula set out by the IRS. Given the volatility of these "crypto-currencies" and the difficulty in establishing a value,  I'd argue that the performance formula is the only way to go here.

I'm not a tax CPA and we all know that these questions don't actually have an IRS sanctioned treatment right now. What I'm fairly confident about is that if you report it and get it wrong then the worst thing that can happen to you is that you will owe penalties -- which could quite likely be waived since there were no regulations at the time you filed. On the other hand, if you end up overpaying, then you can file an amended return and get the funds back once the treatment is clear. If you don't report it at all, then a tax evasion case could potentially be made against you. It's like that old chestnut about how much salary a S corp owner has to pay themselves. The IRS says it must be a "reasonable" salary but doesn't define "reasonable." There are rules of thumb and case law but nothing definitive. So, tax accountant treatments vary.

These are certainly things I'm researching and I'll report back if I learn anything definitive...

- Sam

[SamS]

I'm not a CPA, but I do my best to understand the "shape" of unconventional assets and therefore how they fit in to the tax code. Talking US tax code here. I'm honestly trying to think this through, about halfway there I think.

I disagree, at least at this point in history, that bitcoin mining rewards should be taxed as ordinary income at the time they are generated. This is because they're as much commodity as currency right now. Consider this:

I have obtained BTC through exchanges. I have obtained BTC through mining as well. In both cases, I've been doing so to grow an investment position. I have decided that cryptocurrency is the most attractive high-risk investment for me at this time, so whatever liquid funds I don't need as "safety net" savings in USD, I want to put into this one way or another.

I decided to go with a substantial investment in mining hardware, because this not only allows me to profit off of increase in exchange rate, but also helps fortify the Bitcoin network itself, thereby reducing risk, however incrementally.

So, I tend to view the bitcoin rewards from my mining efforts as earnings for an age-unrestricted annuity.

This leads me to believe the best time to declare any holding at least for this use case (Bitcoin as an investment commodity) would be when exchanging it back to USD, valued at the current rate at time of exchange. This could be taxed partially as income, partially as capital gains, to reflect any increase in BTC/USD exchange rates since the inception of the mining 'annuity.'

The last italicized part would address the biggest challenge of all this in my view, which is determining average cost basis for the BTC holdings at USD conversion time.

CPA(s) in the room, any glaring problems with this?

If you own a copper mine and dig copper is it characterized as an investment or a business -- rhetorical question.

[pwrgeek]

The way I did it last year (I had enough mining income to warrant and enough ordinary income that I am in one of the classes the IRS likes to audit) is as follows.  The CPAs in the room can tell me how off base I was. 

Mining output = Ordinary Income reported to IRS on Line 7 of 1040 by calculating the value on the date (I use Mt Gox weighted average unless they are unavailable in which case I use BTC-E value half way between daily high and low) it was transferred into my wallet.

The value calculated above provides my cost basis of the BTC I own (I never buy on exchanges, but if I did this would be there as well).  When I sell them the profit from my cost basis (if any) are calculated as the difference between my cost basis and the sales price.  Thus I must keep records of the individual cost basis of each BTC I receive separately (and thus it pays to make transactions large and few) and allocate them individually to each sale.  This value is reported as Cap Gains on Schedule D and 1040 Line 13 to the IRS and I pay cap gains (currently short term as I have not held any BTC long enough to qualify as long term) tax on that value.

[SamS]

The way I did it last year (I had enough mining income to warrant and enough ordinary income that I am in one of the classes the IRS likes to audit) is as follows.  The CPAs in the room can tell me how off base I was.  

Mining output = Ordinary Income reported to IRS on Line 7 of 1040 by calculating the value on the date (I use Mt Gox weighted average unless they are unavailable in which case I use BTC-E value half way between daily high and low) it was transferred into my wallet.

The value calculated above provides my cost basis of the BTC I own (I never buy on exchanges, but if I did this would be there as well).  When I sell them the profit from my cost basis (if any) are calculated as the difference between my cost basis and the sales price.  Thus I must keep records of the individual cost basis of each BTC I receive separately (and thus it pays to make transactions large and few) and allocate them individually to each sale.  This value is reported as Cap Gains on Schedule D and 1040 Line 13 to the IRS and I pay cap gains (currently short term as I have not held any BTC long enough to qualify as long term) tax on that value.

This works -- and I think leaves you completely covered with the IRS,  as acting in good faith, no matter how they ultimately decide on the proper treatment for Bitcoin taxation, is a huge plus.  

[melon]

my belief is that whatever coins are  converted into dollars and withdrawn minus infused capital = amount of taxable income before operating costs (expenses of doing business)
 ...since did not put capital into the gox acct then the full amount 'converted' is taxable at your percentage
not as dividend though, only as 'converted' revenue from mining- with no trading in between ...w trading in between the first buyout to cash would be starting amount toward infused capital and would be recorded separate in a ledger from mining operation or extra capital gain above themining. or accumulated altogether with no infused capital amount as an expense.

ex. I put 1000 fiat in*(infused capital) I turn into 1500 fiat...cash all out... 500 is taxable bcz 1000 was infused not profit

this is not lawyer advice take with a grain of password salt...

btw there two types of accounting method..... need to choose one before operating...cash method or accrual

[SamS]

my belief is that whatever coins are  converted into dollars and withdrawn minus infused capital = amount of taxable income before operating costs (expenses of doing business)
 ...since did not put capital into the gox acct then the full amount 'converted' is taxable at your percentage
not as dividend though, only as 'converted' revenue from mining- with no trading in between ...w trading in between the first buyout to cash would be starting amount toward infused capital and would be recorded separate in a ledger from mining operation or extra capital gain above themining. or accumulated altogether with no infused capital amount as an expense.

ex. I put 1000 fiat in*(infused capital) I turn into 1500 fiat...cash all out... 500 is taxable bcz 1000 was infused not profit

this is not lawyer advice take with a grain of password salt...

btw there two types of accounting method..... need to choose one before operating...cash method or accrual

What you suggest could be done for trading income -- which is what you describe in your example. The IRS does allow for this kind of treatment for situations where valuation isn't clear or there are a series of related transactions. I do believe you have to pick a method though -- can't use one for one set of transactions and then another method for a different set. However, I don't think that this approach would work for mining income from what I can tell. What you call infused capital is actually known as your basis. 

[melon]

yeah I would put in the ledger if it were mining, the note, infused capital but if it were purely exchange trading 'basis or cost basis ' would be more widely accepted. I would think infused capital would show that it was a startup cost such as a'mining 'rig before listing as an expense under accrual method and taking depreciation on the rig yearly until the set time( and the btc received as revenue against that infused capital to show profit)