IRS to come after people for selling Bitcoins

[enquirer]

How can I prove I held bitcoins more than 1 year, for long-term capital gains?
Should I declare them now so to set purchase base date?

[Operatr]

1) don't sell, problem solved
2) the heat on media scare stories is really cranking up
3) If you do sell, be a good doobie and pay your taxes

You're right, since it seems that Bitcoin has been legally defined as a 'commodity' ( lol ) despite more and more people accepting it as a currency you could just trade for stuff in Bitcoin and you wouldn't have to pay taxes, the only time you'd ever have to pay taxes is if you're dealing purely in paper with the classic utility companies and so on.

Fiat operates like a commodity as well in a way,  in the way people horde money and assets, and always have.

In the days before a trade medium like banknotes, all trade was done with a commodity. This is just old school barter.

Bitcoin does blur the line a lot more though, as it acts like both at the same time right now, but that is because Bitcoin is so young and susceptible of the tremors of real world financial failures. As money or a commodity, we're in for a wild ride. Today they are viewed more like gold as an appreciating asset that can also be traded for goods and services. Someday it will be viewed as the real currency it is as it grows up and is used more.

Over the long term however the exchange rate will start meaning less and less as the USD continues to lose spending power and dominance, and more and more businesses start accepting Bitcoin and more and more users join the fray, slowly shifting us to the Bitcoin economy and abandoning the old. Products will start being repriced in the new economy as it continues to widen the gap between Bitcoin spending power and Dollar spending power. If you can buy what you want with Bitcoin, why would you convert it back to depreciating currency to buy the same thing.

[Phil21]

I've gotten a myriad of differing (and thus, confusing) answers from accountants on the following scenario:

1) I invested dollars into mining hardware in 2010/2011
2) I invested ongoing expenses such as electricity and spare parts
3) I exchanged some of the bitcoins generated from the mining hardware to dollars in 2013
4) This amount was greater than the amount spent on hardware (call it cashing out at $10,000 and expenses of $5,000 to keep the math simple)

So.. I've just received my $10,000 wire into my account, and in 2010/2011 I had $5,000 worth of expenses.

How is this taxed?

I've gotten answers ranging from it being regular wage income (really? shit!), to it being capital gains, to it being long term capital gains.

Can I write off my expenses in some manner to offset the gains later made? 

And what happens if I want to exchange more bitcoin to US dollars at a later date?

Professional accountants need to get a "Bitcoin Certified" logo program going - I'd love to talk to someone who's eyes don't glaze over while I try to explain things.  Yep, I bought computers.  Yep, they did math and made numbers that other people find valuable, yep, I later exchanged those numbers for money and put it in my bank account.

I'd like to pay the legal amount of taxes necessary, but no one really seems to agree on how exactly this works yet.

-Phil

[theta]

Phil, I would personally ask the IRS directly.
If it's like the UK and assuming that bitcoin is treated as a commodity, i.e. the same way a shoe merchant would treat shoe inventory, my guess is that you are running a home business (sole trader) and your losses can be carried over, and any profit is treated as regular income. So, in 2011 let's say you had spent $5k and ended up with BTC worth $1k, you have $4k carried over losses, and then in 2013 you had $9k gains (sales proceed minus previous value of inventory), so you are liable for taxes on $5k regular income (could be zero if this is your only income). But again, I would ask the IRS directly, that way you are covered.

[theta]

If you directly convert to an asset you are good. It is only cash money they care about.

Not true. If you don't know something, it's better to say that (or preface it with "I think") than saying an outright lie. They DO care about direct conversion to assets.
http://www.irs.gov/taxtopics/tc420.html
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Bartering-Tax-Center
So, Phil, do yourself a favour and ask the IRS directly (start by reading their website linked above).

[Scotty M]

Declare your gains, and remember that if you're making money, then you shouldn't mind paying taxes.

Stockholm syndrome much?

"Thank you master for allowing me to work and earn money. I can't wait to give you half of it."

[botlove]

pay your taxes, people, and then we won't have to worry about anybody trying to hijack the currency.  =)
unless the tax is BS, in which case, don't pay it, keep a record of it, and if/when audited, pay it and the fines.

[darkmule]

Just want to get your guys thoughts on this. 

http://qz.com/72637/why-bitcoin-millionaires-could-accidentally-become-tax-felons/

So you mean if you don't pay taxes you can get in trouble?  Zounds!  I never knew that!

Karl Denninger is a whack job and an Obama birther who has had a hate-on for Bitcoin since the start.  Google Karl Denninger Bitcoin to see his previous ignorant rantings on the subject.

[Phil21]

If you directly convert to an asset you are good. It is only cash money they care about.

Not true. If you don't know something, it's better to say that (or preface it with "I think") than saying an outright lie. They DO care about direct conversion to assets.
http://www.irs.gov/taxtopics/tc420.html
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Bartering-Tax-Center
So, Phil, do yourself a favour and ask the IRS directly (start by reading their website linked above).

That's Theta - I'll give them a call and see what they have to say.  I still have some time (I hope) to get this done, as all my conversion to USD was done in 2013.  My real concern is since I didn't write off the expenses in 2010/2011 what I'm allowed to do "after the fact".

And regarding transferring them to assets - I think it's pretty well understood (maybe not based on posts here?) that barter/trade is still taxed at whatever the real value in USD is.  Yes, this can be gamed/scammed/ignored and is regularly, but it's still violating the law by doing it.  If you trade your computer repair services to the roofer for a new roof - you're still liable for taxes on the value of that trade of services.


It really comes down to what they can prove - if you're cashing out bitcoins for gold, I wouldn't exactly advertise that anywhere if you don't plan on reporting it to the IRS

[darkmule]

So, Phil, do yourself a favour and ask the IRS directly (start by reading their website linked above).

No, do NOT ask the IRS directly.  They will generally tend to give a self-serving answer and not one that is necessarily the law.  See, for example, the recent IRS opinion that they are allowed to spy on American email despite a direct court ruling telling them they are wrong.  Yes, it is a Fox News article, but it correctly states the law.  The relevant case is United States v. Warshak.

The point is the IRS cannot be trusted to state the law accurately when they stand to make a lot of money (or as they call it revenue) from your ignorance of the law.  I would say speak to an accountant, but if the money is substantial enough to trigger an audit, a specialist in tax law may be even better.

Do not consult sovereign citizen non-lawyer nutjobs who lose cases and get their suckers sent to prison.

[Mike Christ]

No, do NOT ask the IRS directly.  They will generally tend to give a self-serving answer and not one that is necessarily the law.

For emphasis

The IRS is interested in the IRS.  If they were interested in anything else, such as human evolution, or the well being of society, they would cease to exist.

[ruggedman_dan]

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PM me to get signed up.

[minerva]

A question if you will. How does it work in the US? One must declare the bitcoins that he holds, or just declare the income when converting them to dollars?

Here in 'merica you would only have to claim your income you made from selling Bitcoins, the Bitcoins you're holding are completely worthless in the eyes of the IRS, they can't tax it. Which is why it is a good thing to pay for things using bitcoins.

You still have income taxes from bartering.

[darkmule]

You still have income taxes from bartering.

They can be a trifle more difficult to collect, like tip income.  The IRS still lays claim to them. 

And, amazingly, tax evasion is still illegal in the land of the U.S. dollar.  Who knew it before Karl Denninger told us?

[frankAcct366]

OK, so I've finally come up with something worthwhile I can "sell" for bitcoins.  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.  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 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

[LobsterMan]

Isn't there some sort of "minimum" that one must make in order for it to even be taxable?

Say...hypothetically, that someone was unemployed during 2010/2011, and did some small time bitcoin mining, but sold those coins back in 2010-11 and made less than $500 total from all the sales.

Aside from kicking themselves for not holding them and selling at the recent peak for $260....would the said person be liable for any tax on that "income"? Hypothetically again, if it were conducted via paypal and the sales were done OTC.

[BitcoinAshley]

OK, some confused folks here:

1) Spending bitcoins on goods/services still requires you to pay tax just the same as if you cashed them. If you buy a computer with bitcoins that appreciated in value from $5 to $200 you have to pay taxes on that increase in value as if you had sold them for USD first and then bought the computer with USD. However, note that it is harder for the IRS to determine what you have purchased with bitcoins directly, especially if you order via Tor and have said goods shipped to a friend. Not that you should do that since that's illegal.

Note that I am not condoning tax evasion, even though some crazy people think it's our duty as patriotic Americans to evade the taxes imposed upon us by our corrupt, terrorist government who uses the money to kill innocent people with bombs all over the world and give ridiculous subsidies to oil, defense, nuclear fusion plants, Monsanto, and other nice people.  Not condoning tax evasion at all. 

2) Sorry, you can't just ACH money from your exchange account into your bank account and then not report it. Any large transfers could be reported by your bank to the IRS, and transfers above a certain amount are required to be flagged and reported. Also, the IRS could decide to audit you, and could request bank statements from your bank, and could ask why you didn't report the $700/week transfer coming from MyBitCoinExchange.net.

Fortunately, there is hope. You could OTC everything. That's harder, especially for those who can only afford to invest small amounts at a time. The risk there is unknowingly selling BTC to an IRS agent - and I wouldn't put it past them.
A slightly less secure option for buying - is to sign up for an exchange account and only ever access it from within the Tor network, and you could hop accounts frequently. Funding is the only issue. You'd have to appear in person at a bank to make cash deposits to said exchange, and if the IRS really wanted to get people, they could subpoena exchanges for records, subpoena BitInstant or LocalTill for bank cash deposit records, subpoena the banks for security camera archives, and get your picture from that. They could go that route in the future for very large evaders.
Of course, after buying at the exchange, you'd then have to sell OTC if you wanted cash, which brings the same risk mentioned before - undercover agents. You can partially avoid this risk by only selling to friends, which requires you have a significant network of trusted friends or family with enough capital to buy BTC from you when you wish to sell.

So, it would be a bit of work to effectively evade the IRS in regards to bitcoin profits, but as they tell us in state-sponsored kindergarten, "you can do anything if you put your mind to it."

[alexh]

Care for this, the IRS is nothing to play with.

[darkmule]

Yep.  Cheat on your taxes like "everyone does" for a couple grand here and there, and even if you get caught, they might waggle their finger at you and say "Oh you."  And, of course, collect the delinquent taxes plus a nice fat penalty and interest.  Do it for a few million, though, and you're looking at serious time.

People who get caught at that level often haven't been tracked down by any extraordinary means or any genius investigation.  The IRS just gets interested in you for whatever reason and notices you claim to do tech support for a buck above minimum wage and yet you showed up at the audit driving a Rolls, live in a million dollar house, and wear a Rolex.

[Dreamweaver]

Hmm..this is quite annoying damn IRS always wants to steal every penny it can. But I don't plan on ever selling off my bitcoins, even if they one day are worth a million dollars xD So this doesnt terribly bother me.