US taxes- specific tax form for BTC/USD trading

[Joe200]

I know most of you have already filed your taxes. I'd appreciate some help on this.

I'd like to report the profit on BTC/USD trading and pay taxes on it, in a way that is fully acceptable to the IRS.

What specific form should I fill out and how?

Here is what I know or think I know so far:
- Marked to market. Meaning, whatever coins I held on Dec 31, convert to USD at the market price, and calculate the profit from that.
- Form 6781 / Gains and Losses From Section 1256 Contracts and Straddles??
- Select "Section 1256 Contracts marked to market".
- Should I select any special handling? It makes sense to me to select "Foreign currency - treat as capital gain or loss". BUT, I've seen something on the net that seemed to imply that gains from currency trading are treated like ordinary income?? What I read was pretty confusing. So should I select "Foreign currency - ordinary income or loss"? Or should I not select any special handling at all? And what difference does this make?

Or do I need a completely different form? 6781 says it's for "foreign currency contracts" among other things. BTC is not a foreign currency contract. It might be "foreign currency" -- not even sure if it's that. Is there a different form for that?

[1715382970]

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[1715382970]

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[1715382970]

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[1715382970]

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[qxzn]

I believe the correct way is to report all of your sales of BTC that happened in 2012 on Form 8949. For every sale, you have to provide a cost-basis to determine profit, as well as a date you acquired the BTC to determine whether it's long or short-term.

For the cost-basis calculation, you have options: first-in-first-out, last-in-first-out, average basis, and a few others.

Once you have your forms 8949 done, you tally them up on a Schedule D.

You are only allowed to do mark-to-market accounting if you have declared that you plan to do so by april 15 of the tax year, meaning in this case you would have had to make the declaration by April 15 of 2012.

Good luck

[Joe200]

I found this article by Robert A. Green, CPA, published in Futures Magazine in April 2004.
http://forums.babypips.com/forextown/117-how-do-taxes-work-forex-trading.html

According to the article, if you trade cash forex as a speculator, the following rules apply:
- Your profit / loss falls under IRC § 988. You report it as ordinary income on Form 1040 line 21. The ordinary tax rate applies.
- You may elect for your profit / loss to be treated under Section 1256. Fill out Form 6781. Taxes are 60/40 (60% long term gains / 40% short term gains).
- If you elect 1256, you must do so before you start trading. But this election is "internal" -- it does not have to be reported to anyone.
- You do not have to report each trade -- you may use the "Performance Record Approach". Basically, ending assets minus beginning assets.

The discussion here appears to support all this.
http://community.intuit.com/posts/currency-trading-transactions-treat-under-988-or-1256

It's interesting that according to all this, cash forex is considered ambiguous when it comes to taxes. Now, what about bitcoin trading?

[qxzn]

I found this article by Robert A. Green, CPA, published in Futures Magazine in April 2004.
http://forums.babypips.com/forextown/117-how-do-taxes-work-forex-trading.html

According to the article, if you trade cash forex as a speculator, the following rules apply:

Interesting. This position assumes bitcoin is a currency, or foreign exchange. On the other hand, if bitcoin is a commodity, I think the capital gains/losses approach I outlined in my previous post applies (this is, I believe, the type of reporting required of individuals trading precious metals, for example -- see http://www.irs.gov/publications/p17/ch14.html ).

[Spendulus]

I found this article by Robert A. Green, CPA, published in Futures Magazine in April 2004.
http://forums.babypips.com/forextown/117-how-do-taxes-work-forex-trading.html

According to the article, if you trade cash forex as a speculator, the following rules apply:

Interesting. This position assumes bitcoin is a currency, or foreign exchange. On the other hand, if bitcoin is a commodity, I think the capital gains/losses approach I outlined in my previous post applies (this is, I believe, the type of reporting required of individuals trading precious metals, for example -- see http://www.irs.gov/publications/p17/ch14.html ).

You know, I believe that if one did his best to pay taxes, whether the right form and method was used or not, that'd be doing pretty good.  They might or might not care or ask for a correction.

But with respect to a "sort of currency that acts like a commodity but we'd like it to be a currency but it's not quite yet" you know, I'd go with considering it a currency.

If one took a position that resulted in paying higher taxes, and a clear determination was later made by the IRS which resulted in lower taxes due, then one could file an amended return.

A much more difficult and interesting question is something like whether it's time to get out of IRA and 401k plans entirely, and what the tax consequences for those types of actions are.

[Hal]

I aquired most of my coins by mining. This has no anology with currency (unless you're counterfeiting ) so I intend to treat bitcoins as precious metals and declare my profits as capital gains. Since I mined them more than a year earlier, they are long term capital gains. This is not as favorable as usual because it turns out that precious metals, even bullion, are considered "collectables" and taxed at a rate of 28%. Normal rate is 15%. If your overall tax rate is less than 28%, you can pay the lower rate. That is what I intend to do, based on my reading of the IRS documents.

[hanwong]

I found this article by Robert A. Green, CPA, published in Futures Magazine in April 2004.
http://forums.babypips.com/forextown/117-how-do-taxes-work-forex-trading.html

According to the article, if you trade cash forex as a speculator, the following rules apply:
- Your profit / loss falls under IRC § 988. You report it as ordinary income on Form 1040 line 21. The ordinary tax rate applies.
- You may elect for your profit / loss to be treated under Section 1256. Fill out Form 6781. Taxes are 60/40 (60% long term gains / 40% short term gains).
- If you elect 1256, you must do so before you start trading. But this election is "internal" -- it does not have to be reported to anyone.
- You do not have to report each trade -- you may use the "Performance Record Approach". Basically, ending assets minus beginning assets.

The discussion here appears to support all this.
http://community.intuit.com/posts/currency-trading-transactions-treat-under-988-or-1256

It's interesting that according to all this, cash forex is considered ambiguous when it comes to taxes. Now, what about bitcoin trading?

If you intend on declaring yourself a specialist trader and elect 1256, I highly advise you to not prepare your own taxes and go to a professional. Yes, 1256 election will give tax benefits on capital gains income, but the tests for 1256 election is numerous and thorough.

If you intent on preparing your own taxes, simply file a Schedule D along with your 1040 and treat all BTC trading activities as capital gains/losses subject to 15% tax rate for long term gains and 30% for short term gains. Yes, this is a worse tax treatment than a 1256 election. You should make your decision based on how much tax savings you will actually realize by taking the 60/40 split vs. how much it will cost you in fees to go see a tax professional. But I commend you on doing your own research and finding out about Form 6781.

My personal opinion on the matter is that BTC does not count as a options or a forward contract. Section 1256 generally only applies to options and forwards. It generally does not apply to spot forex or futures, which BTC is much more closely resembles.

The above is not intended as advice. Seek advice from a trusted source and a licensed professional.

[hanwong]

I found this article by Robert A. Green, CPA, published in Futures Magazine in April 2004.
http://forums.babypips.com/forextown/117-how-do-taxes-work-forex-trading.html

According to the article, if you trade cash forex as a speculator, the following rules apply:

Interesting. This position assumes bitcoin is a currency, or foreign exchange. On the other hand, if bitcoin is a commodity, I think the capital gains/losses approach I outlined in my previous post applies (this is, I believe, the type of reporting required of individuals trading precious metals, for example -- see http://www.irs.gov/publications/p17/ch14.html ).

You know, I believe that if one did his best to pay taxes, whether the right form and method was used or not, that'd be doing pretty good.  They might or might not care or ask for a correction.

But with respect to a "sort of currency that acts like a commodity but we'd like it to be a currency but it's not quite yet" you know, I'd go with considering it a currency.

If one took a position that resulted in paying higher taxes, and a clear determination was later made by the IRS which resulted in lower taxes due, then one could file an amended return.

A much more difficult and interesting question is something like whether it's time to get out of IRA and 401k plans entirely, and what the tax consequences for those types of actions are.

This is a great common sense approach to taxation. And the IRS will look upon you kindly and will more likely than not deal with you in a "fair" manner if you take Spendulus approach. Making the effort to pay your taxes on your bitcoin gains, even though there are no regulations pertaining to it, shows a willingness to abide by current tax rules. And if you have the wrong tax treatment, whenever they do get around to enacting specific regulations to govern digital currencies, you can always amend your return. If you erred on the conservative side, then you are in line to receive some extra money back.

To answer your question regarding cashing out retirement accounts, if you are under 55 for a 401K and 59.5 for a IRA and you withdraw your retirement savings without an exempted reason, then you are subject to a penalty and a tax. The penalty is 10% of the withdrawn amount. The tax is your regular income tax rate. Whatever amount you withdraw will be added to your income, subtract your deductions, exemptions, and credits, then calculate the tax.

Some people make the decision to cash out early because the gains in their retirement plans have been in excess of 10% and the income tax on the withdrawal is minimal due to low taxable income. If you are planning on using the withdrawn retirement funds for a specific reason, buying a house, paying medical bills, you might be exempt from the penalty. If you want to use the funds to invest in a business, you will be able to maintain your funds in a retirement account and still invest in a business. There are many options to access your retirement savings.
Speak with a professional to explore all your options and to find the best tax advantage option for your personal financial situation.

The above is not advice. It is free information. You must pay for professional advice from a trusted source who is professionally licensed.