TurboTax advertises Bitcoin as a tax dodge!

[SgtSpike]

Why does it suck? You are only paying if you are MAKING money, profit, income, Earning, dropping fat stacks, be happy you arent in debt.

It sucks because if I mine just 1 BTC, then, to stay compliant with the law (which would be a nice bonus regardless), I have to report that "income" at its present USD exchange rate, even though:

- I haven't converted it into USD
- I may *have* to convert it just to pay the taxes on it
- it could be worth less when I do convert it, meaning I have to keep records just because of this tiny transaction.

And remember, even if I get bitcoins, that doesn't mean I made a profit!  I have to deduct the cost of the mining rig I put together to get that, which (in the case of receiving just 1 BTC) is a lot more than revenue.  Now, if the IRS actually allows those deductions, it's not so bad.  But really, how much crap do you think you'll have to go through when they see you trying to deduct high-end computing/graphics equipment, and audit you, and you have to convince them the machine just sat in the corner and computed hashes?

Most likely outcome is that they'll declare some arbitrary fraction of its cost to be "personal use" and non-deductible, and then fine you for not guessing that number.

F*** that.  From now on, I'll shut up about how many bitcoins I have, and I'll leave it to them to prove I know the trapdoor information about this or that elliptic curve (i.e. the private keys to certain addresses, in case you missed the reference).

EDIT: OTOH, if the IRS decides to be cool and accept payment directly in BTC, that's one more argument the haters can't use  "Bitcoin's stupid because, unlike the dollar, you can't pay your taxes in it."  "Actually, you can.  See this IRS ruling." "Oh.  Nevermind!  Wait, I've got another one..."

You can and should deduct the cost of the rigs themselves (either amortized through depreciation, or expensed during the tax year they were purchased), as well as the electrical costs of mining with them.  If you keep proper records, there is no need for them to come up with "some arbitrary fraction of its costs to be personal use" either.  You can show what portion is personal use (if any), and it should be acceptable.

So, you should record taxable income when you mine or receive bitcoins for any purpose at the value of the bitcoins at that time.  Then, at the time you sell or use said bitcoins, and they have increased or decreased in value, you would record a capital gain/loss in the extended amount of the difference between the value of the bitcoins at time of receipt, and the fair market value of the goods/services purchased with the same number of bitcoins.

Except, if you just buy Bitcoins, using US dollars, then in that case the BTC shouldn't count as income, right?  Because, you have already paid income tax on the US dollars, and now you are just spending them to buy something.  At most, you should just have to pay a sales or use tax (or a VAT)...

E.g., if I used USD$100 to buy myself a gift card worth $100 at Borders (say), then the gift card shouldn't count as income.

However, if those gift cards later became rare & valuable collector's items, then I can see paying capital gains on the appreciation in value.  Same as for the BTC, if they appreciate.  But, you only have to pay capital gains if/when the item is sold.  What if the Bitcoins appreciate to the point where I can use 1 BTC to buy a million loaves of bread from a baker who accepts BTC?  Then do I have to count the bread so purchased as capital gains in a barter trade?

Right, that's true.  If you buy them directly, it's just as though you purchased an asset, and no income is reported.  If you are given them in trade for an actual good or service, then you have reportable income. 

So, you should record taxable income when you mine or receive bitcoins for any purpose at the value of the bitcoins at that time.  Then, at the time you sell or use said bitcoins, and they have increased or decreased in value, you would record a capital gain/loss in the extended amount of the difference between the value of the bitcoins at time of receipt, and the fair market value of the goods/services purchased with the same number of bitcoins.

Say I play World of Warcraft and I kill a boss and get an item worth 10 gold. If the fair market value of that 10 gold is $5, do I have a taxable gain of $5? (As I understand it, the answer in the United States is "nobody knows".)

Technically, yes.  But I believe the IRS says something along the lines of "we don't care" about amounts less than $600, especially if it's a one-time thing during the year for someone.  For many miners though, they've made a lot more than just $600.

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[lettucebee]

I think it's quite irresponsible of Intuit to even recognize Bitcoin, much less comment on its tax implications. Their lawyers should know better.

Their lawyers are not involved at this stage of this article's writing. Only if there is a legal challenge would Legal be called in.  But I found this article dreadful, probably written by some San Jose hipster with trendy sideburns.  Really poorly researched!  (The initial two comments are great.)

But I have some insight into how these articles are put together.  Some group(s) within Intuit are assigned topics and a young-something-eager-to-please-product-of-modern-schooling takes it and runs and queues up for the next assignment.  No one is checking him/her.  At performance review him/her is graded not on IF they met their goals, but HOW they met their goals and if other managers like him/her.

[repentance]

Intention also matters here when the Tax Office is determining whether an activity is a hobby or a business.  If it's a hobby, the income and profit aren't taxable but nor can you claim deductions or losses.

Wow. In the United States, hobby income is fully taxable though you don't have to pay self-employment taxes on it. Hobby losses are deductible but only against hobby income.

Where people can get caught out here is trying to maintain that income from things like multi-level marketing is hobby income - even if the amount earned is small and the hours spent on it are few, it fits all of the criteria for business activity.

[Serith]

Say I play World of Warcraft and I kill a boss and get an item worth 10 gold. If the fair market value of that 10 gold is $5, do I have a taxable gain of $5? (As I understand it, the answer in the United States is "nobody knows".)

I would guess the IRS isn't interested in WoW gold.  Although that might be a mistake on their part.  Some people have made a lot of money off of Chinese sweatshops that play WoW and rake in the gold...

They are definitely interested in businesses that extract money at the end. For example, if I kill WoW bosses for money and sell those items on eBay, there's no question the IRS wants me to pay income tax on the dollars I get. I can deduct my basis in the item and if I really do play WoW for profit, I can deduct my reasonable business expenses too.

The question is -- what if I never pass through to dollars? What if I earn Bitcoins for consulting -- how is that materially different from getting an item for killing a boss on WoW? And if I buy hardware with my bitcoins, how is that materially different from buying an item at auction in WoW?

The problem is that if they're not taxable if they don't contact a real currency, then you really can bypass income and sales taxes. And if they are taxable even if they don't contact a real currency, then playing WoW could run up a tax bill even if you have no intent to ever cash out.

Bitcoin unit is an encrypted piece of data transmitted by p2p network, it doesn't fall under legal definition of commodity that barter taxation could be applied to nor it is security or currency http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1817857. And according to CampBX it is impossible to explicitly define bitcoin and therefore create a law that affects only bitcoin http://www.theregister.co.uk/2011/07/10/camp_bx_goes_live/

[Jaime Frontero]

there just ain't no telling, boys and girls.

asset?  investment?  currency?

we're just going to have to wait until the lawyers hash it out.  it's a tough one - could take years.

in the meantime; make hay while the sun shines.

...and get the ability to verifiably spend specific coins into the client.

[tymothy]

we're just going to have to wait until the lawyers hash it out.  it's a tough one - could take years.

No court would agree that bitcoin is not an asset. The currency part is debatable, but doesn't really affect the tax situation. All currencies are assets, not all assets are currencies. Absolutely you should to report any income made in the trading of bitcoins to USDs and pay capital gains taxes on them. If you buy ANYTHING whether it's gold or a Euro or a brick or a chicken and sell it later at a profit, you technically owe taxes on that profit. If you haven't realized a profit in bitcoins yet (you're just holding them) then you probably don't need to report them.

Bitcoins and bitcoin profits are a lot EASIER to hide and not pay taxes on than most other assets. Sure there's the blockchain BS, but the resources required to definitively identify your wallet and link you to it would be enormous, require a court battle and not a priority for the IRS, which tries to maximize revenue recovered compared to auditing costs. Also the IRS doesn't even KNOW Bitcoins exist, so even searching the blockchain is a totally foreign concept for any auditor. It's very routine for the IRS to subpoena account records from major financial institutions when pursuing tax evaders, and since your name and signature is on the account it's very easy to prove it's yours. Just because you CAN evade taxes with bitcoins and probably get away with it doesn't mean you should.

[stic.man]

You're crazy if you don't think this is among the best coverage bitcoin has had so far.  Regardless of inaccuracy this is a legit company utilized by millions of people showing how it has practical use economically. 

[killer2021]

Same in most parts of europe.

...

So, I sell some, to pay and expand, and keep some fo which I dont pay income tax until I sell them and get "real" currencyl.

Real and not currency totally in the definition of the law here

yes.  if you keep them they're not taxable, but if you sell them for the currency of your country, they are.

Are you sure?  The IRS pages linked above suggest that merely receiving bitcoins would count as barter income and so is taxable at its market exchange rate to dollars

Yea thats how it works. The IRS has this saying, "all income from whatever source derived is taxable." It defines income as anything of value. So bitcoin income is indeed taxable.

[Rassah]

Same in most parts of europe.

...

So, I sell some, to pay and expand, and keep some fo which I dont pay income tax until I sell them and get "real" currencyl.

Real and not currency totally in the definition of the law here

yes.  if you keep them they're not taxable, but if you sell them for the currency of your country, they are.

Are you sure?  The IRS pages linked above suggest that merely receiving bitcoins would count as barter income and so is taxable at its market exchange rate to dollars

Yea thats how it works. The IRS has this saying, "all income from whatever source derived is taxable." It defines income as anything of value. So bitcoin income is indeed taxable.

Why doesn't Bitcoin qualify as currency from another country, where it would only be taxable when you "repatriate" the currency into USD?

[phillipsjk]

Why doesn't Bitcoin qualify as currency from another country, where it would only be taxable when you "repatriate" the currency into USD?

Because there is no other country that backs bitcoin; so it is not actually a "foreign currency." I am not a lawyer though YMMV.

[Phenomenon]

Just because you CAN evade taxes with bitcoins and probably get away with it doesn't mean you should.

And just because they CAN force you to give them an arbitrary percentage of your income doesn't mean they should.

[ctoon6]

Did anyone mention that you do not have to file taxes as long as you do not make over a certain amount? even if you solved 1 block youself, you still would not have made enough to pay any taxes in any state. this also assumes you do not make any money elsewhere.

But the easy solution is to simply "forget" that you made money via bitcoin when the 1st rolls around 

[Shinobi]

I think it's quite irresponsible of Intuit to even recognize Bitcoin, much less comment on its tax implications. Their lawyers should know better.

Their lawyers are not involved at this stage of this article's writing. Only if there is a legal challenge would Legal be called in.  But I found this article dreadful, probably written by some San Jose hipster with trendy sideburns.  Really poorly researched!  (The initial two comments are great.)

But I have some insight into how these articles are put together.  Some group(s) within Intuit are assigned topics and a young-something-eager-to-please-product-of-modern-schooling takes it and runs and queues up for the next assignment.  No one is checking him/her.  At performance review him/her is graded not on IF they met their goals, but HOW they met their goals and if other managers like him/her.

What do you mean their lawyers aren't involved at this stage? That in itself is even more irresponsible. When a company issues a statement providing legal interpretation of the law - even when they disclaim otherwise, and especially in a grey area - such statement should be carefully vetted by their counsel. If what you say regarding the publication process is true, then I've just lost a lot of faith in Intuit.

[SgtSpike]

Did anyone mention that you do not have to file taxes as long as you do not make over a certain amount? even if you solved 1 block youself, you still would not have made enough to pay any taxes in any state. this also assumes you do not make any money elsewhere.

But the easy solution is to simply "forget" that you made money via bitcoin when the 1st rolls around 

$600 is the taxable minimum.  A block = $13.6 x 50 = $680.  And technically, since you received the "value" of those "credits" during the tax year, even though you didn't sell them, you should report it as income with the basis equal to the value of the coins at the time of acquisition.

[LeonGeeste]

Did anyone mention that you do not have to file taxes as long as you do not make over a certain amount? even if you solved 1 block youself, you still would not have made enough to pay any taxes in any state. this also assumes you do not make any money elsewhere.

But the easy solution is to simply "forget" that you made money via bitcoin when the 1st rolls around 

$600 is the taxable minimum.  A block = $13.6 x 50 = $680.  And technically, since you received the "value" of those "credits" during the tax year, even though you didn't sell them, you should report it as income with the basis equal to the value of the coins at the time of acquisition.

I'm going to made a SWAG at this point that if you actually declared X Bitcoins as income on your taxes, the IRS would just go, "WTF?  Whatever" and move on.  That may change in the future.

[SgtSpike]

Did anyone mention that you do not have to file taxes as long as you do not make over a certain amount? even if you solved 1 block youself, you still would not have made enough to pay any taxes in any state. this also assumes you do not make any money elsewhere.

But the easy solution is to simply "forget" that you made money via bitcoin when the 1st rolls around 

$600 is the taxable minimum.  A block = $13.6 x 50 = $680.  And technically, since you received the "value" of those "credits" during the tax year, even though you didn't sell them, you should report it as income with the basis equal to the value of the coins at the time of acquisition.

I'm going to made a SWAG at this point that if you actually declared X Bitcoins as income on your taxes, the IRS would just go, "WTF?  Whatever" and move on.  That may change in the future.

Not necessarily.  I believe they would consider bitcoins to be credits in an unregistered barter exchange, which counts as taxable income as soon as you receive them.

That said, I'm not going to report them that way unless requested by an auditor.  It would just be a mess trying to account for them.

[phillipsjk]

Not necessarily.  I believe they would consider bitcoins to be credits in an unregistered barter exchange, which counts as taxable income as soon as you receive them.

That said, I'm not going to report them that way unless requested by an auditor.  It would just be a mess trying to account for them.

The Good/Bad news is that your accounting software can check the block-chain after the fact: If you have kept track of all of the addresses you have used. Based on the OP, TurboTax won't have that feature in 2011/2012.

[SgtSpike]

Not necessarily.  I believe they would consider bitcoins to be credits in an unregistered barter exchange, which counts as taxable income as soon as you receive them.

That said, I'm not going to report them that way unless requested by an auditor.  It would just be a mess trying to account for them.

The Good/Bad news is that your accounting software can check the block-chain after the fact: If you have kept track of all of the addresses you have used. Based on the OP, TurboTax won't have that feature in 2011/2012.

All that will tell the software is how much has gone in and out of your wallet.  Just as important is WHY it went in and out of your wallet.

[ctoon6]

I think this opens the market for a client that has a comment section for each transaction, or a label or something

you mark what transactions are taxable and such and leave a comment on each one, why that transaction exists. obviously this would only work for people that DO want to pay taxes, but it would help people that do pay.

[SgtSpike]

I think this opens the market for a client that has a comment section for each transaction, or a label or something

you mark what transactions are taxable and such and leave a comment on each one, why that transaction exists. obviously this would only work for people that DO want to pay taxes, but it would help people that do pay.

Indeed, I agree.

Also nice would be software that would automatically track the value at time of receipt of any bitcoins, as well as any capital gains/losses that result from the sale or use of them afterward.

Really though, someone should talk to an IRS representative to find out how bitcoin transactions should be valued and taxed.  Building accounting software around the wrong ideas (even though they seem right to us, they might not be), would just be a waste of time.