TurboTax advertises Bitcoin as a tax dodge!

[ctoon6]

I think it would be best to have the irs set the exchange rate to the average of that year, it would make things way easier for the irs and the people that pay the taxes.

[mpfrank]

I don't know about anyone else, but after reading this discussion and reviewing some other sources, I'm going to treat my Bitcoins as inventory of my Bitcoin mining/trading business, just as if I was manufacturing, I don't know, glass figurines, and selling some and holding others, and buying some more in the hopes that their market value will appreciate.  And I will depreciate & deduct the cost of my mining hardware like any other capital expenditure.  I don't see how any auditor could fault me for that approach.  If your existing inventory appreciates in value between the start and end of a year, if I recall, that still counts as a form of income even if you don't actually sell the inventory (as long as you can assign a market value to it).

[SgtSpike]

I don't know about anyone else, but after reading this discussion and reviewing some other sources, I'm going to treat my Bitcoins as inventory of my Bitcoin mining/trading business, just as if I was manufacturing, I don't know, glass figurines, and selling some and holding others, and buying some more in the hopes that their market value will appreciate.  And I will depreciate & deduct the cost of my mining hardware like any other capital expenditure.  I don't see how any auditor could fault me for that approach.  If your existing inventory appreciates in value between the start and end of a year, if I recall, that still counts as a form of income even if you don't actually sell the inventory (as long as you can assign a market value to it).

What is your cost basis for each coin?  $0?  The cost of electricity to mine each one?  Something else?

I've really never heard of intangibles being treated as inventory, so I am curious to see whatever sources you were reviewing (if you don't mind sharing).

[bcforum]

On a related note, a merchant could probably easily hide all evidence of having received bitcoins, and then record any product dispensed in return for those bitcoins as a "promotional giveaway", deducting the "forgone income" on their taxes.  Not recommending it, but I don't know how they'd enforce this if the buyer didn't say anything...

Yes, but the income from selling the bitcoins on the open market is still taxable. You might be able to argue it is capital gains instead of income, but then you have to prove when you acquired the coins.

[Jaime Frontero]

What is your cost basis for each coin?  $0?  The cost of electricity to mine each one?  Something else?

and that is why we need the client upgraded with the ability to send specific coins.

the cost basis for a coin i mined in march is entirely different than one i mined last week.  if we don't get the ability to cost out Bitcoin, the IRS will do it for us, in some kind of catch-all fashion.  and they'll do that sooner, rather than later.  and it will suck.

[SgtSpike]

What is your cost basis for each coin?  $0?  The cost of electricity to mine each one?  Something else?

and that is why we need the client upgraded with the ability to send specific coins.

the cost basis for a coin i mined in march is entirely different than one i mined last week.  if we don't get the ability to cost out Bitcoin, the IRS will do it for us, in some kind of catch-all fashion.  and they'll do that sooner, rather than later.  and it will suck.

Agreed.  A patch was made so that one can specify a send from address, but I think that patch should be pulled into the main release.

[Rassah]

What is your cost basis for each coin?  $0?  The cost of electricity to mine each one?  Something else?

and that is why we need the client upgraded with the ability to send specific coins.

the cost basis for a coin i mined in march is entirely different than one i mined last week.  if we don't get the ability to cost out Bitcoin, the IRS will do it for us, in some kind of catch-all fashion.  and they'll do that sooner, rather than later.  and it will suck.

You don't need to track specific coins I don't think. From what I remember of doing my investment related taxes in TurboTax last January, I just needed to know how much it was worth when I bought and how much it was worth when I sold. It then just calculated by gains and losses from that, I think maybe even using weighted averages for number of shares, or something...

[bcforum]

the cost basis for a coin i mined in march is entirely different than one i mined last week.  if we don't get the ability to cost out Bitcoin, the IRS will do it for us, in some kind of catch-all fashion.  and they'll do that sooner, rather than later.  and it will suck.

If you buy a stock at different prices you can choose which cost basis to apply when you sell them, or use the average price as the cost basis.

You don't need to pick and choose which coins you spent, only keep careful records of how many coins you mined at each difficulty and how much you spent to mine them. As long as you don't try and switch back and forth between methods, you'll be fine.

[Xephan]

What is your cost basis for each coin?  $0?  The cost of electricity to mine each one?  Something else?

and that is why we need the client upgraded with the ability to send specific coins.

the cost basis for a coin i mined in march is entirely different than one i mined last week.  if we don't get the ability to cost out Bitcoin, the IRS will do it for us, in some kind of catch-all fashion.  and they'll do that sooner, rather than later.  and it will suck.

This sort of accounting situation, where a particular set of assets/inventory/whatever cannot be easily distinguished, is quite well defined/resolved. There are a few ways to account for them such as LIFO, FIFO and weighted average. Like Jamie Frontero pointed out, the most important thing is that you don't switch between methods without a good reason to give the taxman/auditor.

[mpfrank]

What is your cost basis for each coin?  $0?  The cost of electricity to mine each one?  Something else?

and that is why we need the client upgraded with the ability to send specific coins.

the cost basis for a coin i mined in march is entirely different than one i mined last week.  if we don't get the ability to cost out Bitcoin, the IRS will do it for us, in some kind of catch-all fashion.  and they'll do that sooner, rather than later.  and it will suck.

If I recall, all that the IRS goes by is:

• The value of your inventory at the end of the previous tax year (from your prior year's return)
• The value of your inventory at the end of the current tax year (which you estimate based on the current market price)
• Method used for estimating the total cost basis of your inventory produced/purchased during the tax year, for which you can use any of several standard methods (although you shouldn't change methods without justification/explanation). 

It seems to me that a simple way to estimate the cost basis of net bitcoins gained via trading BTC on exchanges is [money spent in exchanges] minus [money earned on exchanges], which is easy enough to calculate from your transaction histories (or Dwolla transfers plus exchange balances).

So, if the total value of the Bitcoins you hold at the end of the tax year is greater than the value of Bitcoins you had the prev. Dec. 31st (based on their price at that time) by more than the net amount of money you spent buying Bitcoins in the interim, then the difference is a taxable gain in value of your inventory, and you owe tax on it (minus deductions for your other costs like mining hardware & electricity).

I ran into a closely analogous situation in my previous business (running a bookstore).  I accepted book donations/exchanges, so I ended up at the end of the year with a lot more book inventory than you would expect based on books I had actually purchased.  If I recall, I had to count the value of the excess inventory as income, based on an estimated fair market value of the books that I ended up with at the end of the year. 

I think the situation for Bitcoins would be similar - unless you counted them as a capital investment instead of as inventory, but I'm not sure how/whether you could justify that to the IRS.

As for estimating electricity costs, that is easy enough to do given known electrical rates and the power consumption of your graphics card, from its specifications.

[JoelKatz]

and that is why we need the client upgraded with the ability to send specific coins.

the cost basis for a coin i mined in march is entirely different than one i mined last week.  if we don't get the ability to cost out Bitcoin, the IRS will do it for us, in some kind of catch-all fashion.  and they'll do that sooner, rather than later.  and it will suck.

I don't believe you are permitted to choose the item to sell or transfer based on its basis. As I understand it, GAAP and the IRS insist that you use some consistent mechanism to determine the basis of an item. You cannot choose an item to get the tax-optimal basis.

If I'm selling video cards and I have two identical video cards, one that I paid $75 for and one that I paid $85 for, I am not permitted to say "I choose to have sold the $85 video card", regardless of which physical video card I sold. If they're functionally identical, I'm required to consider the basis using generally accepted accounting practices. Tracking the actual basis of each item is not such a practice. FIFO, for example, is one such practice. Weighted average is another.

Specific identification is not generally accepted for fungible goods. "When a company deals in items that are seen as identical by the market but that it bought at different prices, deciding which items were sold is completely arbitrary. If the specific identification method were permitted, a company could raise or lower income and taxes merely by choosing the lower- or higher-priced items without that reflecting any actual difference in their real income."

[lettucebee]

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.

Why should their lawyers care what is said in this frivolous article?  No one is being damaged by the article.  No one has standing to sue over it.  I think we are still at a point where very few people have heard of bitcoin much less have really pondered it.

[ctoon6]

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.

Why should their lawyers care what is said in this frivolous article?  No one is being damaged by the article.  No one has standing to sue over it.  I think we are still at a point where very few people have heard of bitcoin much less have really pondered it.

and how many people read the turbo tax blog? i for one have never even pondered if they had one, let alone look at their website more than 3 times a year.

[JohnDoeZ]

Tim Geithner- I Used TurboTax!‏ - YouTube
http://www.youtube.com/watch?v=eKVxGlkPRlo

[ctoon6]

that grin made me laugh

[Meatpile]

If they don't take the time to actually tell us what it is then clearly we should be doing whatever is the most benefit to us. Until we are told definitively during an audit.

So the logical thing is to avoid taxes by keeping your bitcoins and exchanging them for goods and services. IF you ever change it back to cash thats when you would need to pay taxes, because that is the only time they will track and audit it.  If they do decide you need to pay for any profits still kept in bitcoins, then the auditor will need to do their own blockchain investigation, dont do it for them!

Until they write it into the tax code, and are able to audit it, the onus is on them.

[lettucebee]

Don't cooperate with the IRS.  I think we are at the point in history where social disobedience is called for.

[Anonymous]

How does the IRS send a tax form to the block chain ?

 

[Meatpile]

Whatever the bitcoin equivelent of stegenography is! Anyone who doesn't decipher and understand their notice will be immediately thrust into prison!