Time to start thinking about taxes

[biodieselchris]

US / IRS: has the IRS provided any guidance on virtual currencies yet? If I had to file today my stance would be to file gains as an asset-based capital gain that would be calculated very simply as follows:

Bill bought 1.0 BTC on 6/1/2013 for $10
Bill sold 1.0 BTC on 11/22/2013 for $890 (you can also deduct trade/wire fees, e.g. coinbase)

Bill reports $880 in long terms capital gains (an capital asset held for more than 1 year).

But what the real questions becomes, is how does the IRS classify bitcoin? Searching for "bitcoin" at irs.gov yields 0 results. Is it a commodity or a currency or capital asset? Forbes weighs in here http://www.forbes.com/sites/robertwood/2013/05/02/irs-takes-a-bite-out-of-bitcoin/:

"In the meantime, the tax rules seem pretty clear. If you provide services or sell goods for Bitcoin, you have income. If you exchange Bitcoins for cash, whether you have gain may depend on whether Bitcoin is really currency or commodity. The latter seems more likely, meaning you have gain to the extent of the appreciation in your Bitcoin."

It's strange to start out the comment with "the rules seem pretty clear," because I was thinking just the opposite.

And then there's the question to file anything on a schedule D in the first place. You have to name the asset so is this putting yourself on a federal radar by listing "bitcoin" or "digital currency asset" or the like in column A? If you made a few $K or less it might be a wait-and-see approach but if you made more than that and you're lucky enough to get a field audit they are going to want to know what those $10k+ deposits are.

One approach may be to just file it under "other income" and pay income rates. This may even be preferable for some folks who have no other income. If you file MFJ you get to almost $90k before rising out of the 15% bracket anyhow. But if you're already in a pretty high bracket there's a big difference between LTCG (20%) or short term gain (28%) and the highest income bracket (39.6%) [note that there's an additional 3.8% tax for obamacare I think that affects some people's investment income, which would be added to the long/short 20/28% investment rates:
https://www.fidelity.com/viewpoints/personal-finance/taxpayers-guide)

Anyway, let's kick off the discussion for US-based folks. With BTC up 30,000% in 2 years, you can bet your bippy the IRS is watching. What are people's thoughts (especially accountants!!!   )

[emilia79]

All I have to says is that BTC is hardly a currency.

A currency has no such high fluctuations, otherwise you can compare it to DeutchMArk in 1923, or Zimbabwean Dollar years ago.

It's more an exchange authorisation for payments.

[EntropyExtropy]

Emilia79, you're looking at it from the perspective of a classical economic product, that is currency as minted by a central government. I'm no true believer (tm), but it's unfair to compare a decentralized currently that is slowly asymptotically 'mined' (released quick -> slow) with a government-backed currency as minted in runs. What we're likely going through right now is a volatility and speculation in line with Bitcoin's sudden notoriety (a feedback loop, to be sure), something which will calm down as the Bitcoin economic ecosystem stabilizes.

Regardless, I agree with the sentiments displayed at the senate hearings, namely that all of the existing regulatory frameworks can be painlessly extended to include Bitcoin (with online money transmitters having blazed the trail). Now, where it will get interesting is to see the IRS' negotiation of distributed securities (ie Mastercoin, ColoredCoins, Bitshares). That's going to cause some furor.

[hanwong]

US / IRS: has the IRS provided any guidance on virtual currencies yet? If I had to file today my stance would be to file gains as an asset-based capital gain that would be calculated very simply as follows:

Bill bought 1.0 BTC on 6/1/2013 for $10
Bill sold 1.0 BTC on 11/22/2013 for $890 (you can also deduct trade/wire fees, e.g. coinbase)

Bill reports $880 in long terms capital gains (an capital asset held for more than 1 year).

But what the real questions becomes, is how does the IRS classify bitcoin? Searching for "bitcoin" at irs.gov yields 0 results. Is it a commodity or a currency or capital asset? Forbes weighs in here http://www.forbes.com/sites/robertwood/2013/05/02/irs-takes-a-bite-out-of-bitcoin/:

"In the meantime, the tax rules seem pretty clear. If you provide services or sell goods for Bitcoin, you have income. If you exchange Bitcoins for cash, whether you have gain may depend on whether Bitcoin is really currency or commodity. The latter seems more likely, meaning you have gain to the extent of the appreciation in your Bitcoin."

It's strange to start out the comment with "the rules seem pretty clear," because I was thinking just the opposite.

And then there's the question to file anything on a schedule D in the first place. You have to name the asset so is this putting yourself on a federal radar by listing "bitcoin" or "digital currency asset" or the like in column A? If you made a few $K or less it might be a wait-and-see approach but if you made more than that and you're lucky enough to get a field audit they are going to want to know what those $10k+ deposits are.

One approach may be to just file it under "other income" and pay income rates. This may even be preferable for some folks who have no other income. If you file MFJ you get to almost $90k before rising out of the 15% bracket anyhow. But if you're already in a pretty high bracket there's a big difference between LTCG (20%) or short term gain (28%) and the highest income bracket (39.6%) [note that there's an additional 3.8% tax for obamacare I think that affects some people's investment income, which would be added to the long/short 20/28% investment rates:
https://www.fidelity.com/viewpoints/personal-finance/taxpayers-guide)

Anyway, let's kick off the discussion for US-based folks. With BTC up 30,000% in 2 years, you can bet your bippy the IRS is watching. What are people's thoughts (especially accountants!!!   )

My thoughts, as an accountant, is for you to go find yourself a good accountant and pay him to think about this for you.

TLDR in any event, I'm glad you're thinking about taxes. I will kick off this thread by stating my position for bitcoin taxation as simply as I can, which for an accountant is a hard task.

When you file your taxes, claim your bitcoins as capital gains. You will sleep better doing it that way. Don't waste your time thinking of ways to reduce your tax bill.

[beetcoin]

how do you prove to them that you've had your bitcoins for over a year to get the 15% rate? i definitely don't want the IRS all over me, but it's going to be kind of confusing.

i bet most people are not reporting what the sell.

[J_Dubbs]

There is no realized capital gain until/unless the BTC is exchanged for a traditional currency. You can buy and hold a stock, the gain is only realized upon liquidation. I see no reason to report anything unless there is a realized capital gain. If you are mining you are producing, you don't have reportable revenue until the produced good (BTC) is sold. Cost basis would be the value from when it was mined, plus expenses associated with equipment and transfer fees.

I don't know why anyone would consider reporting the value of something that swings wildly like this, valuation is a momentary occurrence with BTC. Your significant unrealized gain could flip to become a heavy loss in January, only when realized upon exchange do you have a reportable event.

My $0.02 anyways...

[PenAndPaper]

I don't know why anyone would consider reporting the value of something that swings wildly like this, valuation is a momentary occurrence with BTC. Your significant unrealized gain could flip to become a heavy loss in January, only when realized upon exchange do you have a reportable event.

You can't report any value unless you have bitcoins converted to dollars. I mean report the value based on what? MtGOX? Isn't that ridiculous?

[J_Dubbs]

I don't know why anyone would consider reporting the value of something that swings wildly like this, valuation is a momentary occurrence with BTC. Your significant unrealized gain could flip to become a heavy loss in January, only when realized upon exchange do you have a reportable event.

You can't report any value unless you have bitcoins converted to dollars. I mean report the value based on what? MtGOX? Isn't that ridiculous?

Completely agree... simple thing people should ask themselves: Would you pay taxes on a baseball card that has gone up in value? How about artwork or a collectible vintage wristwatch? Of course not! Only exception is if it is sold for a cash profit or loss, meaning it must be sold to realize the gain/loss event. I don't know why anyone would even consider opening the Pandora's box of tax reporting without a report-able event. Bitcoins are like Beanie Babies, only difference is there are several exchange platforms. However, until one of those exchange platforms is used there is nothing to report.

I see a grey area opportunity in exchange for gift cards. Exchange BTC for WalMart gift cards and buy groceries or staple items there. If you sold a $5,000 baseball card for cash you might have some pressure to report a gain, assuming you are an honest Abe type; but exchange that baseball card for merchant services at a place you would spend money anyways, hmmmm... Until we are told how to treat BTC we should treat it as a collectible good, nothing more nothing less. Food for thought, not giving advice but really unless you convert to cash there is no taxable event to speak of and you would be asking for unwanted attention and paying unnecessary taxes.

[hanwong]

I don't know why anyone would consider reporting the value of something that swings wildly like this, valuation is a momentary occurrence with BTC. Your significant unrealized gain could flip to become a heavy loss in January, only when realized upon exchange do you have a reportable event.

You can't report any value unless you have bitcoins converted to dollars. I mean report the value based on what? MtGOX? Isn't that ridiculous?

Completely agree... simple thing people should ask themselves: Would you pay taxes on a baseball card that has gone up in value? How about artwork or a collectible vintage wristwatch? Of course not! Only exception is if it is sold for a cash profit or loss, meaning it must be sold to realize the gain/loss event. I don't know why anyone would even consider opening the Pandora's box of tax reporting without a report-able event. Bitcoins are like Beanie Babies, only difference is there are several exchange platforms. However, until one of those exchange platforms is used there is nothing to report.

I see a grey area opportunity in exchange for gift cards. Exchange BTC for WalMart gift cards and buy groceries or staple items there. If you sold a $5,000 baseball card for cash you might have some pressure to report a gain, assuming you are an honest Abe type; but exchange that baseball card for merchant services at a place you would spend money anyways, hmmmm... Until we are told how to treat BTC we should treat it as a collectible good, nothing more nothing less. Food for thought, not giving advice but really unless you convert to cash there is no taxable event to speak of and you would be asking for unwanted attention and paying unnecessary taxes.

I like the way you think. Of course as a professional I cannot advise anyone to do anything outside of the law, I will say that the law is very gray in everything that is related to bitcoins and taxation. Of course this causes a lot of questions and unease. But it also creates opportunities as well for those who have the knowledge and are willing to take risk. Taxation is very much like markets, people take risks, sometimes they pay off, sometimes they lose.

[J_Dubbs]

I don't know why anyone would consider reporting the value of something that swings wildly like this, valuation is a momentary occurrence with BTC. Your significant unrealized gain could flip to become a heavy loss in January, only when realized upon exchange do you have a reportable event.

You can't report any value unless you have bitcoins converted to dollars. I mean report the value based on what? MtGOX? Isn't that ridiculous?

Completely agree... simple thing people should ask themselves: Would you pay taxes on a baseball card that has gone up in value? How about artwork or a collectible vintage wristwatch? Of course not! Only exception is if it is sold for a cash profit or loss, meaning it must be sold to realize the gain/loss event. I don't know why anyone would even consider opening the Pandora's box of tax reporting without a report-able event. Bitcoins are like Beanie Babies, only difference is there are several exchange platforms. However, until one of those exchange platforms is used there is nothing to report.

I see a grey area opportunity in exchange for gift cards. Exchange BTC for WalMart gift cards and buy groceries or staple items there. If you sold a $5,000 baseball card for cash you might have some pressure to report a gain, assuming you are an honest Abe type; but exchange that baseball card for merchant services at a place you would spend money anyways, hmmmm... Until we are told how to treat BTC we should treat it as a collectible good, nothing more nothing less. Food for thought, not giving advice but really unless you convert to cash there is no taxable event to speak of and you would be asking for unwanted attention and paying unnecessary taxes.

I like the way you think. Of course as a professional I cannot advise anyone to do anything outside of the law, I will say that the law is very gray in everything that is related to bitcoins and taxation. Of course this causes a lot of questions and unease. But it also creates opportunities as well for those who have the knowledge and are willing to take risk. Taxation is very much like markets, people take risks, sometimes they pay off, sometimes they lose.

Thanks, I appreciate the compliment. What I lack in technical ability when rigging up my gear I try to make up for with my econ/financial nerdy-ness.  I used to work in a wirehouse and have been investing for ~15 years. Switched careers a while back to be a designer, much happier with my field but never stopped investing. Freelanced on the side for a while, have always filed my own taxes with the exception of a few times where I needed a CPA to help, but never have cheated or tried to "pull a fast one". I just don't want to see people being overly-cautious to the point where they are shorting their stake in rightfully owned property. If redeeming for US dollars I would say definitely treat it like a currency trade or a stock holding, but if just holding onto BTC or trading for services I honestly do not see any potential benefit or mitigation of risk by claiming something that does not need to be claimed.

With that said, keep receipts for equipment costs and utility bills, and be ready for the day when we might be required to file. If BTC becomes ubiquitous within retail spending the valuation will probably stabilize quite a bit, probably at that point it will be rather clear to establish a small corp or file as a sole-proprietorship. I'm a big fan of fairness, and I don't mind paying my taxes, but overpaying for no reason is simply foolish.

Edit: also, if I bring this to my CPA right now he'd probably be more confused than my mom about what it is. They get paid to make prudent recommendations but are certainly not always "right". If you have a clear approach that makes sense, stick to it and act as if, then when the rest of the world can wrap their head around it we can start asking advice. It's not for us to assume the most conservative self-punishment we can dream up out of paranoia, but rather it is for our government to establish a playing field first and then we play ball. Not picking on anyone but the amount of bad advice in this thread seemed frightening. By all means, if I'm wrong on my logic please poke holes in it, but my understanding is if I milk a cow all week there's nothing to report until I start selling the output (milk) in exchange for dollars. Through trade there might (technically) be la taxable-event to report, but normally small businesses exchange services all the time off the books because the output expense washes with the acquisition. If I keep the milk in my fridge, no income or revenue to report, simple as that. And if exchanging for gift-cards it's on the retailer to tax on the sale of goods, that's their burden; and if they don't it basically comes down to whether you have ever reported your Ebay purchases on your taxes, because that's something we have all been asked to do for years now and hardly anyone does. Just being realistic here- when in Rome... Well, try to remember we are building Rome, maybe...

[hanwong]

you are correct that accountants are not always right. Law, and especially tax law, is a lot more art than science. Interpretation and negotiation are a big part of tax advising. In some areas of tax law, and I believe bitcoin taxation is one of those areas, there are no lines. It's much more impressionist art than realism. Just make sure the tax picture you are painting is not fraudulent art.

[J_Dubbs]

you are correct that accountants are not always right. Law, and especially tax law, is a lot more art than science. Interpretation and negotiation are a big part of tax advising. In some areas of tax law, and I believe bitcoin taxation is one of those areas, there are no lines. It's much more impressionist art than realism. Just make sure the tax picture you are painting is not fraudulent art.

Agreed, honest intentions rarely lead to a bad result.

[maurya78]

Tell me about it!

In my jurisdiction, the regulator has been in observation mode for 6 months now without an official position

There is no clarity on how taxation will work

It is a real pain! All I can do is keep the paperwork clean and ready for when I need it

[Dabs]

If it's not been converted to fiat, it can't be taxed because there are no capital gains, yet.

[beetcoin]

If it's not been converted to fiat, it can't be taxed because there are no capital gains, yet.

in that case, if BTC services were to pop up and we could buy lots of services and goods.. we wouldn't have to pay taxes then? as i understand it, capital gains taxes can't be imposed on straight up fiat currencies.. only on non-monetary assets.

[Dabs]

If it's not been converted to fiat, it can't be taxed because there are no capital gains, yet.

in that case, if BTC services were to pop up and we could buy lots of services and goods.. we wouldn't have to pay taxes then? as i understand it, capital gains taxes can't be imposed on straight up fiat currencies.. only on non-monetary assets.

I think the merchant would have to pay the taxes, from whatever amount you paid them. Sales tax or something.

[beetcoin]

If it's not been converted to fiat, it can't be taxed because there are no capital gains, yet.

in that case, if BTC services were to pop up and we could buy lots of services and goods.. we wouldn't have to pay taxes then? as i understand it, capital gains taxes can't be imposed on straight up fiat currencies.. only on non-monetary assets.

I think the merchant would have to pay the taxes, from whatever amount you paid them. Sales tax or something.

they would have to pay sales tax either way though. that doesn't change as it's already factored into the price.

[PenAndPaper]

Since there is no regulation everyone here is approaching the subject with common sense and i agree with all of the above. On top of that i think regulators will approach bitcoins with common sense as well so if you are not trying to avoid taxes where is shouldn't be avoided then i think you 'll be fine.

[J_Dubbs]

If it's not been converted to fiat, it can't be taxed because there are no capital gains, yet.

in that case, if BTC services were to pop up and we could buy lots of services and goods.. we wouldn't have to pay taxes then? as i understand it, capital gains taxes can't be imposed on straight up fiat currencies.. only on non-monetary assets.

I think the merchant would have to pay the taxes, from whatever amount you paid them. Sales tax or something.

they would have to pay sales tax either way though. that doesn't change as it's already factored into the price.

This is true... If I go trade in my old Xbox games at Gamestop for a new one am I required to file that on my taxes? Of course not, but Gamestop has to run sales tax on the transaction. I know it sounds crazy but until regulators define it technically BTC is not a "currency" yet, it is more like a good, and just like if you sell your goods on Ebay for cash you are supposed to report any gains on your taxes, most of the time used goods are sold at a loss so it doesn't matter but anyone flipping ASICs right now for profit should be aware of this... Not saying go out and report it all, just making the point the expectation to report gains and even un-taxed purchases has always been asked by the IRS, nothing new in that regard.

I honestly think that also depends on the level you are cashing out at. Below a certain income level there is a "hobby" exception in the US tax laws that makes the activity exempt from filing. I mean, if you sell a few old sneakers that you found in a garbage can on Ebay for a profit it's a much different situation than selling a Picasso purchased from a grieving widow for pennies on the dollar. Just like mining with 20gh/s is much different than 900gh/s, the bigger guys will probably want to establish an LLC and claim their heavy expenses. We might all want BTC to become a currency that is widely accepted, but until/unless that day comes it's really just a collectible or a good. The common measure of value in relative terms is cash, same way Beanie Babies were valued before demand dried up. Conveniently, there is a perceived shortage driving up the price, the trend is clear over time and it's all the more reason to just hold longer. The main slam BTC took was due to a special cause event of the Feds closing a marketplace, regulation always prevents market efficiency; assuming only common causes moving forward the upward trend will continue unless demand shifts, supply (rate of production) is fixed and works in our favor for a long position.

I guess the biggest distinction is when mining you are arguably producing the good, which makes us in a similar situation to someone making crafts. If you knit 1,000 scarves but don't sell them on Etsy there's no event to report. If you do sell them you deduct all the expenses and the net profit is taxable, many people might just break even with their mining equipment in the short term anyways. Profit is great, and taxes should be paid on it, but you don't have any unless the BTC is exchanged for cash at a net gain.  


Disclaimer: I'm completely aware my various posts/examples are all very similar, but I just enjoy this topic and coming up with different comparisons to support the argument for a position we should remain unified on.

[NewLiberty]

All I have to says is that BTC is hardly a currency.

A currency has no such high fluctuations, otherwise you can compare it to DeutchMArk in 1923, or Zimbabwean Dollar years ago.

It's more an exchange authorisation for payments.

Greenspan agreed that it is not a currency today on Bloomberg.
http://www.bloomberg.com/news/2013-12-04/greenspan-says-bitcoin-a-bubble-without-intrinsic-currency-value.html

But what does he know anyhow..