Time to start thinking about taxes

[Dabs]

If you buy mining equipment now, you will probably not ROI. Factor in all the expenses and costs of storage, electricity, maintenance, repairs, cooling and you're at negative. Since you can prove you lost money, you shouldn't have to pay taxes.

But if you do make money, you should pay the proper taxes. Higher taxes just means you made more money.

[NorbyTheGeek]

Okay, I get that buying Bitcoin and then selling for a profit probably falls under capital gains.

What about mining?  Say I started with 0 bitcoin, bought some mining equipment with fiat, and mined 1 bitcoin.  If I cash that out, is it capital gains?  Other income?

With my situation, it gets even weirder.  That bitcoin that I mined has never been exchanged for fiat, but instead has been invested into things like CEX and CryptoStocks.  In addition I have a 2nd bitcoin that I bought for $200 that is also invested in these ventures.

I don't plan on cashing any of it out before the end of the year, in fact my mined coins all get reinvested into something.  But I have no idea on how to treat this stuff with regards to U.S. taxes.  Mining in particular is unique in that I'm "creating" either a commodity or a currency, (depending on how you view Bitcoin) as well as performing a service (collecting a fee for confirming transactions).

[The00Dustin]

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..

I thought the FinCen statement a while back pretty much indicated it was a currency.  I could have misunderstood, though.  One could certainly argue that money and currency aren't equal.  Here's some food for thought, though, do precious metals dealers have to register as money transmitters for selling commodities for cash?  I know there were some recent law changes for coins, and I think those laws revert next for year, but in general, is gold "money" in the eyes of FinCen, does money=currency in their eyes, or do we really not know?  Moreover, does the IRS care what FinCen thinks?

Let's assume it's currency for further discussion based on FinCen talking about it and saying spending it doesn't make you a money transmitter.  When you buy something and reside in US states that charge sales tax, you are supposed to pay sales tax on that purchase at the end of the year if you didn't do so at the time of the transaction.  US taxes (and state taxes in the US) must be paid in US dollars by law, and the sell price must be converted to US dollars (which is generally done at the time of purchase by your credit card company if you buy in some other currency).  I'm not sure if/how that applies to barter, but assuming barter isn't taxed as sales tax, I'm guessing bitcoin would be considered currency to states that have sales tax unless the IRS didn't allow states to treat it differently than the federal government (and they had some reason to treat it differently than currency).  Considering that some people are already paid in bitcoin, I'm thinking the IRS will want to treat it as currency to collect income tax.

That having been said, if you trade currencies regularly on an exchange in order to try to make a profit, what do you have to do?  I'm thinking that's capital gains/losses even though it is currencies.  My understanding is those exchanges have to convert to US at midnight each for some tax reason, so holding overnight leads to some expenses, and this would mean currency trading isn't historically something that can be done "long term" (over a year in a position).  On the other hand, if I go to Europe and withdraw some Euros from an ATM on a day that the Euro happens to have temporarily crashed, then come home and convert the Euro to USD for a gain vs what I withdrew (even after ATM and exchange fees), was that a capital gain even though it wasn't really an investment and I'm making an exchange for equal value?  Does anyone actually claim capital losses when they travel and have to convert currency?  Realistically, such exchanges are practically a guaranteed loss, and I don't know that it can be claimed (one would like to think the IRS can't have it both ways).  Regarding all of that, I only tried once, and not really hard, but I didn't find much in IRS publishings about currency exchange in general.

So if BitCoin is currency, I think the real question is, for currency exchange, does intent matter (investment vs exchange to spend / local currency) to tax law, and what tax law applies?  If it is a commodity, then the procedure is out there and followed by anyone who trades securities, but yeah, it could put you on someone's radar.

Anyway, does anyone have any input (answers/corrections/thoughts) regarding my currency exchange questions?

[The00Dustin]

Mining in particular is unique in that I'm "creating" either a commodity or a currency, (depending on how you view Bitcoin) as well as performing a service (collecting a fee for confirming transactions).

I don't think mining would be the proper legal term by any means, but assuming it would, then you would be producing a commodity, otherwise, considering that a finite number of bitcoin will exist, one could argue that they already do exist, and as such, nomenclature aside, you are finding/recovering unclaimed currency, which would be income when you find it.  I'm not recommending this, but here is another argument for it being income: when mining, you are providing (proof of) work for pay (mined coin and/or fees), it just happens that the entity controlling that pay is a peer to peer network that will always net 0 income and loss.

[PenAndPaper]

Btw china issued a regulation notice that it signed by pretty much every official economic authority in the country and mentions nothing about taxes.

[NorbyTheGeek]

Btw china issued a regulation notice that it signed by pretty much every official economic authority in the country and mentions nothing about taxes.

Then how does your post relate to this thread about taxes in the United States?  Or did you just spam our thread to get more exposure for your signature advertisers?

[NewLiberty]

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..

I thought the FinCen statement a while back pretty much indicated it was a currency.  I could have misunderstood, though.  One could certainly argue that money and currency aren't equal.  Here's some food for thought, though, do precious metals dealers have to register as money transmitters for selling commodities for cash?  I know there were some recent law changes for coins, and I think those laws revert next for year, but in general, is gold "money" in the eyes of FinCen, does money=currency in their eyes, or do we really not know?  Moreover, does the IRS care what FinCen thinks?

Let's assume it's currency for further discussion based on FinCen talking about it and saying spending it doesn't make you a money transmitter.  When you buy something and reside in US states that charge sales tax, you are supposed to pay sales tax on that purchase at the end of the year if you didn't do so at the time of the transaction.  US taxes (and state taxes in the US) must be paid in US dollars by law, and the sell price must be converted to US dollars (which is generally done at the time of purchase by your credit card company if you buy in some other currency).  I'm not sure if/how that applies to barter, but assuming barter isn't taxed as sales tax, I'm guessing bitcoin would be considered currency to states that have sales tax unless the IRS didn't allow states to treat it differently than the federal government (and they had some reason to treat it differently than currency).  Considering that some people are already paid in bitcoin, I'm thinking the IRS will want to treat it as currency to collect income tax.

That having been said, if you trade currencies regularly on an exchange in order to try to make a profit, what do you have to do?  I'm thinking that's capital gains/losses even though it is currencies.  My understanding is those exchanges have to convert to US at midnight each for some tax reason, so holding overnight leads to some expenses, and this would mean currency trading isn't historically something that can be done "long term" (over a year in a position).  On the other hand, if I go to Europe and withdraw some Euros from an ATM on a day that the Euro happens to have temporarily crashed, then come home and convert the Euro to USD for a gain vs what I withdrew (even after ATM and exchange fees), was that a capital gain even though it wasn't really an investment and I'm making an exchange for equal value?  Does anyone actually claim capital losses when they travel and have to convert currency?  Realistically, such exchanges are practically a guaranteed loss, and I don't know that it can be claimed (one would like to think the IRS can't have it both ways).  Regarding all of that, I only tried once, and not really hard, but I didn't find much in IRS publishings about currency exchange in general.

So if BitCoin is currency, I think the real question is, for currency exchange, does intent matter (investment vs exchange to spend / local currency) to tax law, and what tax law applies?  If it is a commodity, then the procedure is out there and followed by anyone who trades securities, but yeah, it could put you on someone's radar.

Anyway, does anyone have any input (answers/corrections/thoughts) regarding my currency exchange questions?

Silver and gold is primarily regulated by the CFTC.  Essentially if you are trading in physical, so long as it is under the threshold of a commodities futures contract (or one of the items not included in any futures contract such as Bitcoin Specie) it is not regulated as such.
If it constitutes what would be a futures contract, you are bound to report it to IRS as a trade.

Here is a decent primer on it:
http://www.coinworld.com/articles/what-coins-are-reportable

Point being?  When the Winklevoss ETF enters the scene, Bitcoin trades, even OTC may become reportable under the CFTC rules.

[The00Dustin]

I thought the FinCen statement a while back pretty much indicated it was a currency.  I could have misunderstood, though.  One could certainly argue that money and currency aren't equal.  Here's some food for thought, though, do precious metals dealers have to register as money transmitters for selling commodities for cash?  I know there were some recent law changes for coins, and I think those laws revert next for year, but in general, is gold "money" in the eyes of FinCen, does money=currency in their eyes, or do we really not know?  Moreover, does the IRS care what FinCen thinks?

You answered this.

That having been said, if you trade currencies regularly on an exchange in order to try to make a profit, what do you have to do?  I'm thinking that's capital gains/losses even though it is currencies.  My understanding is those exchanges have to convert to US at midnight each for some tax reason, so holding overnight leads to some expenses, and this would mean currency trading isn't historically something that can be done "long term" (over a year in a position).  On the other hand, if I go to Europe and withdraw some Euros from an ATM on a day that the Euro happens to have temporarily crashed, then come home and convert the Euro to USD for a gain vs what I withdrew (even after ATM and exchange fees), was that a capital gain even though it wasn't really an investment and I'm making an exchange for equal value?  Does anyone actually claim capital losses when they travel and have to convert currency?  Realistically, such exchanges are practically a guaranteed loss, and I don't know that it can be claimed (one would like to think the IRS can't have it both ways).  Regarding all of that, I only tried once, and not really hard, but I didn't find much in IRS publishings about currency exchange in general.

So if BitCoin is currency, I think the real question is, for currency exchange, does intent matter (investment vs exchange to spend / local currency) to tax law, and what tax law applies?  If it is a commodity, then the procedure is out there and followed by anyone who trades securities, but yeah, it could put you on someone's radar.

You didn't discuss this at all.

Silver and gold is primarily regulated by the CFTC.  Essentially if you are trading in physical, so long as it is under the threshold of a commodities futures contract (or one of the items not included in any futures contract such as Bitcoin Specie) it is not regulated as such.
If it constitutes what would be a futures contract, you are bound to report it to IRS as a trade.

Here is a decent primer on it:
http://www.coinworld.com/articles/what-coins-are-reportable

Point being?  When the Winklevoss ETF enters the scene, Bitcoin trades, even OTC may become reportable under the CFTC rules.

Aren't ETFs always reportable because they are securities?  Don't ETFs exist for foreign currencies?  Do they fall under the CFTC rules?  If not, what makes bitcoin a commodity that does?  Commodities can generally be consumed (products of agriculture are eaten, oil is burned, metals are used in the production of other non-commodity other goods), right?  How would one consume bitcoin?

[hanwong]

Moreover, does the IRS care what FinCen thinks?

IRS only cares about how much of your pie they get to eat.

[NewLiberty]

Silver and gold is primarily regulated by the CFTC.  Essentially if you are trading in physical, so long as it is under the threshold of a commodities futures contract (or one of the items not included in any futures contract such as Bitcoin Specie) it is not regulated as such.
If it constitutes what would be a futures contract, you are bound to report it to IRS as a trade.

Here is a decent primer on it:
http://www.coinworld.com/articles/what-coins-are-reportable

Point being?  When the Winklevoss ETF enters the scene, Bitcoin trades, even OTC may become reportable under the CFTC rules.

Aren't ETFs always reportable because they are securities?  Don't ETFs exist for foreign currencies?  Do they fall under the CFTC rules?  If not, what makes bitcoin a commodity that does?  Commodities can generally be consumed (products of agriculture are eaten, oil is burned, metals are used in the production of other non-commodity other goods), right?  How would one consume bitcoin?

Yes ETFs are always reportable.  Yes ETFs exist for foreign currencies, and yes those are CFTC controlled.  (So this also means if you trade OTC in a currency in the volume of an ETF currency basket that OTC currency trade is reportable as if it were a security)
No consumability is not a necessary element for either securitization or incorporation in an ETF and it isn't any "classification" as a commodity that puts it under this governance.  What makes it reportable through the CFTC ruling is trading the equivalent of a securitized basket through an SEC controlled ETF.

With the Winklevoss fund, trading 25K coins would be a basket and trigger their rule, though there may be much lower thresholds under other rules depending on what regulations appear.

[Lethn]

The only country I have seen that has gone and made a clear and rational ruling on Bitcoin is Germany, they have it declared private money and have a tax placed on it, others have a more friendly approach to it but they seem to be all taking a wait and see approach. I emailed the Bank of England recently and I actually got a response, they pretty much were doing exactly the same thing, I emailed them asking about whether they considered it a positive thing etc. to gauge what their future response will be but I haven't received a reply yet, most likely because it's Christmas and they all just want to get home.

I think we're only going to see many of the countries move until we get a substantial amount of capital going into Bitcoin.

[steverabincpa]

"It's strange to start out the comment with "the rules seem pretty clear," because I was thinking just the opposite. "  - Yes, agreed, it is still murky.

Why file anything at all?  Because it starts the clock on the statute of limitations, limiting the ability of tax authorities, in the indefinite future, from targeting you with future forensic technologies, for many years worth of compound interest and penalties, or taking even stronger measures against you.  And because it is the right thing to do. IRC 6501(c)( 1) False return. In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.  See also 6501(c)( 2) Willful attempt to evade tax ; and 6501(c)( 8 ) Failure to notify Secretary of certain foreign transfers.   

"And then there's the question to file anything on a schedule D in the first place.
One approach may be to just file it under "other income" and pay income rates. "
Given the lack of standards for presentation of bitcoin income, I would be much more concerned that numbers are reasonably accurate than to presentation.

The investment approach has the advantages of lower long term capital gain rates and perhaps deferred realization of gains in some exchanges, but losses are capital losses which are harder to utilize.  In contrast the currency approach more readily realizes gains at ordinary income rates, but any losses are ordinary and easier to realize and carryforward as NOL. 

If the dollar difference between the two approaches is large, the taxpayer (or their advisor) may want to pay to obtain a private letter ruling from the IRS on this issue.  I have searched but am not aware of any such rulings to date.  I would not recommend changing between methods without consulting a CPA or tax attorney, and I also recommend professional advice when choosing between LIFO, specific identification, or other methods of timing trading.

Supporting the currency approach:  In SEC vs. Trendon T. Shavers and BTCST  Judge Mazzant writes “It is clear that Bitcoin can be used as money,”  “It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses.”  Also see IRC 988(c )(1)(C )(ii) “Nonfunctional currency. For purposes of this section, the term "nonfunctional currency" includes coin or currency, and nonfunctional currency denominated demand or time deposits or similar instruments issued by a bank or other financial institution.”

Supporting the investment approach: In California Bankers Assn. v. Shulttz “‘Currency’ is defined in the Secretary’s regulations as the coin and currency of the United States or of any other country, which circulate in and are customarily used and accepted as money in the country in which issued.”  Some other jurisdictions may be taking this investment approach.

So far I have been writing about BTC for individuals, not for businesses.  If you have a Bitcoin based mining or trading business then your tax basis may not be cash and your functional currency may not be the dollar, and your situation becomes MUCH more complicated.

There are several other compliance reporting issues US taxpayers with bitcoins should be aware of, particularly if you transact bitcoins outside a brokered exchange:  FATCA, FBAR, Forms 8300 and 1042-S.

I am a USA CPA licensed in CA and IL, and I can be found on LinkedIn or by Google.
Here is my circular 230 disclaimer.  This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing.  It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services.  Please contact us if you have questions. 

[The00Dustin]

In contrast the currency approach more readily realizes gains at ordinary income rates, but any losses are ordinary and easier to realize and carryforward as NOL.

I really want to know how currency exchange works for a typical individual, can you tell me how one would deal with the following scenario, on a federal income tax level?
1) Juan drives up to Canada
2) Juan withdraws $500 CAD from an ATM using a US/USD-based debit card
3) Juan's checking account balance is reduced by $625 USD
4) Juan's need for the cash vaporizes and he drives back to the US with it
5) Juan goes to his local bank branch and exchanges the $500 CAD for $575 USD
Obviously Juan lost $50 in these transactions.  It sounds like you are suggesting that would be a claimable loss.
If that is correct, I would love to know how Juan would claim this loss.  If it is incorrect, please refer to my prior posts in this thread and help me understand or find a document that indicates when/how to know one can claim such a loss.  If the rules for losses are different than gains, please point me toward information affirming that as well.

[steverabincpa]

In contrast the currency approach more readily realizes gains at ordinary income rates, but any losses are ordinary and easier to realize and carryforward as NOL.

I really want to know how currency exchange works for a typical individual, can you tell me how one would deal with the following scenario, on a federal income tax level?
1) Juan drives up to Canada
2) Juan withdraws $500 CAD from an ATM using a US/USD-based debit card
3) Juan's checking account balance is reduced by $625 USD
4) Juan's need for the cash vaporizes and he drives back to the US with it
5) Juan goes to his local bank branch and exchanges the $500 CAD for $575 USD
Obviously Juan lost $50 in these transactions.  It sounds like you are suggesting that would be a claimable loss.
If that is correct, I would love to know how Juan would claim this loss.  If it is incorrect, please refer to my prior posts in this thread and help me understand or find a document that indicates when/how to know one can claim such a loss.  If the rules for losses are different than gains, please point me toward information affirming that as well.

The000Dustin, unfortunately the situation described above sounds similar to the example in IRS Rev. Ruling 74-276 where exchange loss of an overseas employee was not deductible because it was not "(1) losses incurred in a trade or business, (2) losses incurred in a transaction entered into for profit, though not connected with a trade or business. and (3) certain casualty and theft losses."  (see also IRC165( c ) and Treas Reg 1.165-1(e)( 2 ) )

Business expenses ideally are reimbursed by the employer who deducts them on their business return, or as an unreimbursed employee expense on Sch A.  Unincorporated nonemployee businesses deduct exchange loss on Schedule C or E or F of the owner. "Losses incurred in any transaction entered into for profit, though not connected with a trade or business;" I would report as a negative component on 1040 line 21 OTHER INCOME.  And of course investment losses go on Sch D.  Be careful with travel related exchange losses however, as other travel specific limitations may apply.

I hope these comments were helpful.  This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing.  It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services.  Please contact us if you have questions. 

[dentldir]

Worth a read if anyone hasn't seen it already:

http://www.bitcointax.info/

[The00Dustin]

In contrast the currency approach more readily realizes gains at ordinary income rates, but any losses are ordinary and easier to realize and carryforward as NOL.

I really want to know how currency exchange works for a typical individual, can you tell me how one would deal with the following scenario, on a federal income tax level?
1) Juan drives up to Canada
2) Juan withdraws $500 CAD from an ATM using a US/USD-based debit card
3) Juan's checking account balance is reduced by $625 USD
4) Juan's need for the cash vaporizes and he drives back to the US with it
5) Juan goes to his local bank branch and exchanges the $500 CAD for $575 USD
Obviously Juan lost $50 in these transactions.  It sounds like you are suggesting that would be a claimable loss.
If that is correct, I would love to know how Juan would claim this loss.  If it is incorrect, please refer to my prior posts in this thread and help me understand or find a document that indicates when/how to know one can claim such a loss.  If the rules for losses are different than gains, please point me toward information affirming that as well.

The000Dustin, unfortunately the situation described above sounds similar to the example in IRS Rev. Ruling 74-276 where exchange loss of an overseas employee was not deductible because it was not "(1) losses incurred in a trade or business, (2) losses incurred in a transaction entered into for profit, though not connected with a trade or business. and (3) certain casualty and theft losses."  (see also IRC165( c ) and Treas Reg 1.165-1(e)( 2 ) )

Business expenses ideally are reimbursed by the employer who deducts them on their business return, or as an unreimbursed employee expense on Sch A.  Unincorporated nonemployee businesses deduct exchange loss on Schedule C or E or F of the owner. "Losses incurred in any transaction entered into for profit, though not connected with a trade or business;" I would report as a negative component on 1040 line 21 OTHER INCOME.  And of course investment losses go on Sch D.  Be careful with travel related exchange losses however, as other travel specific limitations may apply.

I hope these comments were helpful.  This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing.  It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services.  Please contact us if you have questions. 

Thank you for the response/explanation.  Let's reverse the scenario, though, just in case it makes a difference.
Obviously this is much less likely, but if Juan withdrew $500 CAD and it debited his account $450 USD and then he was able to exchage the $500 CAD for $500 USD upon his return at his local branch, would that $50 gain be reportable as income (and where)?  I ask because it's still not "incurred" in a trade or business, and it's still not from a transaction entered into for profit.  That having been said, if this wouldn't be reportable, would it be because it wasn't a transaction entered into for profit, or would it be because the dollar amount was below a certain threshold?

[steverabincpa]

Thank you for the response/explanation.  Let's reverse the scenario, though, just in case it makes a difference.
Obviously this is much less likely, but if Juan withdrew $500 CAD and it debited his account $450 USD and then he was able to exchage the $500 CAD for $500 USD upon his return at his local branch, would that $50 gain be reportable as income (and where)?  I ask because it's still not "incurred" in a trade or business, and it's still not from a transaction entered into for profit.  That having been said, if this wouldn't be reportable, would it be because it wasn't a transaction entered into for profit, or would it be because the dollar amount was below a certain threshold?

Reversing the scenario does make a difference.  Although losses are only deductible in one of those three categories, all gains, including those outside these categories are usually taxable.  In your case above however, IRC988(e)( 2 )(B) sets a $200 threshold below which the currency exchange gain on personal transactions are ignored.  From a practical standpoint, a taxpayer is unlikely to get audited over the taxes on a single $50 unreported gain. Common things that do cause taxpayers to get audited are tips from ex-wives and ex-employees. 

This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing.  It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services.  Please contact us if you have questions. 

[The00Dustin]

OK, I'm trying hard to understand how an individual who uses bitcoin as it is designed would be able to treat it as a capital asset (although I'm also interested in how multiple people can feel comfortable suggesting treating it as a capital asset based on how it is designed regardless of how an individual uses it [preferrably beyond clinging to a few loosely defined words like "financial institution" or referencing court decisions from presumably local {presumably non-federal, possibly even non-tax, though I didn't attempt to look up the case referenced by steverabincpa} jurisdictions]).

In addition to trying to give me a solid argument for why bitcoin would be a capital asset for individuals, can someone take a swing at the following?

Juan bought a car for $1500 in 2011.  In 2013, he sold it for 5 BTC when BTC were trading at $100.  My understanding is that personal assets aren't treated as capital, meaning there is no capital loss (long term or otherwise) to claim here (which would also be the case if he had actually sold the car for $500).  However, there is no income to claim, either, because he did not receieve more than he paid for the personal asset.

Please correct me if I'm wrong on anything about personal assets (and point me at the appropriate documentation to back up the correction).  Assuming I'm not, how would bitcoin be any different since it isn't defined as a regulated security?

Now, to complicate the scenario (in case someone wants to suggest that Juan should treat BTC as nonfunctional currency while Pablo can  still treat it as capital because Pablo bought BTC as an investment), let's add this to the equation:

Juan also bought 10 BTC for a net $300 expense in 2011 as an investment.  Juan has actual stock market assets as well and uses the FIFO lot tracking method (so he's already using form 8949 and schedule D), and he recently cashed out enough savings bonds from his childhood to have to file schedule B (which is what is used for section 988 [reportable non-day-trader currency exchange] income/losses).  So for Juan, aside from the temptation to treat it as long term capital gain and pay less taxes, reporting it properly using either method isn't an issue.  If juan sold 11 BTC for a net $11,000 credit after the aforementioned transactions (purchase BTC, sell car for BTC), how would he treat BTC on his return?

Frankly, from what I've read so far, I half expect someone here to tell me that Juan should treat 10 BTC sold as long term capital gains of $9,700 and 1 BTC sold as nonfunctional currency for an income of $500.  However, I read a lot of section 988 (26 CFR & 26 USC), and while I am no tax advisor/attorney, I am fairly confident that such treatment would be considered "switching accounting methods," which would appear to be frowned upon / not allowed.  Given that, let's assume that Juan doesn't want to try to contact the office of Timothy Geithner to get permission to change accounting methods (especially since Mr. Secretary has publicly said that he thinks bitcoin is a bubble, among other things).  Again, please correct me if I'm wrong (and point me at the appropriate documentation to back up the correction).

Assuming I'm not, for those suggesting that BTC should be treated as a capital asset with short and long term gains and losses, can you point me toward a section of code that discusses income and cost basis for the exchange of securities?  Or, to provide a more explicit example, suppose Juan wanted to trade his car in the first example for Yahoo! stock, and Pablo had actual certificates he was willing to exchange for the car.  Would this be possible, how would it be reported, and where would this exist in the code.

ETA - Also see: https://bitcointalk.org/index.php?topic=364695.msg3925362#msg3925362 (re: "not a capital asset" from some IRS employee) and share thoughts accordingly.

[melacs]

Intention/use would make sense to matter.
If you bought bitcoin to speculate (and I guess hold it over a year) it would be capital gains.
If you did an online job for bitcoin, I guess you could claim it as income.
What if it was a gift?
I guess if you kept bitcoin and used it to buy something now that the price is higher it would count as bartering if you didn't change it to fiat?

I guess the middle investor is going to be the victim here. Small amounts will be overlooked, millionaires will go to cash havens/change citizenship to avoid taxes and the middle man is going to have to pay up.

[mgio]

Okay, I get that buying Bitcoin and then selling for a profit probably falls under capital gains.

What about mining?  Say I started with 0 bitcoin, bought some mining equipment with fiat, and mined 1 bitcoin.  If I cash that out, is it capital gains?  Other income?

With my situation, it gets even weirder.  That bitcoin that I mined has never been exchanged for fiat, but instead has been invested into things like CEX and CryptoStocks.  In addition I have a 2nd bitcoin that I bought for $200 that is also invested in these ventures.

I don't plan on cashing any of it out before the end of the year, in fact my mined coins all get reinvested into something.  But I have no idea on how to treat this stuff with regards to U.S. taxes.  Mining in particular is unique in that I'm "creating" either a commodity or a currency, (depending on how you view Bitcoin) as well as performing a service (collecting a fee for confirming transactions).

If you mine bitcoins it is counted as income based on the value of the bitcoins at the time you mine them. Yes, it's a huge pain to keep those kinds of records, but it is the legal way to do it.