IRS and tax issues

[mc8113]

New here, not a troll.. made some major profits since buying bitcoins a year ago, now want to dump them for $$. In doing all this research, it appears the only way to avoid any tax is to do in person transactions for cash via a site like localbitcoins.com.  If I use a site like bitstamp or coinbase, they're going to deposit to my bank account so there will be a paper trail.  Do I have this about right?

[stemis]

From what I have read it sounds like you have it about right.  However, Bitcoin is still not considered a form of currency yet so it seems to be a bit of a gray area. 

Although new to this site, I have sees the rise of this coin for awhile and wondered how all the tax implications were going to work out.  I don't think they have been worked out and I wouldn't be surprised if in 5-10 years the government powers come knocking for their back taxes (although it is still a long shot).

Good luck dealing with your situation and I look forward to seeing what others have to say.

[rammy2k2]

US aint so nice when it goes to taxes

[mc8113]

long shot my butt! If the IRS smells another way to extract money from us, they will, end of story. They'll end up going after outfits like coinbase and bitstamp and discover how much they paid out to whom and congress will make a new addition to the already gargantuan tax code about being taxed on the sale of bitcoins.  I'm a little hesitant of meeting someone in person to do the exchange.. this is starting to feel like an action movie with me as the star!

[Kluge]

You can maybe avoid taxes, but you're still legally obligated to pay them. If it's a significant amount, maybe they'll take unorthodox measures to find you.

Cash in-person can work, FedExing cash can work, maybe gift cards, whatever... It's important you don't transmit details of the transaction online. So, if someone's sending you cash for BTC, never say how much cash was sent or what the exchange rate was, and ideally, you'd just securely send them back a USB stivk with a privkey or wallet instead of transmitting any of that data online. The receiver of the USB stick would ideally not move the bitcoins to a wallet he controls, so it's not obvious an exchange occurred. You can later say it was for a higher or lower exchange rate depending on who's being investigated/prosecuted at the time. This requires a significant trust bond between the two conspiring transactors, of course. These are the same principles used in other tax scams. You sell a car for $5,000, but say the transaction was $2,000 so there's less tax burden. Some people do the same for land, airplanes, whatever.

Obviously, you don't want to deposit cash you receive, because you'd have to explain its origin in an audit. The burden of evidence is on you with the IRS. It's generally cheaper and involves less prison time to just pay what the gunmen say you owe than to try defrauding them.

[galbros]

I have been wondering about this myself.  

I think if you use a US based service like Coinbase they will almost certainly send you a 1099 tax form if you sell more than $600 of BTC to them.  I'm not sure, I could not find any mention of that on their FAQ page but that is the usual limit for being required to report a 1099 form to you and the IRS.  If I understand correctly, the IRS says there is tax owed no matter what the amount, but your exchange does not have to report it to them via a 1099 unless you cross the $600 limit.

So yes, face to face cash is your only way to avoid a paper trail, but IRS is going to say you owe taxes no matter what is my guess.

[mc8113]

Cash under the mattress is the way to go these days.. I don't think there's any issue, at least at this stage of the game, with sending the BTC over the internet, and taking the cash in person....Anyone know how to make email notification of replies work on this forum?

[ScripterRon]

I'm going to treat bitcoins as an investment asset until things are clarified.  This means keeping track of the cost basis (BTC purchase price + fees) and subtracting the basis from the net sale (BTC sell price - fees) to calculate the capital gain.  The advantage is that capital gains held for 1 year have a lower tax rate than normal income.  CoinBase provides a CSV export for its transactions as does the Bitcoin-QT client.  If your exchange doesn't provide a paper trail, you'll need to keep your own - be sure to include the transaction identifiers so you can use the blockchain to prove when coins were purchased and sold.

Ron

[FreedomDealer]

They will know about the money when you spend it, and a paper trail may be used as a proof of legitimate origin.

[JReag]

Whatever happens, it should be fun to watch it all unfold.

The state has nothing but contempt for people who try to keep all of the wealth they earned.

[zvs]

US aint so nice when it goes to taxes

it's nicer than more than half of western europe when it comes to capital gains taxes

if you've held the bitcoins for more than one year, then it's taxed at a 15% rate

pay your taxes

[npudar]

I'm going to treat bitcoins as an investment asset until things are clarified.  This means keeping track of the cost basis (BTC purchase price + fees) and subtracting the basis from the net sale (BTC sell price - fees) to calculate the capital gain.  The advantage is that capital gains held for 1 year have a lower tax rate than normal income.  CoinBase provides a CSV export for its transactions as does the Bitcoin-QT client.  If your exchange doesn't provide a paper trail, you'll need to keep your own - be sure to include the transaction identifiers so you can use the blockchain to prove when coins were purchased and sold.

Ron

I think this is how it is going to play out.  The Coinbase transactions have good records of all the transaction fees and the cost basis.  It will be pretty straightforward for those of us still investing, but once I begin making purchases, the record keeping will get confusing because it is not clear to me what the cost basis is for the specific BTCs I will be using.  If I could be specific, I would want to use those BTC that were the most expensive to minimize the capital gains, or even to generate a loss.  Yuck.

[ohiofarmer]

You can maybe avoid taxes, but you're still legally obligated to pay them. If it's a significant amount, maybe they'll take unorthodox measures to find you.

Cash in-person can work, FedExing cash can work, maybe gift cards, whatever... It's important you don't transmit details of the transaction online. So, if someone's sending you cash for BTC, never say how much cash was sent or what the exchange rate was, and ideally, you'd just securely send them back a USB stivk with a privkey or wallet instead of transmitting any of that data online. The receiver of the USB stick would ideally not move the bitcoins to a wallet he controls, so it's not obvious an exchange occurred. You can later say it was for a higher or lower exchange rate depending on who's being investigated/prosecuted at the time. This requires a significant trust bond between the two conspiring transactors, of course. These are the same principles used in other tax scams. You sell a car for $5,000, but say the transaction was $2,000 so there's less tax burden. Some people do the same for land, airplanes, whatever.

Obviously, you don't want to deposit cash you receive, because you'd have to explain its origin in an audit. The burden of evidence is on you with the IRS. It's generally cheaper and involves less prison time to just pay what the gunmen say you owe than to try defrauding them.

Agreed. I'd rather take the legitimate route: pay the taxes (if you end up having to after talking to an accountant and seeing what the IRS ultimately rules). You'll sleep better at night, and you won't have to worry about concealing a huge pile of cash. Just set aside some of your profits for taxes.

[SaltySpitoon]

Ecuador's Capital gains tax is 0.5%, and you don't pay on income earned through foreign means. So if you did some freelance work for someone in the UK (and you live in Ecuador) and they pay you $100,000 in BTC, tis untaxed in Ecuador. However, if BTC then increases in value, and you are now holding $120,000, you owe $100 in taxes 

*in case you didn't get the hint, move to Ecuador  *