Let's share tax advice related to Bitcoin!

[Adam]

"If you spend your bitcoins, this is probably not taxed, as interstate internet purchases are not taxedarter is usually not taxed and difficult to enforce anyway."

I'd be careful with this.  You are referring to sales tax however I'm sure that if you buy something worth $20 with bitcoins that the IRS would deem that you created or earned that $20 and want income tax on it.

They sure would.  The IRS taxes all income, broadly construed, from whatever source derived, and it doesn't matter if you receive cash, merchandise, or services in exchange for your bitcoins, it's still taxable.  Most people would respond to this with "but how would they know?", and of course they wouldn't be able to in most situations, but telling people how to cheat on their taxes is not tax advice regardless of how likely it is to work.

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[billyjoeallen]

"If you spend your bitcoins, this is probably not taxed, as interstate internet purchases are not taxedarter is usually not taxed and difficult to enforce anyway."

I'd be careful with this.  You are referring to sales tax however I'm sure that if you buy something worth $20 with bitcoins that the IRS would deem that you created or earned that $20 and want income tax on it.

They sure would.  The IRS taxes all income, broadly construed, from whatever source derived, and it doesn't matter if you receive cash, merchandise, or services in exchange for your bitcoins, it's still taxable.  Most people would respond to this with "but how would they know?", and of course they wouldn't be able to in most situations, but telling people how to cheat on their taxes is not tax advice regardless of how likely it is to work.

It's not income unless you are a miner. Otherwise it is capital gains, which are not taxed until and unless they are realized.  Buying something with bitcoin is not realizing a capital gain. It is merely exchanging (bartering) one asset for another of equal market value.  It's barter until the governemnt officially recognizes Bitcoin as a currency (don't hold your breath). This is only subject to a sales tax if the transaction occurs entirely within the same tax jurisdiction.

 Even if you were realizing capital gains, you are taxed only on the NET gain, the positive difference between trading wins and losses.

[Adam]

"If you spend your bitcoins, this is probably not taxed, as interstate internet purchases are not taxedarter is usually not taxed and difficult to enforce anyway."

I'd be careful with this.  You are referring to sales tax however I'm sure that if you buy something worth $20 with bitcoins that the IRS would deem that you created or earned that $20 and want income tax on it.

They sure would.  The IRS taxes all income, broadly construed, from whatever source derived, and it doesn't matter if you receive cash, merchandise, or services in exchange for your bitcoins, it's still taxable.  Most people would respond to this with "but how would they know?", and of course they wouldn't be able to in most situations, but telling people how to cheat on their taxes is not tax advice regardless of how likely it is to work.

It's not income unless you are a miner. Otherwise it is capital gains, which are not taxed until and unless they are realized.  Buying something with bitcoin is not realizing a capital gain. It is merely exchanging (bartering) one asset for another of equal market value.  It's barter until the governemnt officially recognizes Bitcoin as a currency (don't hold your breath). This is only subject to a sales tax if the transaction occurs entirely within the same tax jurisdiction.

 Even if you were realizing capital gains, you are taxed only on the NET gain, the positive difference between trading wins and losses.

It's still income in any case if you buy something with appreciated bitcoins.  If you bought a bitcoin for $10 and exchanged it a month later for something worth $20 (cash, goods, or services) you have a $10 gain, there is no way around that.  Bartering transactions are still taxable.  

Let's say you bought bitcoins when they were a penny each or mined them, so either way your cost basis is negligible.  If you pay me 10 bitcoins right now to do your taxes and bitcoins are worth $17 each at the moment, we are actually both taxed on $170 in income.  I am taxed on it because I performed a service and received $170 in compensation for it.  It isn't 100% clear right now how the IRS will classify bitcoins, but if you think they are either a currency or a capital asset then I should recognize the $170 in income once I receive the payment, regardless of whether I sell the bitcoins or not.  The $170 becomes my basis in the bitcoins, and if I later sell them for $150 then I have a $20 capital loss, if I sell for $200 I have a $30 capital gain.  In the same way you are taxed on $170 in income because you received the $170 service and gave up a capital asset for which you had effectively zero cost basis.  You still have to recognize the gain whether you convert the bitcoins to cash and use that to pay for the service or if you straight up trade bitcoins for the service.

Jurisdiction does not matter at all.  What matters is what you got in exchange for the bitcoins and what you had in them (your basis).  Miners have zero basis so 100% of the value is income, but they can also write off expenses incurred to produce the bitcoins so effectively they only get taxed on their profit.  Traders get taxed on the fair value of goods or services they receive in excess of how much they paid for the bitcoins they traded.

[billyjoeallen]

So let's say that instead of a Bitcoin miner, you were a farmer and you grew potatoes. If you traded some potatoes to the dairy farmer for some milk, is that taxable? For whom? Why would the market price of milk and/or potatoes even enter into the equation?

If a Christmas gift exchange taxable? What if you traded photographs of your respective kids, something with no commercial value? So what's the difference if any? 

A good tax lawyer could make a persuasive argument that there is little if any tax liability. Hell, maybe you could just blame your fraudulent return on TurboTax. Seems to work for certain Treasury Secretaries.

[Adam]

1. So let's say that instead of a Bitcoin miner, you were a farmer and you grew potatoes. If you traded some potatoes to the dairy farmer for some milk, is that taxable? For whom? Why would the market price of milk and/or potatoes even enter into the equation?

2. If a Christmas gift exchange taxable? What if you traded photographs of your respective kids, something with no commercial value? So what's the difference if any? 

3. A good tax lawyer could make a persuasive argument that there is little if any tax liability. Hell, maybe you could just blame your fraudulent return on TurboTax. Seems to work for certain Treasury Secretaries.

1. Yes, it's taxable for both to the extent that what they receive exceeds their costs.  See my example about doing your taxes.  You can see it right on the IRS webpage: http://www.irs.gov/taxtopics/tc420.html

"Bartering occurs when you exchange goods or services without exchanging money. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of goods and services received in exchange for goods or services you provide must be included in income in the year received."

2. Gifts are taxable if you give more than $13,000 to any one person in any year.  There is more to it than that, but suffice to say for ordinary gifts between family members for birthdays and Christmas the tax doesn't enter into it.  The gift tax is really there to stop people from being able to gift all their assets before they die and avoid the estate tax.

3.  A tax lawyer or a CPA could never make that argument because the law is very clear.  All realized gains are taxable, no matter what source the income might be derived from.  You can come up with whatever contrivance you want when you engage in these transactions, but that doesn't make it a nontaxable event.  And jumping from having a tax lawyer defending a certain position on a tax return to knowingly filing a fraudulent return and blaming it on software is a huge leap and they shouldn't even be in the same conversation.  I would lose my license if I knowingly signed any fraudulent tax return.

[billyjoeallen]

$13,000/year per trading partner is a heluva lot. You gift them the coins. They gift you the cash or vise versa. Easy Peasy Japanesy.

The only rule when a Genie grants you a wish is that you cannot wish for more wishes. Think outside the Box and wish for more Genies. The moral is that, every situation has a loop hole. 

[Adam]

$13,000/year per trading partner is a heluva lot. You gift them the coins. They gift you the cash or vise versa. Easy Peasy Japanesy.

The only rule when a Genie grants you a wish is that you cannot wish for more wishes. Think outside the Box and wish for more Genies. The moral is that, every situation has a loop hole.  

That doesn't work.  First, there is an IRS doctrine you should be aware of called substance over form.  Basically it doesn't matter how you attempt to structure a transaction (the form) you still get taxed on the actual economic substance of the exchange.

Second, the gift situation applies on assets for which you have already paid taxes.  So I earned $100,000 in wages, paid my taxes, and I can gift you $13,000 of it without paying any additional tax.  I still paid tax on my entire $100,000 though, and it would work the same way no matter if I gifted stock, gold, cash, bitcoins, etc. it doesn't matter.  The gift tax is an additional tax on top of everything else, much like the estate tax.

The only way I can think of to be able to be able to legally have a tax free gain on capital assets is to die, and leave an estate with just under the minimum taxable amount.  All your assets get stepped up to fair value in your estate, but you only pay tax if if the total estate if over a certain amount.  At the federal level it's currently $5 million, but most states have their own estate taxes on top of that, so in my state it's $1M.  So here's some free tax planning:  Get your gran to start mining bitcoins and then leave them to you in her will.  If they go way up you can spend them tax free!

http://www.youtube.com/watch?v=Maz9ddxEQnM

[billyjoeallen]

$13,000/year per trading partner is a heluva lot. You gift them the coins. They gift you the cash or vise versa. Easy Peasy Japanesy.

The only rule when a Genie grants you a wish is that you cannot wish for more wishes. Think outside the Box and wish for more Genies. The moral is that, every situation has a loop hole. 

That doesn't work.  First, there is an IRS doctrine you should be aware of called substance over form.  Basically it doesn't matter how you attempt to structure a transaction (the form) you still get taxed on the actual economic substance of the exchange.

Second, the gift situation applies on assets for which you have already paid taxes.  So I earned $100,000 in wages, paid my taxes, and I can gift you $13,000 of it without paying any additional tax.  I still paid tax on my entire $100,000 though, and it would work the same way no matter if I gifted stock, gold, cash, bitcoins, etc. it doesn't matter.  The gift tax is an additional tax on top of everything else, much like the estate tax.

The only way I can think of to be able to be able to legally have a tax free gain on capital assets is to die, and leave an estate with just under the minimum taxable amount.  All your assets get stepped up to fair value in your estate, but you only pay tax if if the total estate if over a certain amount.  At the federal level it's currently $5 million, but most states have their own estate taxes on top of that, so in my state it's $1M.  So here's some free tax planning:  Get your gran to start mining bitcoins and then leave them to you in her will.  If they go way up you can spend them tax free!

There's also three more IRS doctrines that you may or may not be aware of:
1. If you cheat on your taxes, but have the right friends, they make you Secretary of the Treasury and direct overseer of the IRS.
2. If you if you fly under the RADAR, the IRS will expend its limited tax enforcement resources on bigger targets. 
3. Revenue "recovery" is a higher priority than convictions, but funds stored in an encrypted and backed-up wallet file cannot be seized.

Seriously, I very much appreciate your insights. What if I buy and hold Bitcoin, and then borrow against my equity while only selling enough to pay the interest on the loan? Isn't loan interest deductible?

[Adam]

$13,000/year per trading partner is a heluva lot. You gift them the coins. They gift you the cash or vise versa. Easy Peasy Japanesy.

The only rule when a Genie grants you a wish is that you cannot wish for more wishes. Think outside the Box and wish for more Genies. The moral is that, every situation has a loop hole.  

That doesn't work.  First, there is an IRS doctrine you should be aware of called substance over form.  Basically it doesn't matter how you attempt to structure a transaction (the form) you still get taxed on the actual economic substance of the exchange.

Second, the gift situation applies on assets for which you have already paid taxes.  So I earned $100,000 in wages, paid my taxes, and I can gift you $13,000 of it without paying any additional tax.  I still paid tax on my entire $100,000 though, and it would work the same way no matter if I gifted stock, gold, cash, bitcoins, etc. it doesn't matter.  The gift tax is an additional tax on top of everything else, much like the estate tax.

The only way I can think of to be able to be able to legally have a tax free gain on capital assets is to die, and leave an estate with just under the minimum taxable amount.  All your assets get stepped up to fair value in your estate, but you only pay tax if if the total estate if over a certain amount.  At the federal level it's currently $5 million, but most states have their own estate taxes on top of that, so in my state it's $1M.  So here's some free tax planning:  Get your gran to start mining bitcoins and then leave them to you in her will.  If they go way up you can spend them tax free!

There's also three more IRS doctrines that you may or may not be aware of:
1. If you cheat on your taxes, but have the right friends, they make you Secretary of the Treasury and direct overseer of the IRS.
2. If you if you fly under the RADAR, the IRS will expend its limited tax enforcement resources on bigger targets.  
3. Revenue "recovery" is a higher priority than convictions, but funds stored in an encrypted and backed-up wallet file cannot be seized.

Seriously, I very much appreciate your insights. What if I buy and hold Bitcoin, and then borrow against my equity while only selling enough to pay the interest on the loan? Isn't loan interest deductible?

Now you're thinking, that is one of the tricks rich people use.  I would caution you that investment interest is only deductible to the extent of your investment income though.  The unused portion does carry forward to future years.  But we have clients paying ten of thousands of dollars a year in investment interest and they can't deduct any of it because they have nothing to offset it with.

And five years ago I was pretty much in the same mindset trying to come up with crazy schemes involving gifts and gambling losses to try and avoid paying taxes on 60k in poker winnings. Since all my income was gambling income I was going to make like $10,000 bets with friends on things I'd be guaranteed to lose so I could write it off against my gambling income.  They would be in low or zero tax brackets and owe nothing on the win, and then gift it back to me.  But then I talked to an accountant who told me there was no point because even though the form of the transaction was there, it couldn't possibly stand up in an audit.  There's just not a lot individuals can do besides outright cheating.  All the loopholes are pretty much for the businesses and the super wealthy.

[billyjoeallen]

Cool, so what I need is:
1. a lender who is willing to accept bitcoin as collateral

2. some other form of income that my interest deduction can apply to.

is #2 correct? 

[Adam]

Cool, so what I need is:
1. a lender who is willing to accept bitcoin as collateral

2. some other form of income that my interest deduction can apply to.

is #2 correct? 

It can only be investment income, not just any income. It isn't a big deal or anything so long as you actually have an unrealized gain.  You'll get to take the deduction on the gain for the pieces you sell to service the debt, and any residual interest will carry forward indefinitely until you have other investment income or sell the balance of the bitcoins.

[GlenBot]

If I'm using BitCoin as an investment (purchasing BTC with USD on an exchange), and I bought 5,000 BTC at $10 each ($50,000 investment), and now the price has tanked to $5 each BTC, and I cash them out, I've effectively lost half of my investment.  Are those losses that I can use to reduce the amount of Income Tax i'd need to pay?

[TTBit]

If I'm using BitCoin as an investment (purchasing BTC with USD on an exchange), and I bought 5,000 BTC at $10 each ($50,000 investment), and now the price has tanked to $5 each BTC, and I cash them out, I've effectively lost half of my investment.  Are those losses that I can use to reduce the amount of Income Tax i'd need to pay?

To offset capital gains up to your loss. Otherwise, you can take off $3k/year.

So, if you've been holding onto Apple stock for the last decade, sell $25k in profit to offset the bitcoin loss.

Someone please verify.

[niko]

A couple of days ago I called the official Dutch tax information line out of pure interest.
After explaining bitcoin a couple of times they faced a tax problem.
Simplified version of my question:
What if mining would earn me 5000 euro's a month?

The Dutch tax system simple has no regulations for this type of thing. Its not extra income, because this needs to be backed up by a product or service you provide. Neither is it a form of stock trading etc., because money is basically generated.
As far as they could tell its a new and legal way of "printing extra money". And therefore there is no regulation at the time.

The advice I got was that if I was going to generate those amounts of money, I should write down the whole story and send it to a government tax advisory bureau so they can come up with something for me. That way I wouldn't be avoiding taxes.

I bet there are some people really breaking their brains about how to add this form of money to the tax system right now

The nature of Bitcoin mining is such that earning coins (from the block reward and from the tx fees) is a matter of luck. When somebody hits the jackpot while hashing, they earn a block reward plus the fees.
I know that in Canada, for example, lottery winnings are not taxed. So, if a Canadian miner finds a block (by mining alone or in a pool) and then sells coins they "won" for Canadian dollars, they should be able to claim this is as tax-free lottery winnings. Any increase or decrease in value from the moment coins were mined to the moment they were converted to fiat would then be considered as capital gains or losses.

Any thoughts?

[V4Vendettas]

Email extract from my accountant in the UK.

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Thank you for your phone call earlier today.

I did some research about Bitcoins and the way it works. Here are some very important points you should consider:

Legal point of view:
I believe Bitcoins is legal mainly in several states in the USA (not all of them). It is not officially legal in the UK. I would even add and say that it is frown upon in the UK by both HMRC and the police.

The main reason for it being frown upon is because (as you mentioned earlier) any individual can hide behind a reference number with no name, address etc… the British authorities are very concerned about this relatively new online system and here you are digging into complex rules under the crime act, money laundering and terrorism funding.

You might get a knock on your door in future from the police or other body asking you to prove that you are not funding any terrorism or crime activity. This is how serious it is.

Although there is a big potential within this concept, looking at the above points, it is my job to warn you of the complications with the law you might have.
I strongly believe that it is only a matter of time until the UK government will come up with a law against it but as you probably know these things take time.

Terribly sorry if this is not the answer you were hoping for.

Tax point of view:     
As Bitcoins are not officially illegal and I can’t stop you from trading, this is how we should treat the income:

•   This is a matter of capital gains rather than normal profit and loss as you are selling items of value (investment through coins).
•   There is an annual exemption of £10,100 for an individual – this will be deducted from your profit before calculating your tax due.
•   Capital tax is calculated at 18% from the net gain (sale proceeds less costs of sales).
•   I believe that under costs of sales we will also be able to claim the electricity your computers use
•   As long as you did not sell the coins into actual cash there will be no tax implications needed.
•   You should keep records of your income as well as the costs you have incurred during the procedure of mining the coins you sold.

I think this covers pretty much everything.

Please let me know if there is anything else I can help you with.

Kind Regards,

[BubbleBoy]

This sounds like inflammatory and misguided advice. It's ridiculous to believe that declaring your bitcoin income for tax purposes will bring the anti-terrorist police to your door. That's the whole reason terrorists will use bitcoins, to maintain anonymity.

Secondly, the phrase "As long as you did not sell the coins into actual cash there will be no tax implications needed." is plain wrong. As long as you keep your mined coins in your wallet yes, there are no tax implications. As soon as you exchange them for anything you are engaging in a commercial activity and that's a taxable event. If you barter your coins for food you need to add the fair value of that food to your income for tax purposes; additionally the business selling you that food must retain and pay VAT - it applies to barter transactions too.

[V4Vendettas]

Hmmm knew I was dumb for sharing  .

Anyway thats how my accountant is handling it for me.
As for not selling the coins he actualy ment just that, in the wallet and not buying or bartering with them etc.


The police and terror side of things well

[BitMagic]

A couple of days ago I called the official Dutch tax information line out of pure interest.
After explaining bitcoin a couple of times they faced a tax problem.
Simplified version of my question:
What if mining would earn me 5000 euro's a month?

The Dutch tax system simple has no regulations for this type of thing. Its not extra income, because this needs to be backed up by a product or service you provide. Neither is it a form of stock trading etc., because money is basically generated.
As far as they could tell its a new and legal way of "printing extra money". And therefore there is no regulation at the time.

The advice I got was that if I was going to generate those amounts of money, I should write down the whole story and send it to a government tax advisory bureau so they can come up with something for me. That way I wouldn't be avoiding taxes.

I bet there are some people really breaking their brains about how to add this form of money to the tax system right now

This simply makes no sense to me, nor any other response related to the "complexity" of mining. Mining BTC is, for tax purposes, absolutely no different than mining for gold or any other naturally occurring commodity. There are definitely laws in place to tax firms that engage in this practice; how can there not be any mental connection from standard mining to BTC mining?

I think our tax collectors need to use their brains a bit.