reporting and audits

[ferbe]

I am building an online shopping cart (in US) with a payment option to pay a electrum bitcoin wallet address.  I will later transfer the bitcoin to an exchange like coinbase, and periodically from there to my bank account.

1. As I understand, i only need to claim capital gains once I transfer to my bank account. is that right? and would this be the same for bitcoin "income" in general? 

2. If I want to report bitcoin income on a tax return, do I simply add it to the "other income"  how should I label it? 

3. From your experience, will this trigger an audit to any greater degree? 

4. If I do get audited, what must I show them?  I only plan on maintaining a numerical client ID and amount paid in quickbooks. All other info like client name, email, IP...etc will get auto purged as part of my privacy policy. 
The exchange would only show random deposits from various temporary electrum wallets.  Would this routine be an issue if the IRS wanted to audit? 

I guess the bottom line is, I want to get the IRS their money, but in terms of "information" only provide what I am legally required to. 

[audaciousbeing]

I am happy that you are asking the right question even before you begin because several businesses have closed down when the hassle of the law gets to them and they could not cope with compliance. For one you have not indicated the country you are resident and this will go a long way in eliciting the right response.

But base on what you put there, I think as for you business, you might be liable to pay both CGT and income taxes. However, the moment you can do the right thing from the beginning, I don't think you should have anything to fear from government or any of its agents.

[tiar4dewie]

I don't really understand the legal situation in your country and may not provide any solution in your opinion. But I have a suggestion for you to consider.
Maybe you need to create a bank account specifically for your new business. This will make it easier in your business income reporting even though you have another bitcoin business.

3. From your experience, will this trigger an audit to any greater degree? 

Not so sure, then the things you must provide and consider are...

legally required

Yes, most will concern the privacy of your customers. So your trust is at stake here.

[1Referee]

In the US even the most common events subject you to taxation. Whether it is you using your Bitcoins to cash out to fiat, convert to another crypto, use your Bitcoins to buy whatever goods, etc. It's all taxable unfortunately. There have been a few stories where certain individuals literally rekkt themselves just by not knowing how taxation in their country works.

In that case they were better off not declaring anything to begin with. It's horrible that even when you try to do the 'good' thing you are punished for that, but it is what it is I guess. In order to be sure, and prevent situations where you put yourself into deep troubles with the IRS, contact someone on a professional level to explain you how things work. Better safe than sorry.

[ferbe]

@audacious
Sorry, I mentioned "in US" and "IRS" and figured it would be obvious, but yes I live in the US. 

@1ref
yes, I will ask a tax person I guess.

but while we are here I guess I will try to figure out as much as possible (yay to the advent of forums). So, correct me if I am wrong, but if I transfer money directly from a paper wallet (lets call this the starting point) to an exchange acount, then immediately cash out by sending to my bank account, there should be no gains from trading bitcoin right? because I am not buying then selling, I am funding, then cashing out.  So it would simply be a matter of claiming the income being cashed out from the exchange account? 

thanks for helping me figure this out.

[bbenpieters]

cool!

[figmentofmyass]

1. As I understand, i only need to claim capital gains once I transfer to my bank account. is that right? and would this be the same for bitcoin "income" in general? 

capital gain/loss occurs when you sell for USD. it doesn't matter when you transfer to your bank account. you need to track your cost basis (the cost when you received/bought the property).

with bitcoin income (from goods and services), businesses are normally taxed on net income during the year. how you report depends how your business is organized. as a sole proprietorship, your net business income (bitcoin or not) would be taxed as ordinary income.

2. If I want to report bitcoin income on a tax return, do I simply add it to the "other income"  how should I label it? 

it depends what kind of income it is. if it's self-employment income, the gross taxable amount goes on schedule SE and the amount taxable as personal income goes under "other income".

self-employment can make things complicated as it is, before involving the capital gain/loss reporting from regular bitcoin sales. it might be simpler to organize your business as an LLC or corporation.

3. From your experience, will this trigger an audit to any greater degree? 

4. If I do get audited, what must I show them?  I only plan on maintaining a numerical client ID and amount paid in quickbooks. All other info like client name, email, IP...etc will get auto purged as part of my privacy policy. 
The exchange would only show random deposits from various temporary electrum wallets.  Would this routine be an issue if the IRS wanted to audit? 

if you're just talking about selling goods then i think that's sufficient. as far as auditing goes, i have no idea.

[Theb]

I am building an online shopping cart (in US) with a payment option to pay a electrum bitcoin wallet address.  I will later transfer the bitcoin to an exchange like coinbase, and periodically from there to my bank account.

Why do you need to go to this process on receiving payments to your Electrum wallet address? When Coinbase itself has a commerce service where you can accept BTC payments directly to your Coinbase wallet and even in your bank account. Coinbase also has a competitor named Bitpay which also offers the same service. Both of them can be good for your setup as website integration will be much easier if you choose either of the services I mentioned. Also you will be incurring additional cost just by transferring your earnings from Electrum to Coinbase because of network fees.

[ferbe]

@fig
looks like I will claim as personal income and do a sole PP (later). But for now, pending my site dev and while I try to make things work, I guess I will just add as personal income.  

You said "capital gain/loss occurs when you sell for USD. it doesn't matter when you transfer to your bank account."

So at the exchange level, I would have to sell, then it converts to USD. Does that mean I pay for both capital gain and personal income on each transaction seperately?  And if that is the case, would't that make using bitcoin as payment more expensive then simply getting paid in USD?

[BitHodler]

Why do you need to go to this process on receiving payments to your Electrum wallet address? When Coinbase itself has a commerce service where you can accept BTC payments directly to your Coinbase wallet and even in your bank account. Coinbase also has a competitor named Bitpay which also offers the same service. Both of them can be good for your setup as website integration will be much easier if you choose either of the services I mentioned. Also you will be incurring additional cost just by transferring your earnings from Electrum to Coinbase because of network fees.

Maybe that he doesn't want to use a centralized party to do something he doesn't need anyone for? I'm happy to see that someone is willing to take care of his own business instead of using external parties.

BitPay is not a good service. They use a different payment format that isn't supported by all wallets, plus they force people paying for goods to include an additional fee, which is retarded. People should avoid BitPay at all cost.

[figmentofmyass]

@fig
looks like I will claim as personal income and do a sole PP (later). But for now, pending my site dev and while I try to make things work, I guess I will just add as personal income.  

just remember the bit about self-employment tax. you're considered self-employed if you run a business as a sole proprietor. that means you may have to pay the 15.3% self-employment tax on net business income and file schedule SE with your tax return. this is in addition to your personal income tax owed:

You must pay self-employment tax and file Schedule SE (Form 1040) if either of the following applies.
    Your net earnings from self-employment (excluding church employee income) were $400 or more.

You said "capital gain/loss occurs when you sell for USD. it doesn't matter when you transfer to your bank account."

So at the exchange level, I would have to sell, then it converts to USD. Does that mean I pay for both capital gain and personal income on each transaction seperately?  And if that is the case, would't that make using bitcoin as payment more expensive then simply getting paid in USD?

no, taxable events are just triggered at different times depending on type of income. you don't get double taxed.

for capital gains:
your customer buys a good with bitcoin. the market price at the time of purchase = your cost basis. when you sell those bitcoins, you take [final sale price] - [cost basis] = capital gain/loss.

for personal income:
you take [gross business income] - [deductible business expenses] = net business income. if you are a sole proprietor, this amount gets added to your personal income on form 1040.