IRS Releases Tax Rules on BTC

[mgburks77]

If you had the ability to pay taxes in btc it would be real money.

This basically treated btc as property and when you sell it you either have a loss or, hopefully, a capital gain.

Stores would simply factor this cost into their prices and the consumer would be taxed at the point of sale because the store will pass the cost of the tax on to the consumer.

No need to keep a list of btc users or anything for that. It's not really a tax on the consumer. It's a tax on the capital gain of the business of the seller. They would just pass it to the consumer to avoid net loss.

[amspir]

This is insane if they expect miners to go off of moment of holding/creation for gains

Would this include Alt coins? I mine a variety of coins and have thousands of them. Then I have at the least 30 or so Alt coin to BTC trades going on each day.

Do they expect me to base the gains on when I get the actual BTC? or the Alt coins?

Then there's my tiny little bluefury making a whopping .00002 btc a day. Do they really want a gain for that fraction when after a few months I have enough to even hit the withdraw limit from a pool?

Fuck, this is how you kill mining for the common person.

Your transactions would be reported to the IRS by the legally compliant second party if they exceeded $600.   That's what the IRS will know, and your records would have to show that after your pay you taxes.

[Peter R]

This guidance confirms what we already knew: bitcoin is property and is taxed accordingly.  The only thing that has changed between yesterday and today is that individuals and businesses now have greater clarity.

[RodeoX]

Remember also there is the letter of the law and the practical law. How many of us record and calculate gains from a spring garage sale? I think I'm supposed to, but I don't. Or let's say you find a wedding ring while hiking in a park. You must claim the wealth you obtained from your treasure, but I bet very few do.

If you really want to be accurate you may find that you have very precise records from your bitcoin client, exchanges, and the blockchain. I was able to find almost every transaction I have done. That allows me to do "first in" accounting.  Those first coins I bought for pennies are going to be taxed dearly. Over time that should reduce if the price stabilizes. Or I may have to pay more if the price climbs again. Either way I'm only paying on my profits.  

[mgio]

This is going to be both good and bad.  In reality this ruling now treats Bitcoins just like physical gold coins.  For institutional investors and investment companies who deal in large quantities, this is good because the rules are clear and there is now no question on the legality or illegality of bitcoins.  For the casual user, similar to a gold bug who buys/sells in small amounts with cash at local coin shops, bitcoins are now in the same boat.  If you want to avoid the IRS, buy/sell on exchanges outside the US or for cash in person.  Small time bitcoin users will mostly be unaffected, while the big players now have legal legitimacy to it all.  Overall I think this is a positive step for the bitcoin economy and should boost long-term confidence.

Not like gold coins at all!

Gold coins are taxed as collectibles which are taxed at 28% for long term gains and are not eligible for long term gains at all in several states (such as MA). Completely different than bitcoin!

[minerva]

the power elite have succeeded

bitcoin is effectively banned

[amspir]

If you really want to be accurate you may find that you have very precise records from your bitcoin client, exchanges, and the blockchain. I was able to find almost every transaction I have done. That allows me to do "first in" accounting.  Those first coins I bought for pennies are going to be taxed dearly. Over time that should reduce if the price stabilizes. Or I may have to pay more if the price climbs again. Either way I'm only paying on my profits.  

Could you transfer your first purchased BTC to an IRA vehicle?

[Delarock]

This guidance confirms what we already knew: bitcoin is property and is taxed accordingly.  The only thing that has changed between yesterday and today is that individuals and businesses now have greater clarity.

Am I correct in thinking that this guidance affects miners more than anyone else?

[spazzdla]

the power elite have succeeded

bitcoin is effectively banned

No, America sees the glimmer of bitcoin and wants in.

[RodeoX]

the power elite have succeeded

bitcoin is effectively banned

What? lol. This is the best news for American bitcoin holders this year. Now I know the rules. There was never a time when bitcoin was not taxable.  Why do people keep thinking that unlike all other objects in the universe, bitcoin is not taxable. It just is not and never was true.

[minerva]

the power elite have succeeded

bitcoin is effectively banned

No, America sees the glimmer of bitcoin and wants in.

by making bitcoin so difficult to transact in it's impossible?

have you ever filled out a tax return and had to report capital gains?

no?

Hmmmmmmm.

[mgio]

So, if I mined through 2013 at an average price of say $200/btc and put my coins on gox, then lost them with gox's closure when the price was ~$500 then...

I pay income tax on the $200/btc mined coins - my mining equipment and electricity expenses

Can I then claim property loss at the price when gox closed?

You pay income tax on your $200/btc mined coins, and then you take a capital loss for the coins (again at $200/btc).

Alternatively you could declare a gain of $300 and then a loss of $500 but it would end up the same anyways as $300 of the loss would cancel out the gain.

Hopefully you had other capital gains that year you can cancel out because you can only deduct $3500 in capital loss off of your income per year (you can carry it over to future years though).

If you actually mined a lot of coins, never sold them, and then lost them all when gox went under you could actually end up owing more tax than money you have because of the inability to deduct your capital loss.

[conspirosphere.tk]

Good for businesses in the US because they have a clear definition instead of ambiguity.

And a clear path forward: relocate.

+1337
I'm starting to suspect that some are hodlers just because they don't want to pay sh*t to the taxman. That's my case at least. And relocation is my top priority, before which i won't liquidate sh*t.
It's another way about how taxes can make something valuable.

[bitbouillion]

This is going to be both good and bad.  In reality this ruling now treats Bitcoins just like physical gold coins.  

Gold coins are treated as collectibles and taxed at 28% tax rate for long term holdings:

The term "net long-term capital gain" means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years. Generally, for most taxpayers, net capital gain is taxed at rates no higher than 15%. Some or all net capital gain may be taxed at 0% if you are in the 10% or 15% ordinary income tax brackets. However, beginning in 2013, a new 20% rate on net capital gain applies to the extent that a taxpayer’s taxable income exceeds the thresholds set for the new 39.6% ordinary tax rate ($400,000 for single; $450,000 for married filing jointly or qualifying widow(er); $425,000 for head of household, and $225,000 for married filing separately).

There are a few other exceptions where capital gains may be taxed at rates greater than 15%:
    The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
    Net capital gains from selling collectibles (like coins or art) are taxed at a maximum 28% rate.
    The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

http://www.irs.gov/taxtopics/tc409.html

Since the new guidance does not mention virtual currencies as collectibles I would assume that the 15% applies (or even 0% .. or 20% ... see above) for bitcoin long term holdings. This is much better than 28% on gold coins and going to be both good and even better  

[Peter R]

I think many people are misinterpreting this guidance.  It is just saying that "bitcoin is property."  When determining the appropriate course of action, ask yourself what course of action you would take in an analogous case using physical property that you're already familiar with.  Here are a few examples:

Growing a few dollars of tomatoes and trading them at the local farmer's market for some jam has the same tax implications as mining a few dollars of bitcoins and trading it for a beer at a local bar.  

Purchasing a 1 acre greenhouse and growing $1,000,000 of tomatoes and selling them to Trader Joe's has the same tax implications as setting up an industrial bitcoin mining operation and selling $1,000,000 of coins to Second Market.  

Cashing in one of the gold coins your grandfather gave you when you were a boy has the same tax implications as cashing in a bitcoin you acquired a few years ago.  

Selling the 10 BRK-A shares on the NYSE for $1,860,000 that you bought for $100,000 many many years ago has the same tax implications as selling $1,860,000 of bitcoin that you acquired last year.    

Receiving $50 of scotch as a gift from your buddy for helping him move has the same tax implication as receiving $50 of bitcoins for helping a forum member write some software.  

Receiving $120,000 a year from your engineering job has the same tax implications as receiving $120,000 of bitcoins as a paid developer for a bitcoin start up.  

[Raize]

So if Bitcoin is property and not currency in the eyes of government, why do we need to follow KYC and AML laws?

[allten]

For individual Bitcoiners, the only enforcement they will see is self enforcement.
The IRS cannot prove that you have Bitcoin property.
Only the owners of private keys can prove ownership of property.

You may be able to prove that you sent coins to an address I own, but what if the
corresponding keys were lost, stolen/hacked. Again, you cannot prove ownership
is still under my control.

This will be interesting.

[usabitcoinbuyer]

Oh my.  What does this mean for bitcoin payment processors like BitPay?

Say I use BTC to buy $1000 in gold from someone who uses BitPay.  This exceeds the $600 reporting threshold.  As BitPay is doing the BTC->USD conversion, the gold dealer gets paid in cash and has no reporting responsibility.  However, in this scenario, I believe BitPay would have a reporting responsibility.  Ugh.

Edit: It turns out the IRS Q&A addresses this in Q-15 (below).  Form 1099-K is filed by the payment processor for funds paid to the merchant.  It's not immediately clear that there's any reporting by the payment processor that would pertain to the bitcoin spender :
===
Q-15:  Are there IRS information reporting requirements for a person who settles payments made in virtual currency on behalf of merchants that accept virtual currency from their customers?

A-15:  Yes, if certain requirements are met.  In general, a third party that contracts with a substantial number of unrelated merchants to settle payments between the merchants and their customers is a third party settlement organization (TPSO).  A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000.  When completing Boxes 1, 3, and 5a-1 on the Form 1099-K, transactions where  the TPSO settles payments made with virtual currency are aggregated with transactions where the TPSO settles payments made with real currency to determine the total amounts to be reported in those boxes.  When determining whether the transactions are reportable, the value of the virtual currency is the fair market value of the virtual currency in U.S. dollars on the date of payment.

See The Third Party Information Reporting Center, http://www.irs.gov/Tax-Professionals/Third-Party-Reporting-Information-Center, for more information on reporting transactions on Form 1099-K.
===

[Peter R]

Oh my.  What does this mean for bitcoin payment processors like BitPay?

Say I use BTC to buy $1000 in gold from someone who uses BitPay.  This exceeds the $600 reporting threshold.  As BitPay is doing the BTC->USD conversion, the gold dealer gets paid in cash and has no reporting responsibility.  However, in this scenario, I believe BitPay would have a reporting responsibility.  Ugh.

This is not correct. I reviewed this with BCB several months ago to be sure.  BitPay is a third-party payment processor that facilitates the transaction between buyer and seller.  Any obligatory reporting falls on the buyer or seller.  For example, there are no reporting requirements when buying a coffee or a TV from Overstock, and the reporting requirements fall on the seller when buying a car from a dealership.

When Goat bought his Lamborghini, he paid via BitPay.  BitPay had no requirement to report this transaction, and probably a legal obligation not to.  However, the Lamborghini Dealership would have reported the transaction just like how they would report the transaction if Goat had paid via wire transfer or cash.  

[BldSwtTrs]

For individual Bitcoiners, the only enforcement they will see is self enforcement.
The IRS cannot prove that you have Bitcoin property.
Only the owners of private keys can prove ownership of property.

You may be able to prove that you sent coins to an address I own, but what if the
corresponding keys were lost, stolen/hacked. Again, you cannot prove ownership
is still under my control.

This will be interesting.

Well... they aren't taxing your bitcoin holdings. They are taxing you when you spend them or convert them. They don't need to prove ownership of Bitcoin, only that a transaction occurred.

If the merchant or exchange doesn't report the transaction, enforcement will obviously be difficult.

If the merchant or exchange does report the transaction, you might not want to evade taxes when the IRS is backed by men with guns.

If you can't prove when you obtained those coins, you will probably simply be taxed at the maximum rate, so if you plan to abide by the law, it's in your best interest to keep records and be able to prove them.

This is not tax advice. Consult a professional.

Btw how do we prove when we obtained the coins?