IRS Releases Tax Rules on BTC

[Digi7ech]

The closest place I figure the IRS can truly trace, is to the Fiat conversion.

I use coinbase so they'll have a deposit and then a bank transfer.

How do they how long I've had the coins before that transfer is up to me if using a private wallet. If you use an exchange like cryptsy, they could possibly get that info from them.

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[Tranz]

Is this FIFO, do wash rules apply??

It is stupid to think you have to pay taxes on mining and then pay taxes again on use(assume btc is up) which you probably already paid taxes on the goods anyway.

So triple taxation for mining and using btc?

This is a shot directly at btc. Make is so unfriendly no one can possibly use it.

[amspir]

Is this FIFO, do wash rules apply??

It is stupid to think you have to pay taxes on mining and then pay taxes again on use(assume btc is up) which you probably already paid taxes on the goods anyway.

So triple taxation for mining and using btc?

This is a shot directly at btc. Make is so unfriendly no one can possibly use it.

Thank the special tax rates for capital gains.   Income is made through labor or by capital gains, and your accounting for the IRS will determine what kind of gain it is.   This is why Mitt Romney paid a much lower tax rate than the typical American middle-class family, or why Warren Buffet pays a lower tax rate than his secretary.

Any politician that makes a move to get rid of the tax code of the special treatment of capital gains will be confronted by a huge army of highly-paid lobbyists fueled by dark money.

[usabitcoinbuyer]

Is this FIFO, do wash rules apply??

It is stupid to think you have to pay taxes on mining and then pay taxes again on use(assume btc is up) which you probably already paid taxes on the goods anyway.

So triple taxation for mining and using btc?

This is a shot directly at btc. Make is so unfriendly no one can possibly use it.

Given that the IRS has decided bitcoin is property (like shares of stock) I would assume wash sale rules apply.

The triple taxation argument is a strawman.  It's no different than 1) paying taxes on your salary, 2) using that salary to make money in the stock market and paying taxes on the gains, and 3) spending that money and paying sales tax on what you buy.

Let's make this clear.  If BTC is worth $500 when you mine it and $600 when you spend it, you pay taxes on the $500 of mined value when you mine it.  You pay taxes on the $100 increase in value when you spend it.  The total $600 essentially only gets taxed once.

The idea that I generate a bit of tax bookkeeping every time I buy a bitcoin latte *is* rather annoying.  What I would do personally in that situation, rather than keeping track of and reporting each individual transaction, is to total them up on a monthly, quarterly or annual basis, and report as an aggregate transaction: Spent a total of 2 BTC for 40 dinners worth a total of $1200.  Cost basis of the 2 BTC was $900, so a net taxable gain of $300.  A BTC wallet app could easily keep track of it.

Edit: On second thought, wash sale rule probably doesn't apply to bitcoin as it's not a "security".

[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.  

I wanted to clarify when the $600 rule applies.  An example would be if you operated a gold-4-bitcoin shop and used BitPay as a payment processor.  

If you only sold $400 of gold via BitPay that year, nothing would happen. However, if you sold $100,000 of gold via BitPay that year, BitPay would be required to report this amount.  In no case does BitPay care who your customers are, they just need to keep track of the total funds they transfer to you.  Your customers are your business, not BitPay's.  

These are the same reporting requirements as for PayPal or Visa.  

[usabitcoinbuyer]

I wanted to clarify when the $600 rule applies.  An example would be if you operated a gold-4-bitcoin shop and used BitPay as your payment processor.  

If you only sold $400 of gold via BitPay that year, nothing would happen. However, if you sold $100,000 of gold via BitPay that year, BitPay would be required to report this amount.  In no case does BitPay care who your customers are, they just need to keep track of the total funds they transfer to you.  Your customers are your business, not BitPay's.  

These are the same reporting requirements as for PayPal or Visa. 

Thanks for the clarification.  I picked up on that when I looked up the details on 1099-K reporting, which I suspect BitPay is likely already doing.

[Tranz]

Is this FIFO, do wash rules apply??

It is stupid to think you have to pay taxes on mining and then pay taxes again on use(assume btc is up) which you probably already paid taxes on the goods anyway.

So triple taxation for mining and using btc?

This is a shot directly at btc. Make is so unfriendly no one can possibly use it.

The triple taxation argument is a strawman.  It's no different than 1) paying taxes on your salary, 2) using that salary to make money in the stock market and paying taxes on the gains, and 3) spending that money and paying sales tax on what you buy.



The idea that I generate a bit of tax bookkeeping every time I buy a bitcoin latte *is* rather annoying.  What I would do personally in that situation, rather than keeping track of and reporting each individual transaction, is to total them up on a monthly, quarterly or annual basis, and report as an aggregate transaction: Spent a total of 2 BTC for 40 dinners worth a total of $1200.  Cost basis of the 2 BTC was $900, so a net taxable gain of $300.  A BTC wallet app could easily keep track of it.

Perhaps strawman, but unless I get do deduct the cost of mining from the equation, it is unfair to be sure.  Not to mention quite difficult to track.

Also I don't think you can simply roll up your you liability into anything other then per transaction.  The only way I know you can roll up stock transactions is if you have a broker license.  Otherwise every sale must be meet with the purchase.

[LostDutchman]

http://www.foxbusiness.com/markets/2014/03/25/irs-rules-bitcoin-as-property-subject-to-tax/

"Bitcoin miners -- those people who validate Bitcoin transactions on their home computers -- will now be subject to tax on gains.

As a profession, "mining" will be considered a trade or business, subject to self-employment taxes.

You guys wanted bitcoin to "go mainstream" and it has.

Happy now?

My $.02

.)

[superduh]

the ruling just opened another can of worms.

i still don't understand their reasoning for making miners pay at "time of mining" and not at time of selling.

if you mine REAL gold and add it to inventory i don't believe they pay taxes on INVENTORY! only when they sell the gold, the diamonds, the property.
paying taxes on "inventory" makes no sense at all.
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Inventory-Manufacturing-Tax-Tips

or am i just not understanding this at all

[BCB]

Full text of Notice 2014-21 Here:
http://www.scribd.com/doc/214527517/US-IRS-Bitcoin-Guidance



IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply
 
IR-2014-36, March. 25, 2014

WASHINGTON – The Internal Revenue Service today issued a notice providing answers to frequently asked questions (FAQs) on virtual currency, such as Bitcoin. These FAQs provide basic information on the U.S. federal tax implications of transactions in, or transactions that use, virtual currency.

In some environments, virtual currency operates like “real” currency -- i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction.

The notice provides that virtual currency is treated as property for U.S. federal tax purposes.  General tax principles that apply to property transactions apply to transactions using virtual currency.  Among other things, this means that:

•   Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
•   Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.  Normally, payers must issue Form 1099.
•   The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
•   A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. 

Further details, including a set of 16 questions and answers, are in Notice 2014-21, posted today on IRS.gov.

[amspir]

the ruling just opened another can of worms.

i still don't understand their reasoning for making miners pay at "time of mining" and not at time of selling.

if you mine REAL gold and add it to inventory i don't believe they pay taxes on INVENTORY! only when they sell the gold, the diamonds, the property.
paying taxes on "inventory" makes no sense at all.
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Inventory-Manufacturing-Tax-Tips

or am i just not understanding this at all

It's actually an advantage.  Capital gains are taxed at lower rates than other income.   I'm sure the IRS would be happy if you considered it inventory then paid the higher income rates on your appreciated inventory than paying taxes on income on when it was mined, then paying capital gains after you realized it as profit.

[johnyj]

A clear definition: Digital Asset

[superduh]

the ruling just opened another can of worms.

i still don't understand their reasoning for making miners pay at "time of mining" and not at time of selling.

if you mine REAL gold and add it to inventory i don't believe they pay taxes on INVENTORY! only when they sell the gold, the diamonds, the property.
paying taxes on "inventory" makes no sense at all.
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Inventory-Manufacturing-Tax-Tips

or am i just not understanding this at all

Most miners aren't actually miners, they are hash rate providers who are paid by their employer, the mining pool operator.

Actual miners should be treated differently than hash rate providers, IMO.

it's truely showing the government is two steps behind the technology and understanding.
you are technically correct as well. and what if a US citizen provides hash power to say a company in Ukraine. this ruling is honestly pretty shitty mostly because it shows how truly behind the times the gov can be. they kind of failed at understanding what this is.
once more countries go the way of denmark, germany, UK i can imagine many US citizens giving up their citizenship

[usabitcoinbuyer]

Is this FIFO, do wash rules apply??

It is stupid to think you have to pay taxes on mining and then pay taxes again on use(assume btc is up) which you probably already paid taxes on the goods anyway.

So triple taxation for mining and using btc?

This is a shot directly at btc. Make is so unfriendly no one can possibly use it.

The triple taxation argument is a strawman.  It's no different than 1) paying taxes on your salary, 2) using that salary to make money in the stock market and paying taxes on the gains, and 3) spending that money and paying sales tax on what you buy.

The idea that I generate a bit of tax bookkeeping every time I buy a bitcoin latte *is* rather annoying.  What I would do personally in that situation, rather than keeping track of and reporting each individual transaction, is to total them up on a monthly, quarterly or annual basis, and report as an aggregate transaction: Spent a total of 2 BTC for 40 dinners worth a total of $1200.  Cost basis of the 2 BTC was $900, so a net taxable gain of $300.  A BTC wallet app could easily keep track of it.

Perhaps strawman, but unless I get do deduct the cost of mining from the equation, it is unfair to be sure.  Not to mention quite difficult to track.

Also I don't think you can simply roll up your you liability into anything other then per transaction.  The only way I know you can roll up stock transactions is if you have a broker license.  Otherwise every sale must be meet with the purchase.

If you itemize deductions, I see no reason why you cannot deduct mining expenses as "miscellaneous investment expenses".

Note that strictly speaking, the IRS may not allow aggregating transactions, but from a practical standpoint, if it results in the right amount of tax paid and I can defend it should I be audited, I think it's fine.  

There are some precedents in aggregated reporting, even if you aren't a broker.  You are explicitly allowed to aggregate various purchases (see page 68, bottom of middle column: http://www.irs.gov/pub/irs-pdf/p550.pdf).  For Section 1256 (futures) contracts, all the broker even reports is an aggregate net gain/loss (in part due to the high transaction volumes in trading these instruments).  There are also specific exceptions listed in the Form 8949 instructions.  Granted, none apply directly to bitcoin "sales" per se.

It's generally difficult to roll up stock transactions because they're reported individually by your broker on a 1099 and the IRS likes to see things match up.  Assuming that retailers or payment processors aren't going to generate me a 1099 record for every bitcoin transaction, I believe it's immaterial whether I report separate transactions for my morning coffee, lunch, and dinner purchases versus a single transaction for "miscellaneous bitcoin transactions" containing the net total basis and proceeds (keeping long and short term transactions separately).  The IRS isn't going to know without my telling them anyway.  If called to task at an audit, I would hope that the common sense argument - "Did you really want 20 pages containing the 1000 or so $5 transactions I made?  The end result is the same tax." - would settle the matter.  Yeah.  I know the IRS doesn't always work on common sense.  I'll take my chances.

Note that IANAL.  These are just my opinions and how I've decided I'd report the tax consequences of my bitcoining.

[httpcore]

Not bad, not bad at all!

[smooth]

"Bitcoin miners -- those people who validate Bitcoin transactions on their home computers -- will now be subject to tax on gains.

That makes it sound like pool participants are not miners; they don't validate transactions. I think the tax treatment is likely to be the same though, you are a provider of computing services to the pool which pays you a fee (revenue when received).

[amspir]

Most miners aren't actually miners, they are hash rate providers who are paid by their employer, the mining pool operator.

Actual miners should be treated differently than hash rate providers, IMO.

You still are a contractor that receives income in the form of BTC.  The tax man says you owe normal income tax on this.

When you convert your BTC to fiat or other property in consideration, you are realizing a capital gain, and the tax man says you owe a capital gains tax on this.

[Vitamin]

OK, now I'm confused.  Is the $600 limit per transaction, or accumulitve throughout the tax year?

[J_Dubbs]

Point of confusion here...

My understanding is when mining we are supposed to account for BTC payout at value on the date paid, understood. So the risks of holding onto the BTC as it loses value are ours to bear should we decide not to immediately convert to USD. But if we hold and show a gain we also need to pay tax on the gain from payout to exchange if their is price appreciation. Can we also record and, if greater than -$3k in a year, carryover losses to future filings?? First thing I think is this makes holding onto mining income in the form of BTC much less attractive, from a tax and complexity perspective at least. I get it, but I just think it's dumb to be taxing the mining payouts on the value received.

Second issue is related a bit to above... Equipment costs. Nobody mining at current difficulty is producing anything significant enough to report unless they bought some gear. So we've got equipment costs, electricity, losses on equipment sales, etc. I started mining in early November, have been pretty smart about it, but I honestly think I'm showing a net loss when I run all the numbers. I bought a lot of equipment with mining revenues, so there's more expenses. I mean, am I really gonna report all this shit and have it show a loss? I'm not a tax guy, and I'm not starting an LLC, so how or why exactly would I report a bunch of activity from an unprofitable hobby? I mean, taxes are applied to profits, not revenues, and none of this gear can be depreciated because the useful life is under 1 year. I'm just not seeing it, can anyone clear me up?

Sounds to me like this guidance was designed with the big guy miners in mind, I.e., corporate mining operations.

[smooth]

I'm not a tax guy, and I'm not starting an LLC, so how or why exactly would I report a bunch of activity from an unprofitable hobby? I mean, taxes are applied to profits, not revenues, and none of this gear can be depreciated because the useful life is under 1 year. I'm just not seeing it, can anyone clear me up?

Schedule C (if run as a business) or Schedule A (if a hobby).  If you don't understand the difference or don't know what to do, which seems to be the case from your question, get good advice.