Bitcoin Is Property Not Currency

[flounderella]

All I'm thankful for is I didn't preorder those 1TH+ miners... with the difficulty this high and now daily mining being taxable as ordinary income (and not when btc are sold/exchanged) and with cost of hardware and power, there's no ROI left. IRS has essentially gifted mining to the Chinese.

The only way you'd owe taxes is if you were making income by mining (by definition!).  

From what I understood, that's only if you file "self-employment", then you can include expenses like hardware and power and then it will all net out plus some writedowns ... if not, then its just ordinary income (although obviously a monetary loss with costs and taxes included)

[t1000]

I think this is really good news!

Looking forward to take out a mortgage against my bitcoins.

[CurbsideProphet]

All I'm thankful for is I didn't preorder those 1TH+ miners... with the difficulty this high and now daily mining being taxable as ordinary income (and not when btc are sold/exchanged) and with cost of hardware and power, there's no ROI left. IRS has essentially gifted mining to the Chinese.

One word:

Corporations.

Watch for my offerings in that regard, coming soon to an internet forum near you.

My $.02.

So basically you mine as income and offset it with expenses such as hardware, utilities, depreciation, etc.? 

[phazon307]

I was just about to come here an post this. haha!

[vpitcher07]

This was inevitable. To be honest, this at least shows that the US government isn't going to ban bitcoin outright. I'd much rather see regulated exchanges on US soil than what we have today.

[LostDutchman]

All I'm thankful for is I didn't preorder those 1TH+ miners... with the difficulty this high and now daily mining being taxable as ordinary income (and not when btc are sold/exchanged) and with cost of hardware and power, there's no ROI left. IRS has essentially gifted mining to the Chinese.

One word:

Corporations.

Watch for my offerings in that regard, coming soon to an internet forum near you.

My $.02.

So basically you mine as income and offset it with expenses such as hardware, utilities, depreciation, etc.? 

By George, I think you've got it!

Al least part of it..............................

My $.02.

[phazon307]

Ok if they can tax it make it also available for anyone to play in online casinos it's not like we don't travel to places and give them our money that you could be earning anyways.

[up2urheadlights]

All I'm thankful for is I didn't preorder those 1TH+ miners... with the difficulty this high and now daily mining being taxable as ordinary income (and not when btc are sold/exchanged) and with cost of hardware and power, there's no ROI left. IRS has essentially gifted mining to the Chinese.

The only way you'd owe taxes is if you were making income by mining (by definition!).  

From what I understood, that's only if you file "self-employment", then you can include expenses like hardware and power and then it will all net out plus some writedowns ... if not, then its just ordinary income (although obviously a monetary loss with costs and taxes included)

The real reason this is bad is for miners is that it could greatly increase the risk.  The IRS just said you are taxed at the rate when you receive the coin.  What happens if the coin loses value from the point when it's mined to the point when you sell it?  

Lets say I mine 1 btc on a pool and the pool sends me the BTC.  I have a record of the transaction being sent to my wallet.  I can then look up the value on bitstamp at the time I received the BTC, lets say it's worth $580.  The IRS says I'm taxed on the $580 as "income" minus any expenses such as cost of miner and electricity.  Now I wait 6 months and the coin I mined is only worth $200 and I sell.  The question becomes, have I just realized a $380 capital loss to adjust income?  This is the big question I have from reading the IRS FAQ.  

It would be so much simpler if mining income was calculated when you actually sell the bitcoin.  It's the same way for individuals that mine gold, the only difference here is that bitcoin has a public ledger and gold does not.

[smooth]

If you made a ton of micro payments over say the course of a year when the bitcoin price was rising relative to usd, what are you supposed to do, go back and find the exact capital gains of each micropayment and total them? That's what they are implying and few people are going to do that.

I wonder if you could get a computer to do that. You think?

[DeathAndTaxes]

How does this work for stocks.  If I own 100 Shares of Stock XYZ for 364 days and then purchase 10 more shares and then wait one day then sell 10 shares.  Would that sell be at taxed at long term or short term gains ?

Even if it is a single sale (i.e you sold 110 shares) it would be recorded as two transactions.

100 shares as a long term capital gain.
10 shares as a short term capital gain.

Yes it gets very complicated, and yes there is expensive software (i.e. gainskeeper) to make sense of it all.  If it is a lot of money/value we are talking about, get an accountant.

[smooth]

All I'm thankful for is I didn't preorder those 1TH+ miners... with the difficulty this high and now daily mining being taxable as ordinary income (and not when btc are sold/exchanged) and with cost of hardware and power, there's no ROI left. IRS has essentially gifted mining to the Chinese.

The only way you'd owe taxes is if you were making income by mining (by definition!).  

From what I understood, that's only if you file "self-employment", then you can include expenses like hardware and power and then it will all net out plus some writedowns ... if not, then its just ordinary income (although obviously a monetary loss with costs and taxes included)

If you are spending thousands to tens of thousands of dollars on mining equipment and power bills, that is a business, sole proprietorship (what you mean by self employment) or otherwise. It is not a lemonade stand or a garage sale. Possibly you could screw that up by not operating properly, keeping good records, etc. You may judge that not to be paperwork trouble and decide not to mine for that reason, which is certainly reasonable. But otherwise there is no reason shouldn't be able to treat it as a business and deduct expenses.

[smooth]

Lets say I mine 1 btc on a pool and the pool sends me the BTC.  I have a record of the transaction being sent to my wallet.  I can then look up the value on bitstamp at the time I received the BTC, lets say it's worth $580.  The IRS says I'm taxed on the $580 as "income" minus any expenses such as cost of miner and electricity.  Now I wait 6 months and the coin I mined is only worth $200 and I sell.  The question becomes, have I just realized a $380 capital loss to adjust income?  This is the big question I have from reading the IRS FAQ.  

You can deduct 3000 per year of capital losses against regular income, the rest gets carried forward. You can also use the loss as an opportunity to realize tax free gains by selling other appreciated assets. There are some edge cases where this causes a problem (for example, you have a huge loss December 31 and a huge gain the following day) but for the most part it is fairly reasonable.

If you don't understand these things learn or talk to an advisor.

[DeathAndTaxes]

The real reason this is bad is for miners is that it could greatly increase the risk.  The IRS just said you are taxed at the rate when you receive the coin.  What happens if the coin loses value from the point when it's mined to the point when you sell it?  

Lets say I mine 1 btc on a pool and the pool sends me the BTC.  I have a record of the transaction being sent to my wallet.  I can then look up the value on bitstamp at the time I received the BTC, lets say it's worth $580.  The IRS says I'm taxed on the $580 as "income" minus any expenses such as cost of miner and electricity.  Now I wait 6 months and the coin I mined is only worth $200 and I sell.  The question becomes, have I just realized a $380 capital loss to adjust income?  This is the big question I have from reading the IRS FAQ.  

There are TWO taxable events.  The first is at the point you had taxable income, the second is at the time of the sale.

To expand on your example:

Say you mined 1 BTC today and the current exchange rate is $580.  That would be $580 in "regular income".  You can file this as a business and reduce that by the electricity and amortized hardware cost. Lets say your costs are $320.  You would file a Schedule C report the income, your expenses (like electricity) and the depreciation on your miner.  Lets pretend it works out to $320.  Then you would have a net income of $580 -$320 = $260 added to your other income (wages, tips, interest) and it would be taxed at your normal tax rate.

Now if you sold that coin today as well then you would have NO capital gain.  However lets say you held on to that 1 BTC for three months and when you sold it you got $900.   You would have a capital gain on the GAIN over the $580.  So $900 - $580 = $420.  On the other hand lets say the price had declined and you sold it for only $400.  You would have a capital loss of $180 ($400 - $580 = -$180).  The capital loss can offset capital gains and up to $3K can be applied against "regular income", the rest rolls forward to the next year.  If the time between mining and selling was greater than a year then those would be long term capital gains/losses otherwise they are short term capital gains/losses.

Note this isn't legal advice just trying to parse out what the IRS said.  It also doesn't mean I agree with any of it.  Just going by what was written and pointing out it is possible for there to be two taxable events.  It is very likely the IRS will need to provide some concrete examples with figures before this debate it put to rest.

[BitChick]

So Money Transmitter Licenses not needed because it is "Property" not a "Currency"?

IRS will provide guidance to regulators.

Any clarification on  long term capital gain tax applying to holdings over a year?  I belive that is taxed at a lower rate.

Bitcoins held for more than a year and then sold would pay the lower tax rates applicable to capital gains -- a maximum of 23.8 percent compared with the 43.4 percent top rate.

Thanks, I wonder how this could really be done.  There is no easy way for anyone to prove time of ownership.  I doubt its feasiable for the IRS to investigate this.I guess the IRS would just have to take someone's word on it .   Seems like an easily expoitable system.

We have been keeping records and printing out statements of when we purchased coins so that we can prove that the purchase of the coins so we can prove that we held them over a year.  I guess the paperwork could be forged but they could check with Coinbase for some of the purchases.  Of course Bitfloor, where we made our initial purchases, is no longer around. 

[Klestin]

The handling of mined coins seems inconsistent and problematic.  A painter is not taxed the value of her painting as she paints. She's taxed when she sells her creation.  A closer analogy is a team of software engineers creating a game. They're not taxed as they code; they're taxed on the income from the sale of the game.

The problematic part has been touched on above, but to add to that, if the miner is taxed at the time of mining, how is the sale handled when they sell the coins? What basis is used? I suppose the FMV at the time of mining, but of course there will be no receipt. Normally, basis is what you paid for the item, which in this case would be 0.  If it were 0, that would result in double taxation of the same income.

The IRS should revisit the rules RE: mined coins. The rest seems pretty much as expected.

[DeathAndTaxes]

Thanks, I wonder how this could really be done.  There is no easy way for anyone to prove time of ownership.  I doubt its feasiable for the IRS to investigate this.I guess the IRS would just have to take someone's word on it .   Seems like an easily expoitable system.

No different than lots of other assets.   Keep good records.  When you file a tax return you don't file any "proof" you just say here is my capital gains, here are the taxes.   The IRS doesn't audit every tax return so yes people do lie about capital gains.  They do so every year in every asset class you can imagine.  Now if you get audited and you don't have sufficient records well the IRS is going to recompute your taxes using the worst possible method and throw additional interest and penalties.

So it is important to separate out "the tax code" with "can I cheat on my taxes and get away with it".  They are two totally different questions.   The more you make, the more likely you are to be audited.  If we are talking a couple Bitcoins it is very likely the IRS wouldn't catch on even if you were audited (they don't have magical powers).  If we are talking about tens of thousands of Bitcoins you should be using the services of a CPA. Period.

[DeathAndTaxes]

The problematic part has been touched on above, but to add to that, if the miner is taxed at the time of mining, how is the sale handled when they sell the coins? What basis is used? I suppose the FMV at the time of mining, but of course there will be no receipt. Normally, basis is what you paid for the item, which in this case would be 0.  If it were 0, that would result in double taxation of the same income.

The basis would be the valuation used for the gross income that you declared.  I showed an example above.  It would never be zero.  I agree the IRS is being inconsistent here but there would be no double taxation.

[acoindr]

So it is important to separate out "the tax code" with "can I cheat on my taxes and get away with it".  

I think that's a bit charitable. The tax code is so convoluted it's probably possible to get even the most anal of honest tax reporters on something if they wanted to.

[smooth]

The handling of mined coins seems inconsistent and problematic.  A painter is not taxed the value of her painting as she paints. She's taxed when she sells her creation.  A closer analogy is a team of software engineers creating a game. They're not taxed as they code; they're taxed on the income from the sale of the game.

The software engineers are taxed as they code. It's called salary. Even if they are paid in stock they might be taxed on the value of the stock (complex rules apply).

As an individual, though, yes this is somewhat different. If you create something as an individual you are not taxed on it right away. The IRS rules are somewhat goofy in that sense.

However, if you are mining on a pool you are not really creating bitcoins, you are providing a service to the pool and being paid a fee (usually in bitcoins) based on some formula related to the quantity of service you provided. This is a lot being an employee or independent contractor. The IRS rules are less goofy in this case, though I doubt this was really their intent. Sort of a goofiness-reducing accident.

[leopard2]

So when will the first whales renounce citizenship?  

It is en vogue

http://www.forbes.com/sites/robertwood/2014/02/06/americans-renouncing-citizenship-up-221-all-aboard-the-fatca-express/

Americans abroad can be pariahs shunned by banks for daily banking activities.  (even without BTC involvement!)

Perhaps Iceland is an option?