Bitcoin Is Property Not Currency

[FeedbackLoop]

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/

Perhaps Iceland is an option?

Denmark has 0% tax on Bitcoin from today apparently:

 https://bitcointalk.org/index.php?topic=530205.0

mighty nice place to live also.

[cryptic20]

This is confusing as hell. Really sucks for American bitcoin users.

[LostDutchman]

This is confusing as hell. Really sucks for American bitcoin users.

So many wanted Bitcoin to go "mainstream" and now it has.

Be careful what you wish for.

My $.02.

[googlemaster1]

This might be helpful to some:

Determining Whether Sales Are Hobby or Business

Income made from online sales can be reported to the IRS as "hobby income" if the sales activity qualifies as a hobby according to the IRS, i.e. sale without the intention of making money. For example, a recreational photographer selling a photo on eBay should report the sale as hobby income. One test is whether the seller has made no profit from the hobby in two of five consecutive years. If the income does qualify as a hobby income, sellers can deduct hobby expenses from the income but cannot use hobby losses to offset other non-hobby income. - See more at: http://tax.findlaw.com/federal-taxes/do-you-need-to-report-your-online-sales-to-the-irs.html#sthash.nNPeBs1B.dpuf

[LostDutchman]

This might be helpful to some:

Determining Whether Sales Are Hobby or Business

Income made from online sales can be reported to the IRS as "hobby income" if the sales activity qualifies as a hobby according to the IRS, i.e. sale without the intention of making money. For example, a recreational photographer selling a photo on eBay should report the sale as hobby income. One test is whether the seller has made no profit from the hobby in two of five consecutive years. If the income does qualify as a hobby income, sellers can deduct hobby expenses from the income but cannot use hobby losses to offset other non-hobby income. - See more at: http://tax.findlaw.com/federal-taxes/do-you-need-to-report-your-online-sales-to-the-irs.html#sthash.nNPeBs1B.dpuf

Nice try but that one is going to go about as far as your post.

My $.02.

[Klestin]

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).

Employee software engineers sure, but that wasn't my intent with the example. I was thinking more along the lines of independent software engineers working on a new project.  In the case of employee programmers, the company creating the software is again not taxed on the value of the software as it's created. They're taxed on the profit when they sell it.

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.

Agreed that this does complicate the issue.  However, it is also akin to a group of people working together to create something, as in the software engineers above.

Bottom line is their "solution" seems inconsistent with the definition of property, and entirely unnecessary.  Miners mining for USD profit will sell their coins, and the tax value will be captured at that time.

The issue gets a bit worse with the current weird combination ruling.  Generally, capital losses cannot offset ordinary income (except a small allowance per year).  So, if you're taxed at the high value when you mine, and later sell the coins at a loss from that value, it may take a long time to recoup the overtaxation.  This is exacerbated with the odd montage ruling on mined coins.

[TheButterZone]

Tyrants gonna tyrant.

[smooth]

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.

Agreed that this does complicate the issue.  However, it is also akin to a group of people working together to create something, as in the software engineers above.

Only if you actually have some participation in operating the pool, as opposed to merely using it. It seems possible there might be public a pool organized as a coop where the miners could vote on decisions about running the pool, etc. but I'm not aware of one. But in general that's not how pools work, aside from private pools organized by a small group of miners, and those could fit your description. The pool is a separate business and you are contracting with it.

[MarketNeutral]

They're still stuck on defining their terms, but at least it gives the CPAs and attorneys something to play with.

[Klestin]

Only if you actually have some participation in operating the pool, as opposed to merely using it. It seems possible there might be public a pool organized as a coop where the miners could vote on decisions about running the pool, etc. but I'm not aware of one. But in general that's not how pools work, aside from private pools organized by a small group of miners, and those could fit your description. The pool is a separate business and you are contracting with it.

I don't see that it's quite as clear cut as you indicate.  For instance, the pool I use has a 0% fee, and so is pretty much an agreement between users to split the value of mined coins equally according to work done.  I can't really think of an exact analog in the pre-bitcoin world.

[seriouscoin]

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.

What happens to a mining business that have shared holders outside of US?

The IRS just make it way too complicated for miners. Why do they have do to tax for miners if they already have tax event at buy&sell ?

[amspir]

This is not good

All it means is that a compliant taxpayer pays at a lower capital gains tax rate when a profit due to the price going up is realized.   If it had been decided the other way, then a compliant taxpayer would have to pay on the gains at the normal income tax rate, which for most people is higher.

If you are a tax evader, it doesn't make a difference, other than your lawyer might be able to present a lower tax liability when you are brought to IRS court.

[smoothie]

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.

I suspect you would just offset your capital gains with capital losses for the year.

[bbeagle]

I don't see that it's quite as clear cut as you indicate.  For instance, the pool I use has a 0% fee, and so is pretty much an agreement between users to split the value of mined coins equally according to work done.  I can't really think of an exact analog in the pre-bitcoin world.

It's all very simple. The value of any property you receive is taxed. It could be labeled as a 'gift' from someone else, or gotten through some other means. Doesn't matter. For example, if you receive 2 btc somehow (and a value that day of $600 per btc), you have received $1200. This $1200 is your earnings for the year. You can then deduct what you have spent (in power, etc.) to get that money. Whatever you end up with, say $700 is taxable.

If you ignore to do this, fine. No problem - unless you're audited, then they'll  research your activities and you'll be liable for that amount (or more if they calculate more) plus penalties.

It's always safer to figure it out conservatively, and then if you get an audit, you don't have to worry about anything. In general, in an audit, if the US government feels you knew the law and tried to apply it properly (even if you were off by 10%), they're okay with it. If they feel you tried to cheat them, only then will they try to nail your ass to the wall.

[marcus_of_augustus]

So exactly which part of the system is "property"? Did the gurus at the IRS define that precisely?

Is it the private keys, or the blockchain entry, both, either, niether or something else entirely?

And if it is the private keys, what if they have been destroyed because all I have now is a brain wallet?

I just do not see how they could successfully legally define any part of the system as "property", in the usual context of "property law". Awaiting the court cases with popcorn ready.

[Beliathon]

I have about 15 BTC in my Coinbase.com account, which is linked to my bank account. On this amount, I will pay taxes - it would be foolish to try to hide that money from the IRS.

On the other hand, the day the IRS can tell me how much wealth I have in my (vastly larger quantity) brain wallet is the day I pay taxes on my true wealth.

Spoiler: This day will never come.

This comes down to the (un)enforceability of the tax laws on a pseudonymous currency.

Cryptocurrency and torrent technology have a great deal in common... think about it.

No more money for unjustified, pre-emptive wars of aggressive for corporate profit margins. Cut the bastards off.

[LostDutchman]

So exactly which part of the system is "property"? Did the gurus at the IRS define that precisely?

Is it the private keys, or the blockchain entry, both, either, niether or something else entirely?

And if it is the private keys, what if they have been destroyed because all I have now is a brain wallet?

I just do not see how they could successfully legally define any part of the system as "property", in the usual context of "property law". Awaiting the court cases with popcorn ready.

Well, they just freakin' did it, so you are going to take them to court over the matter, right?

That's what I thought.

Thank you for your input.

My $.02.

[Beliathon]

Well, they just freakin' did it, so you are going to take them to court over the matter, right?

Smart players will simply ignore the laws, as the technology already transcends the government's ability to enforce them, for anyone who knows what they're doing.

Just like we did with copyright laws. You have law-breakers to thank for your $10 / month Netflix account instead of $5 per DVD movie rentals.

Calling it now, within 5 years the IRS will have launched a propaganda campaign extolling the virtues of paying taxes and begging everyone to "chip in and do their part".

This is going to be hilarious to watch.

*popcorn*

“Disobedience, in the eyes of any one who has read history, is [hu]man's original virtue. It is through disobedience that progress has been made, through disobedience and through rebellion.”
-Oscar Wilde

[Klestin]

It's all very simple. The value of any property you receive is taxed. It could be labeled as a 'gift' from someone else, or gotten through some other means.

A solo miner isn't given those bitcoins - he creates them, analogous to a painter creating a painting.  Again, the painter isn't taxed on her creation until (if) she sells it.

Setting aside the consistency or fairness of this ruling, let's consider practicality. Does a miner mining for a pool "receive" those bitcoins when they're credited to his account at the pool, or when he transfers them to another wallet?  If the latter, he can avoid taxes year after year until he withdraws them?  If the former, note that many pools continuously credit accounts based on each block of work received.  This means the potential for many thousands of transactions per day, each of which conceivably needs an individual fair market value.  Not to mention the complete lack of historical data for either of these figures.

[amspir]

I just do not see how they could successfully legally define any part of the system as "property", in the usual context of "property law". Awaiting the court cases with popcorn ready.

The ruling is very narrow in scope and only applies to tax law.   Bitcoin earned is taxed at the current value when you receive them as normal income.  The profit from Bitcoin that you hold onto will be taxed at lower capital gains rates when you trade them or sell them later.