New IRS rules for BTC as related to US Tax payers

[DeathAndTaxes]

But this is a deathblow. How will businesses keep track of what a coin was worth when they exchanged a good or service for said bitcoin? This Bloomberg article puts it perfectly

Any company doing international sales is already doing the same thing when it comes to getting paid in Euros.  For most merchants which don't hold BTC there is never any gain.   For merchants that do, and can't do it themselves I am sure processors like bitpay will provide services to track all that and give them a report at the end of the year.

[1713904567]

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[1713904567]

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[DeathAndTaxes]

Also, as a consumer, if you have 2 bitcoins in your wallet one day (let's say for simplicity sake you bought the. For $1 each) and then you go buy a cup of coffee for $2,  but at the time of your purchase, your bitcoins doubled in value and are now worth $4 so you only need to spend one of them. Now in the eyes the government you just PROFITED $1.

So? You did profit $1. You started with a bitcoin worth $1, and exchanged it for a cup of coffee worth $2. Unless your accountant is skilled at bistromathics, $2 - $1 = $1 profit.

For now at least, it is completely not feasible for any consumer to keep track of this. And you can say yes it's impossible to keep track of AND enforce....but the tax manwillnot give a fuck if they audit you. "You didn't keep diligent records on your bitcoin purchases and expenditures....fuck you, pay me."

Actually, it's impossible not to keep track of this. Your wallet software keeps track of all your transactions, so all you have to do is export it to a spreadsheet, email it to your accountant and let them figure it out. Simple (unless you're the accountant, but that's you get paid for).

Point taken, but this does not make using bitcoin easier or more attractive to either the consumer or the merchant. I thought bitcoin was supposed to eliminate the middleman? Seems to me it's becoming more complicated and therefore more middlemen/opportunities for middlemen will pop up. To be clear, I am NOT against the IRS taxing of bitcoin, but I think it should be treated as a foreign currency, not property.

Maybe you can clear this up for me. Let's go back to the coffee analogy. Let's say one day I buy a bitcoin for $1. The next day I but a bitcoin for $2 because the worth has doubled. I now have 2 bitcoins worth $4, one has doubled in value but the other still has the same worth as what I bought it for. If I buy a coffee for $2 with one bitcoin, how do we know which bitcoin I used to buy the coffee? They are all in the same wallet. So essentially I have two bitcoins...one of them I would owe capital gains tax of $1 if I used it to buy the $2 coffee. The other bitcoin I would owe no capital gains tax on if I used that bitcoin. How is that determined? And I'm not being a dick...I really just don't understand how that would work.

The IRS allows a number of methods to determine basis.  The default option is FIFO.

So if you bought the following Bitcoins

10 BTC @ $10 ea
20 BTC @ $30 ea
50 BTC @ $60 ea
10 BTC @ $20 ea

and then you decide to sell some Bitcoins (either for fiat or in exchange for goods and services) and the exchange rate today is $50 per BTC then you simply start at the oldest coins.

If you sold 10 BTC it would be ($50-10)*10 = $400 capital gain.  
If you sold 20 BTC it would be ($50-10)*10 + ($50-20)*10 = $700 capital gain.
If you sold 70 BTC it would be ($50-10)*10 + ($50-20)*20 + ($50-$60)*50 =$500 NET capital gain.  Note the third batch is sold at a loss.

Understand capital losses would work exactly the same.  Someone who bought BTC at the peak and then today decided to spend/sell them would get a tax break on the difference in value.

There are more complex forms of computing basis by tracking each individual coin but it doesn't NEED to be done.  It is done by people who want to control their taxes (note it doesn't reduce your taxes but it allows you to control when you pay it).  Hedgefunds and major companies will almost certainly be using coin control to pick the exact coins they sell/spend in order to exactly control their tax liability.

[Operatr]

So does this mean we'll be taxed on alternative currencies too, or only if we sell them for bitcoin?

My guess is that a bitcoin tax will only promote an increase in altcoin usage (assuming it is only btc that will be taxed). Time to buy more litecoin!

It's not a bitcoin tax. It applies to ALL cryptocurrencies.

Except not all of them have USD trade pairs. What are we supposed to reference in this case as "fair market value"? The altcoins worth of Bitcoin to USD value?

[MinorError]

Also, as a consumer, if you have 2 bitcoins in your wallet one day (let's say for simplicity sake you bought the. For $1 each) and then you go buy a cup of coffee for $2,  but at the time of your purchase, your bitcoins doubled in value and are now worth $4 so you only need to spend one of them. Now in the eyes the government you just PROFITED $1.

So? You did profit $1. You started with a bitcoin worth $1, and exchanged it for a cup of coffee worth $2. Unless your accountant is skilled at bistromathics, $2 - $1 = $1 profit.

For now at least, it is completely not feasible for any consumer to keep track of this. And you can say yes it's impossible to keep track of AND enforce....but the tax manwillnot give a fuck if they audit you. "You didn't keep diligent records on your bitcoin purchases and expenditures....fuck you, pay me."

Actually, it's impossible not to keep track of this. Your wallet software keeps track of all your transactions, so all you have to do is export it to a spreadsheet, email it to your accountant and let them figure it out. Simple (unless you're the accountant, but that's you get paid for).

Point taken, but this does not make using bitcoin easier or more attractive to either the consumer or the merchant. I thought bitcoin was supposed to eliminate the middleman? Seems to me it's becoming more complicated and therefore more middlemen/opportunities for middlemen will pop up. To be clear, I am NOT against the IRS taxing of bitcoin, but I think it should be treated as a foreign currency, not property.

Maybe you can clear this up for me. Let's go back to the coffee analogy. Let's say one day I buy a bitcoin for $1. The next day I but a bitcoin for $2 because the worth has doubled. I now have 2 bitcoins worth $4, one has doubled in value but the other still has the same worth as what I bought it for. If I buy a coffee for $2 with one bitcoin, how do we know which bitcoin I used to buy the coffee? They are all in the same wallet. So essentially I have two bitcoins...one of them I would owe capital gains tax of $1 if I used it to buy the $2 coffee. The other bitcoin I would owe no capital gains tax on if I used that bitcoin. How is that determined? And I'm not being a dick...I really just don't understand how that would work.

The IRS allows a number of methods to determine basis.  The default option is FIFO.

So if you bought the following Bitcoins

10 BTC @ $10 ea
20 BTC @ $30 ea
50 BTC @ $60 ea
10 BTC @ $20 ea

and then you decide to sell some Bitcoins (either for fiat or in exchange for goods and services) and the exchange rate today is $50 per BTC then you simply start at the oldest coins.

If you sold 10 BTC it would be ($50-10)*10 = $400 capital gain.  
If you sold 20 BTC it would be ($50-10)*10 + ($50-20)*10 = $700 capital gain.
If you sold 70 BTC it would be ($50-10)*10 + ($50-20)*20 + ($50-$60)*50 =$500 NET capital gain.  Note the third batch is sold at a loss.

Understand capital losses would work exactly the same.  Someone who bought BTC at the peak and then today decided to spend/sell them would get a tax break on the difference in value.

There are more complex forms of computing basis by tracking each individual coin but it doesn't NEED to be done.  It is done by people who want to control their taxes (note it doesn't reduce your taxes but it allows you to control when you pay it).  Hedgefunds and major companies will almost certainly be using coin control to pick the exact coins they sell/spend in order to exactly control their tax liability.

Thanks for clearing that up. Your explanation is thorough and really helped me grasp how to calculate expenditures in BTC. However, for the average person, this is just too much. You don't have to do any of this nonsense with dollars. So, I get how bitcoin could possibly survive as some sort of alternative to gold and then therefore exist in a commodities world, buying and selling futures, things like that....but becoming a viable currency....I don't see it.

[h@shKraker]

The long and short of this is that it's time to get yourself a copy of quick books and truly run/account for your mining operation like a real business.  This way you can fully exploit the tax code.

H@shKraker

[dogechode]

The biggest problem I see is that there is no centralized body tracking the prices of bitcoin and other coins. So who's to say whether a bitcoin or goatcoin or dumbasscoin was worth 215 satoshis or 250 satoshis or 200 satoshis at the time it was exchanged/spent/mined? And even the exchanges mostly track the prices in terms of btc value, not USD - so are people going to calculate how much xyz-coin was worth in terms of BTC at the time they mined it, then calculate how much BTC was worth in terms of USD at that same time?

One person could say well I mined 5000 abc-coins and exchanged them at a rate of 200 satoshis each on mintpal, and then check the price of BTC/USD on BTC-e.

A second person could mine the same 5000 abc-coins but exchange them on cryptsy and get 215 satoshis each, then check the price of BTC/USD on Coinbase and arrive at a completely different result.

And who is keeping track of the history of all these values? What proof do you have if the IRS audits you down the road, and joe-blow-exchange which you had used to swap many of your coins, is closed/out of business and cannot produce records?

This could get very tricky. I think it would make a lot more sense if they just said look, when you convert any coin to USD then you owe taxes on the gain based on how much fiat you got right then and there. As far as coins spent at merchants, I can't even think of a feasible way to deal with that... it's one thing if you make a large purchase, but what if you made many small purchases? Mountains of paperwork...

[boumalo]

The biggest problem I see is that there is no centralized body tracking the prices of bitcoin and other coins. So who's to say whether a bitcoin or goatcoin or dumbasscoin was worth 215 satoshis or 250 satoshis or 200 satoshis at the time it was exchanged/spent/mined? And even the exchanges mostly track the prices in terms of btc value, not USD - so are people going to calculate how much xyz-coin was worth in terms of BTC at the time they mined it, then calculate how much BTC was worth in terms of USD at that same time?

One person could say well I mined 5000 abc-coins and exchanged them at a rate of 200 satoshis each on mintpal, and then check the price of BTC/USD on BTC-e.

A second person could mine the same 5000 abc-coins but exchange them on cryptsy and get 215 satoshis each, then check the price of BTC/USD on Coinbase and arrive at a completely different result.

And who is keeping track of the history of all these values? What proof do you have if the IRS audits you down the road, and joe-blow-exchange which you had used to swap many of your coins, is closed/out of business and cannot produce records?

This could get very tricky. I think it would make a lot more sense if they just said look, when you convert any coin to USD then you owe taxes on the gain based on how much fiat you got right then and there. As far as coins spent at merchants, I can't even think of a feasible way to deal with that... it's one thing if you make a large purchase, but what if you made many small purchases? Mountains of paperwork...

You have to keep track of everything

If you mine them the price you got the BTC is 0$ + costs; if you sell them on an exchange, the selling price is what you get and if you buy something with the BTC it is the market price of that item

When you sell you use the btc you got the cheapest or the price of the oldest coins first or if you want to gamble with the irs you use a price average

More infos here from a us tax lawyer : http://www.reddit.com/r/Bitcoin/comments/1uccfz/i_am_a_tax_attorney_here_are_my_answers_to_the/

[MinorError]

As far as coins spent at merchants, I can't even think of a feasible way to deal with that... it's one thing if you make a large purchase, but what if you made many small purchases? Mountains of paperwork...

This is the crux of it. Current rules will never allow widespread adoption. Way too much hassle for the consumer, unless you are only using BTC to make large purchases every now and then. Which is absolutely not the goal...or at least not in my mind.

[dogechode]

You have to keep track of everything

If you mine them the price you got the BTC is 0$ + costs; if you sell them on an exchange, the selling price is what you get and if you buy something with the BTC it is the market price of that item

When you sell you use the btc you got the cheapest or the price of the oldest coins first or if you want to gamble with the irs you use a price average

More infos here from a us tax lawyer : http://www.reddit.com/r/Bitcoin/comments/1uccfz/i_am_a_tax_attorney_here_are_my_answers_to_the/

Yeah but if you mine other coins than BTC it adds a whole extra layer of complexity, since altcoin prices are usually denominated in terms of how much BTC they are worth, NOT how much USD, adding a whole step to the process as I described.

[MinorError]

So if the IRS ruling was good for bitcoin, what's up with losing almost 20% of its value today?

https://bitcoinaverage.com

[dogechode]

So if the IRS ruling was good for bitcoin, what's up with losing almost 20% of its value today?

https://bitcoinaverage.com

It isn't really good or bad. People that thought they could somehow get away with not paying taxes in the US are naive as hell.

If anything I think overall it is good because they clarified that you can indeed pay a lower tax rate for long term gains.

I doubt this news is the reason for bitcoin's price being down, it has taken a hell of a beating lately and been extremely volatile. I wouldn't assume that this news is even affecting the price.

[MinorError]

So if the IRS ruling was good for bitcoin, what's up with losing almost 20% of its value today?

https://bitcoinaverage.com

It isn't really good or bad. People that thought they could somehow get away with not paying taxes in the US are naive as hell.

If anything I think overall it is good because they clarified that you can indeed pay a lower tax rate for long term gains.

I doubt this news is the reason for bitcoin's price being down, it has taken a hell of a beating lately and been extremely volatile. I wouldn't assume that this news is even affecting the price.

Obviously bitcoins would have to be taxed, and to be frank I loathe the people on this forum who are always saying "screw the NWO  government, Alex jones is my hero and they'll never catch me!" But the tax code renders bitcoin as a currency useless. It's still fine for making big purchases now and then, but if you wanted to walk around a city and use it like cash, buying lunch here a few drinks there, dinner here...it turns into an accounting nightmare.

[twiifm]

Its not even legal tender so the merchant would have to convert back to fiat anyways. If they need fiat to operate their business

The easiest way to do this is through a service similar to credit or debit cards.   Isn't there some service for this already?

Its a pain to use bitcoins currency.   No different if you work for dollars then instead of a checking account you buy gold.  When you need dollars you sell that gold back to dollars to make purchases

[MinorError]

Its not even legal tender so the merchant would have to convert back to fiat anyways. If they need fiat to operate their business

The easiest way to do this is through a service similar to credit or debit cards.   Isn't there some service for this already?

Its a pain to use bitcoins currency.   No different if you work for dollars then instead of a checking account you buy gold.  When you need dollars you sell that gold back to dollars to make purchases

Right but the goal of bitcoin is to be a global currency, not a commodity. It will never see widespread adoption if the consumer has to worry about tracking the price a BTC was bought for vs the price it is selling for when he goes to use said BTC in a transaction with a merchant. Imagine if every time you spent a dollar, you might be liable for capital gains tax because that dollar increased in value since you acquired it. It's not feasible.

[twiifm]

Its not even legal tender so the merchant would have to convert back to fiat anyways. If they need fiat to operate their business

The easiest way to do this is through a service similar to credit or debit cards.   Isn't there some service for this already?

Its a pain to use bitcoins currency.   No different if you work for dollars then instead of a checking account you buy gold.  When you need dollars you sell that gold back to dollars to make purchases

Right but the goal of bitcoin is to be a global currency, not a commodity. It will never see widespread adoption if the consumer has to worry about tracking the price a BTC was bought for vs the price it is selling for when he goes to use said BTC in a transaction with a merchant. Imagine if every time you spent a dollar, you might be liable for capital gains tax because that dollar increased in value since you acquired it. It's not feasible.

I agree w you.   If they designed it as a curency then people would use it as such.  But they designed it like a commodity and so no wonder it attracts speculators.   IRS has to treat is as commodity due to current laws.  Even as currency it can only exchange amongst an internal group like funny money in strip clubs or poker chips in casinos.  Even those money are backed by the issuer.  Who is backing bitcoin?    I think it near impossible to invent a currency to compete or supplant w fiat like USD.   Especially one with a political agenda which most people disagree with.  The designers didn't really consider the economic reason for Central Banks or elasticity of money.  

[boumalo]

Its not even legal tender so the merchant would have to convert back to fiat anyways. If they need fiat to operate their business

The easiest way to do this is through a service similar to credit or debit cards.   Isn't there some service for this already?

Its a pain to use bitcoins currency.   No different if you work for dollars then instead of a checking account you buy gold.  When you need dollars you sell that gold back to dollars to make purchases

Right but the goal of bitcoin is to be a global currency, not a commodity. It will never see widespread adoption if the consumer has to worry about tracking the price a BTC was bought for vs the price it is selling for when he goes to use said BTC in a transaction with a merchant. Imagine if every time you spent a dollar, you might be liable for capital gains tax because that dollar increased in value since you acquired it. It's not feasible.

I agree w you.   If they designed it as a curency then people would use it as such.  But they designed it like a commodity and so no wonder it attracts speculators.   IRS has to treat is as commodity due to current laws.  Even as currency it can only exchange amongst an internal group like funny money in strip clubs or poker chips in casinos.  Even those money are backed by the issuer.  Who is backing bitcoin?    I think it near impossible to invent a currency to compete or supplant w fiat like USD.   Especially one with a political agenda which most people disagree with.  The designers didn't really consider the economic reason for Central Banks or elasticity of money.  

I think Bitcoin can success even if it is not a global currency, it can success as a global commodity that you can keep without third party risk, you can exchange it easily and you buy quite a number of things with it

When you buy something with it you do have to consider capital gains in the states but not everybody lives in the states and I think it is not such a set back in a long term perspective

[mycoin25]

This is really good news and or complete death of alt coins.    Nothing in between.   Hoping it is good news.  I have an accounting degree and I did my 2012 taxes based on just about exactly the rules they picked today.   Pretty much the only correct method to do them.  The business articles that mention this as a blow to miners are written for people that have no training in finance/accounting/tax law.  All necessary evils in a civilized world.

[h@shKraker]

Ladies-N-Gents .....

Remember when I said the removal of the uncertainty was a velocity creator for BTC (i.e a V-E-R-Y G-O-O-D thing) in the U.S.A ...... well .... looks like it is -> http://thenextweb.com/insider/2014/03/31/square-now-lets-sellers-accept-bitcoin-storefronts/ .  You see (at least as I see it), values based on speculation and representative Fiat value store alone is, by my estimation, an incomplete picture.  *WE* (and others) need more merchant channels utilizing BTC as a representation of value (i.e. real currency) so velocity supports the fiat-TO-fiat price and NOT inter-currency spread speculation.  Now my thoughts have come full circle.  I see this whole banana (peel and all) as a GOOD thing.  What say you???

H@shKraker

[LAMarcellus]

This seems impossible to enforce for the consumer.  If I buy $700 worth of stuff on Overstock in BTC that I paid $500 for how is the IRS going to track this or even know?  Am I just on the honor system to report it?  Good luck with that...

Yes.
Income taxes are "voluntary", Harry Reid said so.

I believe this is a monumental opportunity for bitcoin.
Watch the IRS flail about as it attempts to tax everything that moves including 1's and 0's.
And fail stupendously.

Since the tax is due in USD and not bitcoin, I expect this will quickly hasten the demise of the dollar and send BTC exponentially upward.
This will also result in the US government hyper inflating away its debts, and the IRS turning into a septic cleaning service to clear out all their inked TP.


Grab the popcorn. This should be a good show. David vs. Goliath like.

[precrime3]

This seems impossible to enforce for the consumer.  If I buy $700 worth of stuff on Overstock in BTC that I paid $500 for how is the IRS going to track this or even know?  Am I just on the honor system to report it?  Good luck with that...

Yes.
Income taxes are "voluntary", Harry Reid said so.

They're voluntary, but your basically risking an audit everytime. Even if it's a small risk, I wouldn't risk it personally.