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Author Topic: US tax obligations with bitcoin increase in value  (Read 7701 times)
NghtRppr
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May 07, 2011, 05:35:34 AM
 #21

I think Im going to have my corp accountant write a brief on tax obligations with trading and having btc increase in value.  I may publish the report here on the forum under a cc license.

... or maybe there is an accountant on this site who can speak authoritatively on the subject.

My understanding is that I would need to report the gains at the end of the year.

Thoughts?

Another thing I'm considering is hiring a local attorney who is knowledgeable with FTC laws to write up a brief on the legality of doing btc trading against USD.  I figure being on the correct side of the law when you liquidate could go a long why in protecting your earnings.

I think that Bitcoin is closer related to World of Warcraft gold or Linden Dollars. What are the laws like for people doing business in those digital goods?
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abyssobenthonic
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May 07, 2011, 12:56:22 PM
 #22

I've talked to some accountants and this is what I understand on the matter and what I do personally.

If you just cash out bitcoins to yourself thats capital gains. you pay 10 to 35% depending on your tax bracket unless you hold onto the bitcoins for more then a year, then its long term capital gains which is 5-15%.

If you start a business and pay yourself a salary from bitcoin earnings that normal income tax. Thats the same 10 to 35% as short term capital gains.

What I did is incorporate and I pay myself in dividends. Dividends tax is 0-15%

The issue with incorporation is that either the incorporated entity itself is subject to corporate income tax (double taxation) or the profits, whether distributed as dividends or not, pass-through to you as regular income.

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mjsbuddha
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May 08, 2011, 04:36:46 AM
 #23

I've talked to some accountants and this is what I understand on the matter and what I do personally.

If you just cash out bitcoins to yourself thats capital gains. you pay 10 to 35% depending on your tax bracket unless you hold onto the bitcoins for more then a year, then its long term capital gains which is 5-15%.

If you start a business and pay yourself a salary from bitcoin earnings that normal income tax. Thats the same 10 to 35% as short term capital gains.

What I did is incorporate and I pay myself in dividends. Dividends tax is 0-15%

The issue with incorporation is that either the incorporated entity itself is subject to corporate income tax (double taxation) or the profits, whether distributed as dividends or not, pass-through to you as regular income.

the corporation is taxed on their total profit at the end of the year. on Dec. 31 buy bitcoins then sell them again on Jan. 1 and you pay no taxes because at the end of the year you had no profits.
WhatIf
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May 08, 2011, 04:44:59 AM
 #24

Holy crap, that is genious!  Bitcoin will now have its own version of the Santa Claus rally Tongue
mjsbuddha
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May 08, 2011, 04:50:26 AM
 #25

Holy crap, that is genious!  Bitcoin will now have its own version of the Santa Claus rally Tongue

Business 101 Tongue most big corp CEO's take $1 salary and pay themselves in dividends and the corporations go on spending sprees at the end of the year. how do you think a huge company like GE gets away with paying 0 taxes?
mcdett
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May 08, 2011, 05:00:22 AM
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Holy crap, that is genious!  Bitcoin will now have its own version of the Santa Claus rally Tongue

Business 101 Tongue most big corp CEO's take $1 salary and pay themselves in dividends and the corporations go on spending sprees at the end of the year. how do you think a huge company like GE gets away with paying 0 taxes?

GE paid no taxes because they were epitome of crony capitalism.  One of the many things we would like to be done with.
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May 08, 2011, 05:28:17 AM
 #27

Holy crap, that is genious!  Bitcoin will now have its own version of the Santa Claus rally Tongue

Business 101 Tongue most big corp CEO's take $1 salary and pay themselves in dividends and the corporations go on spending sprees at the end of the year. how do you think a huge company like GE gets away with paying 0 taxes?

GE paid no taxes because they were epitome of crony capitalism.  One of the many things we would like to be done with.

care to explain? define your variables. what do you mean by "crony capitalism" and who are "we"?
jasonk
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May 08, 2011, 06:00:00 AM
 #28

This is the way I see it:

1) If you are buying holding then selling BTC for USD, then you should be liable for capital gains or short term capital gains tax.

2) If you mine and sell the bitcoins for USD, I see this as being no different than business income or hobby income, similar to if you mowed someones lawn for money.

If you classify it as business income, you should be able to deduct the full value of the computer(s) as well as electricity consumed.  You should also be able to get additional money for asset depreciation.

Like my post?  Consider giving me a tip! =)

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NghtRppr
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May 08, 2011, 06:07:02 AM
 #29

This is the way I see it:

1) If you are buying holding then selling BTC for USD, then you should be liable for capital gains or short term capital gains tax.

2) If you mine and sell the bitcoins for USD, I see this as being no different than business income or hobby income, similar to if you mowed someones lawn for money.

If you classify it as business income, you should be able to deduct the full value of the computer(s) as well as electricity consumed.  You should also be able to get additional money for asset depreciation.

I think people should be able to keep 100% of what they earn but maybe you're speaking from a legal standpoint rather than a moral standpoint.
jasonk
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May 08, 2011, 08:30:56 AM
 #30

This is the way I see it:

1) If you are buying holding then selling BTC for USD, then you should be liable for capital gains or short term capital gains tax.

2) If you mine and sell the bitcoins for USD, I see this as being no different than business income or hobby income, similar to if you mowed someones lawn for money.

If you classify it as business income, you should be able to deduct the full value of the computer(s) as well as electricity consumed.  You should also be able to get additional money for asset depreciation.

I think people should be able to keep 100% of what they earn but maybe you're speaking from a legal standpoint rather than a moral standpoint.

Yes.  Technically any amount of money earned more than about $500 the IRS "requires" you to report it.

Like my post?  Consider giving me a tip! =)

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marcus_of_augustus
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May 08, 2011, 11:04:20 AM
 #31

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Yes.  Technically any amount of money earned more than about $500 the IRS "requires" you to report it.

Define "money".

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May 08, 2011, 11:07:29 AM
 #32

What's the difference between income and taxable income?
gareth69
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May 08, 2011, 07:51:41 PM
 #33

@OP you are not thinking about this in the right way.

Just because its called a bit"coin" does mean it's money.

You can't use it to pay taxes.
It is not recognized as a currency by the BIS
Almost nobody accepts it in payment. Try "paying" your accountant or tax adviser in bit"coins".

By the way, I'm also eating some chocolate "money" as I type this.

BTC are simply a virtual good. Like a lot of people you seem terrified of the law and or government...this should tell you something about the system you live in.

If you held a World of Warcraft character that "appreciated" from $200 to $600 dollar, would you have to declare this? Don't tell me its "illegal" to sell your Warcraft account....it IS however against Blizzards "Terms of Service". Other online games *allow* trading of virtual goods. People in EVE online sell Pilot Extension licenses all the time, and this is endorsed by the Company (CCP). The value of Pilot Extension License changes all the time....you DONT have to declare a "capital gain" in your pretend on-line spaceship to the government.

Bartering is not illegal (yet....lol), you can therefore swap your virtual good "bitcoin", for a real good or another virtual good.....no USD necessary. The only problem is when you decide to "Cash Out"...by doing this you are basically showing that you don't really view BTC as a currency (why the hell would you sell it if you thought it was a useful store of value and appreciating).

If you do cash out into Federal Reserve notes, you've now entered the Feds juristiction, you probably DO need to pay capital gain.

By using bitcoin it helps you see the inherent corruption in the USD system. Everytime a  USD moves, the Feds take a cut of it, in effect they are extracting the value and essence of your life and work. If bitcoin takes off, why would you want to use the crappy Federal Reserve USD system which is designed to steal your wealth and transfer it to the elites.

An interesting point in history, according to Benjamin Franklin, the main reason the British went to war with the States was over the fact that the States was issuing its own currency, thereby cutting London "out of the action" as it were. No British pounds used, no Loans in British pounds, people trading in third party currency...how the hell were the British Elite parasites gonna get their "cut" of the Americas wealth? The sad fact now though is that  under the Federal Reserve, the American elites are just running the same system to transfer wealth from ordinary Americans to themselves.
abyssobenthonic
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May 08, 2011, 08:48:02 PM
 #34

@OP you are not thinking about this in the right way.

Just because its called a bit"coin" does mean it's money.

You can't use it to pay taxes.
It is not recognized as a currency by the BIS
Almost nobody accepts it in payment. Try "paying" your accountant or tax adviser in bit"coins".

By the way, I'm also eating some chocolate "money" as I type this.

BTC are simply a virtual good. Like a lot of people you seem terrified of the law and or government...this should tell you something about the system you live in.

Very true.

Quote
If you held a World of Warcraft character that "appreciated" from $200 to $600 dollar, would you have to declare this? Don't tell me its "illegal" to sell your Warcraft account....it IS however against Blizzards "Terms of Service". Other online games *allow* trading of virtual goods. People in EVE online sell Pilot Extension licenses all the time, and this is endorsed by the Company (CCP). The value of Pilot Extension License changes all the time....you DONT have to declare a "capital gain" in your pretend on-line spaceship to the government.

Under US law, yeah, actually you do (unless the government has seen fit to explicitly exclude virtual goods).

26 CFR 1.61:

Quote
Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. Section 61 lists the more common items of gross income for purposes of illustration. For purposes of further illustration, §1.61–14 mentions several miscellaneous items of gross income not listed specifically in section 61. Gross income, however, is not limited to the items so enumerated.

Not commenting on the morality, etc.  Just stating the view of the folks who happen to have more guns than you.

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m4rkiz
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May 08, 2011, 09:08:49 PM
 #35

well i would still object

if you have been picking small yellow rocks on the beach and putting them into your shed would you consider them as "Gross income"?
probably not

but now imagine that there is more and more demand for them so price (in souvenir shop near beach) is rising to $10 per rock, yet you don't sell any of yours, would you try to consult your accountant about them? Wink

i believe that so far from legislation point of view btc is no different than boinc points or farmville coins, although they may have some value to someone they are not backed up by anything so unless you sell them there is no income of any kind

that is my opinion anyway

edit:

interesting times we living though - wondering if state should benefit from hashes that my gpu is calculating Cheesy
abyssobenthonic
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May 08, 2011, 09:15:24 PM
 #36

i believe that so far from legislation point of view btc is no different than boinc points or farmville coins, although they may have some value to someone they are not backed up by anything so unless you sell them there is no income of any kind

that is my opinion anyway

That's almost certainly the practical reality, especially since the government is almost certainly not interested in the tax evasion in an economy with about USD 1.5m in daily transaction volume.  That said, the average American almost surely commits a thousand federal felonies per year, most of which go uncharged, but the feds retain the ability to charge people and make an example of them.

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Stephen Gornick
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May 09, 2011, 01:33:28 AM
 #37

I think that Bitcoin is closer related to World of Warcraft gold or Linden Dollars. What are the laws like for people doing business in those digital goods?

A paper on this topic was just published:
  http://www.jdsupra.com/post/documentViewer.aspx?fid=5ad6627a-30b4-40c7-92c3-3413064f4207 (pdf)

Conclusion:
Quote
The tax issues that arise as the virtual world continues to expand its offering of goods, services, information, experience, and entertainment are no different than issues that arise in the physical world — but the very nature of the virtual economy and the difficulty of applying antiquated tax statutes to them promises to make tax reporting, collection, and enforcement a challenging proposition. Our prediction: It won’t be long before the Multistate Tax Commission and some of the states open up virtual offices and hire virtual auditors to roam Second Life, Facebook, and other virtual worlds to track down virtual tax scofflaws.

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