Bitcoin Tax Information - Interesting

[the joint]

So, about 2 months ago I went to H&R Block to get my taxes prepared.  I explained to the lady, who apparently was very experienced and had worked there for many years, about Bitcoin.  At the time, she told me that she was unsure of how to treat Bitcoin with regards to taxation -- is it a business?  Is it a hobby?  Is it an investment?

Well, 2 days ago I finally got my answer.  After asking the 5 longest-working members at that particular H&R Block location AND after calling the IRS, the lady said that Bitcoin is a hobby.  She knows that I buy precious metals with Bitcoin, knows that I have money in accounts all over the globe, and knows that I have conducted business deals and have provided services specifically dealing in Bitcoin.  I even showed her an old TradeHill check of some of my profits.

Long story short, I don't need to file any taxes this year    But then again, I was kinda hoping to write off some of my computer equipment as a business expense.

[matthewh3]

I think in the UK it would come under "capital gains tax" I reckon so you only pay ~18% after £10,600.00 or about of capital gains.  So you would have to make more than £10,600.00 to offset your tax.

Yes the UK the land of 50% tax for top earners but only 18% for the 1%.

Edit:  In the US you have even more loopholes for the rich than the UK so you should all be laughing?

[Etlase2]

hobby income still requires taxes be paid on it

[Cryptoman]

hobby income still requires taxes be paid on it

Yes, you can pour loads of money into your "hobby" and not be allowed to deduct one red cent, but Caesar wants a piece of your first nickle of income.

[Mousepotato]

Yes, you can pour loads of money into your "hobby" and not be allowed to deduct one red cent, but Caesar wants a piece of your first nickle of income.

So if you made 100 BTC last year and it's sitting in your wallet.dat, how much do you send to the IRS?  Do they even have a receiving address for BTC?

[Stephen Gornick]

I don't need to file any taxes this year

Just want to clarify here because the words you are using don't necessarily back your conclusion.

A person whose income is below certain levels is not required to file taxes.  That doesn't mean their income, from whatever source, isn't considered taxable income.  Did you intend to say that you don't need to report any Bitcoin-related income this year instead?

And related:
 - http://www.bankrate.com/finance/money-guides/turning-hobby-into-business-means-tax-breaks.aspx

[edited for clarity]

[the joint]

I don't need to file any taxes this year 

Just want to clarify here because the words you are using don't jive with your conclusion.

A person whose income is below certain levels is not required to file taxes.  That doesn't mean their income, from whatever source, isn't considered taxable income.

And related:
 - http://www.bankrate.com/finance/money-guides/turning-hobby-into-business-means-tax-breaks.aspx

No, seriously.  H&R block said don't even bother coming in, that I have NO income.

[Etlase2]

Yes, you can pour loads of money into your "hobby" and not be allowed to deduct one red cent, but Caesar wants a piece of your first nickle of income.

well I believe Caesar has a minimum of $200 or so before needing to file, but for the most part, yes

[hashman]

But the joy of bitcoin is anonymity... even if your profits were declared taxable, couldn't you just convert the cash into bitcoin and hide it?

If by "cash" you mean fiat notes, then they are already much more anonymous and untaxable than bitcoins.  Converting said cash into bitcoins will only be creating a paper/electronic trail and setting off alarm bells among caesar's compromised tax collectors.   

[Raoul Duke]

The only thing I found interesting was that you have NO income lol
How much was that TradeHill cheque? $5?

[vampire]

I believe they will be treating bitcoins as a commodity like gold.

[kjlimo]

I have yet to find someone who has actually declared mining income or capital gains (and paid taxes) for the tax return due today April 17, 2012.

 https://bitcointalk.org/index.php?topic=54645.0;all

I personally haven't made it into the green yet, but hope to cut Uncle Sam. Check next year after I make some dough this year

I agree with the commodity approach.

[nedbert9]

Yes, you can pour loads of money into your "hobby" and not be allowed to deduct one red cent, but Caesar wants a piece of your first nickle of income.

So if you made 100 BTC last year and it's sitting in your wallet.dat, how much do you send to the IRS?  Do they even have a receiving address for BTC?

Haha!!  That made me lol.

[kjlimo]

Yes, you can pour loads of money into your "hobby" and not be allowed to deduct one red cent, but Caesar wants a piece of your first nickle of income.

So if you made 100 BTC last year and it's sitting in your wallet.dat, how much do you send to the IRS?  Do they even have a receiving address for BTC?

Here's one interpretation:

We need some more data, so let's assume the 100 BTC was earned by mining two bitcoin blocks.  One on June 30, 2011 and the other on November 1, 2011.

Record this as ordinary income of

50 BTC * $17 (price of bitcoins on June 30, 2011)   = $850
50 BTC * $3.10 (price of bitcoins on June 30, 2011) = $155
                                                               Total $1,005

So whatever your tax bracket is (let's assume 25%), then your tax line would include $251 of tax.

Now if you want to offset the $1,005 with hardware & electricity costs, I think that's reasonable (and why I haven't declared any income yet).  I'm not sure if you'll need to setup some sort of LLC to do that or not.

Disclaimer: I'm not a tax accountant, and do not rely on these estimates or interpretations as they are a brainstorm of thought and have not been verified by a qualified source.

[matthewh3]

I think you will only be taxed via capital gains tax for any bitcoins that you convert to cash as there is no tax on bitcoins (or gold in the EU just capital gains of the cash made from selling gold)

[DeathAndTaxes]

Well, 2 days ago I finally got my answer.  After asking the 5 longest-working members at that particular H&R Block location AND after calling the IRS, the lady said that Bitcoin is a hobby.  She knows that I buy precious metals with Bitcoin, knows that I have money in accounts all over the globe, and knows that I have conducted business deals and have provided services specifically dealing in Bitcoin.  I even showed her an old TradeHill check of some of my profits.

Long story short, I don't need to file any taxes this year    But then again, I was kinda hoping to write off some of my computer equipment as a business expense.

Your statements and conclusion don't match. 

If the IRS considers your action a hobby they STILL want a cut of any profits BUT you can't deduct any losses, depreciate hardware, carry forward losses, etc like you can with a business.  Essentially it is a worst case scenario.

I have my mining operation filed as an LLC (to depreciate hardware, account for my labor costs, etc).  We will see if IRS rejects my tax return.

[DeathAndTaxes]

No, seriously.  H&R block said don't even bother coming in, that I have NO income.

Once again just because you are broke it doesn't mean that Bitcoin ventures being considered a hobby are a good thing.  It isn't surprising, the IRS is generally very conservative and often requires "convincing" to see non-traditional ventures as businesses.

However "a hobby" doesn't erase your tax liability.  If you made $100K from this "hobby" the IRS would want a cut (a very big cut) and the bad news is the hobby declaration would limit your ability to reduce the liability  (things like carry forward prior year losses, use losses from your Bitcoin ventures to reduce taxes on other income, depreciate hardware, etc).  

That being said I would take H&R Blocks universal proclamation with a grain of salt.

There is no universal rule.  The IRS considers hobby vs business on a case by case basis.
http://www.irs.gov/newsroom/article/0,,id=169490,00.html

One person's hobby is another persons business.

Someone who uses gaming computer to mine some coins part time, has no records of expenses, and uses the same hardware, building, and internet connection for non Bitcoin uses = likely a hobby.

Someone who invested $100K in mining hardware has them in a dedicated building, has filed as a LLC to limit personal liability, runs the rigs 24/7 in a dedicated fashion, keeps detailed profit and loss statements, and has a seperate business checking account = likely a business.

Note the above two are intended to be extreme examples there are not "hard lines".

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

In order to make this determination, taxpayers should consider the following factors:

Does the time and effort put into the activity indicate an intention to make a profit?
Does the taxpayer depend on income from the activity?
If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
Has the taxpayer changed methods of operation to improve profitability?
Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
Has the taxpayer made a profit in similar activities in the past?
Does the activity make a profit in some years?
Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

If someone has a token amount of Bitcoin "income" (common definition not IRS definition) then it likely doesn't matter.  However if you have a significant amount it would be a good idea to consult with an accountant and tax professional.

The above post should be considered informational and not relied upon as tax advice.

[Jon]

There's no system in place to audit Bitcoin transactions. The IRS can't do squat in regards to Bitcoin.

Don't bother filing. Don't ever bother filing if you just put your Bitcoins through any service. There's nothing to hold you accountable.

[triplehelix]

There's no system in place to audit Bitcoin transactions. The IRS can't do squat in regards to Bitcoin.

Don't bother filing. Don't ever bother filing if you just put your Bitcoins through any service. There's nothing to hold you accountable.

all well and good unless your converting to fiat.  the second you do that, you have to explain where the money came from.

my recommendation, if anyone has 10k+ of bitcoin income, talk to a good accountant.  less than 10k, still a good idea, but the IRS probably won't be as interested compared to larger amounts of money.

[niko]

Yes, you can pour loads of money into your "hobby" and not be allowed to deduct one red cent, but Caesar wants a piece of your first nickle of income.

So if you made 100 BTC last year and it's sitting in your wallet.dat, how much do you send to the IRS?  Do they even have a receiving address for BTC?

Here's one interpretation:

We need some more data, so let's assume the 100 BTC was earned by mining two bitcoin blocks.  One on June 30, 2011 and the other on November 1, 2011.

Record this as ordinary income of

50 BTC * $17 (price of bitcoins on June 30, 2011)   = $850
50 BTC * $3.10 (price of bitcoins on June 30, 2011) = $155
                                                               Total $1,005

So whatever your tax bracket is (let's assume 25%), then your tax line would include $251 of tax.

Now if you want to offset the $1,005 with hardware & electricity costs, I think that's reasonable (and why I haven't declared any income yet).  I'm not sure if you'll need to setup some sort of LLC to do that or not.

Disclaimer: I'm not a tax accountant, and do not rely on these estimates or interpretations as they are a brainstorm of thought and have not been verified by a qualified source.

I think this would apply only if you sold BTC for fiat - and in that case, the exchange rate at the time of sale would apply. If you simply hold on to your mined coins, there is no tax involved.