Somebody in the Bitcoin ecosystem would get a lot of attention if they published an authoritative number for the average Bitcoin price in 2013, which would likely suffice for most taxpayers' needs for a reasonable and consistent valuation. (Ask a tax professional if you disbelieve that informal recommendation.)
This is one of the many equally valid options for e.g. calculating the yen/USD conversion if you happen to have many yen transactions which are approximately equally distributed throughout the year. (The Treasury Department has a handy web page listing yearly averages for reference, but you're allowed to use any number which is reasonable and consistent. One of the best reasons to keep good books is that you can try several reasonable methods and then consistently adopt the one which is most favorable to your interests. Welcome to taxes, if that being OK is counterintuitive.)
Isn't the whole point of saying bitcoin is not currency, but property, that you're not allowed to do this kind of accounting? I'm pretty sure if I buy and sell the same stock throughout the year, I can't simply account for it using the stock's average for the year.
Special rules apply to stocks, principally because the IRS thinks you should have really good records for your cost basis. If you had acquired them through a dividend reinvestment plan (DRIP) average market price over time is exactly what you'd use.
If you run a numerical simulation of white noise distribution of buy and sell, you'll find no profit to tax and your buy and sell prices will average close to that number.
http://bitcoinaverage.com/ does currency-adjusted price averages across many exchanges around the world.
You should be able to get a yearly average from the API but I worry this would not be what the IRS had in mind, but rather specific prices at time of purchase vs liquidation.
(1) Launch a Bitcoin capital gains/losses tax approximation application (the "App") in beta. User keys in their Bitcoin addresses. App searches the block chain for the user's entry and exit times. App searches exchanges for the most favourable pricing source. App then returns an approximation of taxes owed/to be credited (e.g. in case of coins lost at Mt. Gox). App has a prominent disclaimer across the top warning against using it as tax advice.
(2) Bring on board a senior CPA with policy-making experience. Clean up the tax logic of the App under their guidance. Call buddies in the IRS and New York State Department of Taxation and Finance. Ask them to look over the tax logic of the App in exchange for dinner, drinks and equity. Move the disclaimer from the top of the app to the bottom.
(3) Call TurboTax and small accounting firms with any public posts about Bitcoin. Meet to discuss a partnership. Parlay into an acquisition.
App searches exchanges for the most favourable pricing source.
The taxpayer has to be consistent with how they determine the price of bitcoins, generally meaning that they have to use the same method unless they have a good reason for switching. Deliberately choosing the most favorable pricing source is fine the first year--but they'd have to stick with the same source in subsequent years.
Also, the app would be enabling tax fraud. A "prominent disclaimer" isn't going to be much protection. If anything, it's likely to be used against the appmaker to demonstrate willful blindness.
A taxpayer has to be internally consistent in picking their pricing source. It does not follow that the pricing source must be consistent between tax payers. Different situations could merit different pricing sources. It is not wrong to advise different people in different situations on how their differing needs may merit different pricing sources.
> (1) [...] User keys in their Bitcoin addresses. App searches the block chain for the user's entry and exit times.
How will you know which output is spent on purchasing something for bitcoins (a taxable event), and which is change, sent back to the user?
You'll see a bunch of transactions like these:
Redeem 3.4784 BTC from output 1 from tx 23e23f23f23be52bef98a8b...
Send 0.879 BTC to 1CjPR7Z5ZSyWk6WtXvSFgkptmpoi4UM9BC
Send 2.5993 BTC to 1NxaBCFQwejSZbQfWcYNwgqML5wWoE3rK4
Has the user spent 0.879 or 2.5993 BTC on something?
Or has he just sent money to another wallet, or deposited with an exchange?
The index number of the non-change output in a transaction is intentionally randomized, so it can't be figured out, from blockchain data, which is the payment and which is change.
> “The danger is the creation of an electronic black market, similar to the cash economy,” Joshua Blank, a tax law professor at New York University, said in a December interview. “That’s what the IRS wants to avoid.”
I think demanding over 40% tax on a trivially worldwide transferable, hard to track, easy to secretly manufacture commodity is exactly the best way to create black market.
Those of us selling software have not frequently complained that we should get preferential tax treatment because our basis is zero and tax fraud would be almost too easy.
Tax fraud only became easy with the possibility of anonymous acceptance of payments. Now with Bitcoin you and everyone who produces intangible goods can officially complain about not getting preferential tax treatment.
Tax fraud has always been easy, why do you think restaurants/barbers/plumbers/etc. prefer cash so strongly?
The official line is that credit and debit cards have high transaction fees, and that's true (especially for very low and very high prices), but cash isn't free to accept (security, counting, counterfeit risk, etc.), and yet service industries universally prefer cash over any other payment method. Why? Tax fraud.
The IRS literally said exactly that, assuming you run your business like a business. This would require, among other things, adequate record keeping to substantiate what portion of your electrical costs were necessary and customary in your business, since you can't deduct the personal use portion of the bill.
You'd probably have to depreciate equipment rather than deducting it, unless it has an expected useful life under a year or hits some de minimis threshold. (The IRS rule on this one is really wonky. Suffice it to say that most Bitcoin miners have to depreciate not deduct.)
I think that given the speed at which bitcoin mining hardware is obsoleted, it is perfectly reasonable that most ASICs would have an expected useful life of under a year.
The relevant test is "economic useful life", which the IRS helpfully defines:
(b) Useful life. For the purpose of section 167 the estimated useful life of an asset is not necessarily the useful life inherent in the asset but is the period over which the asset may reasonably be expected to be useful to the taxpayer in his trade or business or in the production of his income. This period shall be determined by reference to his experience with similar property taking into account present conditions and probable future developments. Some of the factors to be considered in determining this period are (1) wear and tear and decay or decline from natural causes, (2) the normal progress of the art, economic changes, inventions, and current developments within the industry and the taxpayer's trade or business, (3) the climatic and other local conditions peculiar to the taxpayer's trade or business, and (4) the taxpayer's policy as to repairs, renewals, and replacements. Salvage value is not a factor for the purpose of determining useful life. If the taxpayer's experience is inadequate, the general experience in the industry may be used until such time as the taxpayer's own experience forms an adequate basis for making the determination. The estimated remaining useful life may be subject to modification by reason of conditions known to exist at the end of the taxable year and shall be redetermined when necessary regardless of the method of computing depreciation. However, estimated remaining useful life shall be redetermined only when the change in the useful life is significant and there is a clear and convincing basis for the redetermination.
The lower 20% (Didn't it recently go up to 29%?) rate is only applicable if you have held the asset for 2 years. If you buy and sell short term, as I have, then short-term capital gains applies.
Did they also extend the time? It used to be 1 year and 1 day to qualify for long term capital gains treatment. Or 2 years from the date of the grant of incentive stock options.
Capital gains varies a little depending on the asset (currencies, precious metals, real estate, etc have special rules), but generally it's 15% for long-term capital gains (1 year, not 2 years) and your regular income tax rate for short term capital gains.
It was recently raised to 20% for people in the highest income tax bracket. AMT of 28% may be used instead in certain circumstances.
It seems there are hypothetical scenarios where your taxes could exceed your net worth. If you mine a bitcoin worth $1000, and then it's value falls to $100, you could owe taxes on $1000, and the $900 capital loss would only carry forward to the next year.
You can use the $900 in capital losses to offset your income (up to $3000). According to the IRS, you would have only $100 in income ($1000 - $900). So in your example, you would have $100 cash and tax liabilities on $100 in income. You will only run into a problem when you exceed $3000 in capital losses, that is when you would have to rollover your losses to the next year.
How so? These aren't new rules, just old rules that are newly applied to Bitcoin. As others have noted, this is how things work for employer issued stock. You only put yourself in danger if you are ignorant of the rules and don't take necessary precautions. If you are investing enough to open yourself up to a capital gains loss of more than $3000, you have no excuse to be ignorant.
Tax tip from a non-lawyer/non-accountant - Immediately sell a percentage of your newly mined bitcoin equal to your marginal tax rate. If your tax rate is 25%, sell 25% of your bitcoin as soon as it is mined. Those coins already belong to the US government. If you don't convert to cash immediately, you are basically leveraging the government's money to invest in Bitcoin speculation.
> If you are investing enough to open yourself up to a capital gains loss of more than $3000, you have no excuse to be ignorant.
I disagree wholeheartedly. The tax code is needlessly complex. These are not laws of nature, they are arbitrary rules that have accumulated over time. Large capital gains happen naturally and it's silly for there to be gotchas like this.
The fact that "it's always been that way" is no refutation of the fact that "it's a problem" that you could lose money and yet still owe taxes as if you had gains because capital losses (hysteretically) saturate at $3000.
It's not a problem if you immediately sell a portion of the coin to cover your tax liability. This is how employer stock programs work; when shares vest, some are immediately sold to cover the income tax. Then, if the shares decrease in value and are sold, you have a normal capital loss to deduct. If they increase in value and are sold, you have normal capital gains.
It doesn't seem fair or correct to compare Bitcoin to employer stock programs. The IRS seems to be doing this as well. Stock and stock options are generally granted in exchange for work performed for an employer so you have earned those amounts but Bitcoins are created through mining not given by an employer.
That said, it doesn't matter what is and is not "fair" when dealing with the IRS. Choice A is to do what they tell you to do. Choice B is to fight them in court.
This thread assumes you want to go with Choice A and that you want to limit your liability if something goes wrong. Like most risk-management techniques, it does decrease your returns.
(Tax lawyers might have some better advice. Perhaps you can mine into a blind trust, and pay income taxes in 5 years on the current value of the coins? Dunno, not a tax expert or a laywer. I would consult with one if I was mining a lot of Bitcoin.)
So here's a question for everyone -- if I take a few hunks of wood, say worth 10 bucks, and use it to craft a musical instrument that can be sold for $100, does that count as $90 in income, even if I just leave it on a shelf?
Capital gains (the losses) don't saturate at $3,000.
If I have accumulated $100,000 in capital losses over the prior ten years, I can wipe all of that out in one shot by producing a large enough capital gain in one year.
Capital losses saturate when applied to ordinary income.
This would be a problem if bitcoins were illiquid. They are not, so it's easily solved. The IRS simple rule is to treat all income as incurring tax on the moment it is received.
They make allowances for things that are not liquid.
i.e. would sales inside MTGox have counted towards this tax or isn't only with withdrawl/deposit into their ecosystem. I can imagine that if internal to MTGox interactions are treated this way then there are a lot of people who sustained a capital loss higher than that and had no option to withdrawl the money to pay taxes.
This is pretty much what happened to a lot of people in the valley during the dot-com bubble pop - your stock losses could be carried forward until the heat death of the universe, but you paid on 100% of the (illusory) gains.
Mostly this happened to people that got bad advice (I really hope all of the entrepreneurs reading this site are smarter now).
For most, the issue was exercising their options. This is a tax event -- and the tax is owed on the difference in your strike price and the current price of the stock. If you find yourself in this situation -- immediately sell enough stock to cover the tax.
If you are given stock -- that is the tax event. You need to have enough cash to cover taxes on stock given to you -- if the stock is illiquid, and this is a bonus or something, then you should ask for part of the bonus to be in cash (to cover tax). If the stock is liquid, immediately sell enough to cover tax.
If you are a founder, and your stock just goes up in price, that is not a tax event.
Being given at-the-money options is not a tax event. You only owe <s>stock</s> tax once you exercise.
IANAA (not an accountant)
EDIT: replace "stock" with "tax" in the second to last paragraph
It happens to people who got good advice too. I was an investor in a startup that sold for 3x (yay!), and the deal was less than 1 yr from my investment (35% short term capital gain rate + 13% NYC rate = 48% tax rate on the spot) but the deal was 45% cash, 55% stock. So I already had out-of-pocket expenses.
But I had to wait 6 months to sell any stock (SEC rule 144, applies to anyone whose shares were not bought), during which buying company share crashed 75% unrelated to this deal.
Now, since the deal happened to be in the first 6 months of the year, I was able to net it all, and a 3x exit was reduced to ~1.5x thanks to rule 144
If the deal had happened just 3 months later (any day after 1-jul), I would have lost money - not even full return of capital - on a successful exit, and had losses to carry till the end of the universe.
The tax laws are the problem. I have a good accountant, but wasn't in the driver seat for this deal, so I couldn't properly structure it.
> Doesnt selling stock immediately rather than after a year mean your tax rate on it is higher?
This is the exact thinking that got many people in trouble during the dot.com bubble.
They exercised their options and neglected to sell and hold enough capital to pay their tax obligation.
Then the bubble burst and stock prices dropped, in some cases to nothing, within a year. The IRS still wanted the capital gains taxes on the difference between the option's grant price and the stock price on the day the options were exercised (aka the taxable event).
It was not uncommon to have people loose their houses and have their wages garnished to pay off their taxes.
Consider this a cautionary tale when speculatively trading Bitcoin.
But do see my other comments on SEC rule 144 - sometimes you are forbidden from selling in a way that exposes you to loss risk that cannot be mitigated without running afoul of security laws.
There was specific language that explicitly said "this is illegal" until the latest revision. Now, it's implicit, and in inquiries to the SEC they have repeatedly said "that goes against regulation".
The general idea behind rule 144 very sane: It's supposed to limit pump-and-dump IPOs and M&As, by forcing anyone who did not pay for their shares outright to wait 6 months before they can gain anything (and legally, the SEC is only interested in the overall guarantee - e.g. put options that guarantee you don't lose are AGAINST the current spirit and the former letter of the law).
However, the laws apply equally to someone who owns 90% of the shares (who is in a position to abuse an IPO and M&A) and 0.1% of the shares (who is likely an employee receiving RSU or options, has zero control, and likely not even any finances to draw upon)
The tax law is insane, the security regulations are complicated, and their interplay is ludicrously insanely crazy.
Whenever you see people saying "oh, it's very simple - you just didn't get the right advice" you can be sure that they have no idea what they are talking about - either they didn't have to deal with it, or they weren't aware they were doing something illegal.
Yes; for people participating in an employee stock purchase program, it is called a Disqualifying Disposition. It puts you in the short-term capital gains bracket (with about 15% higher tax).
However, it's still a VERY good idea to do if you plan on holding stock.
I know stories of several people who were exercised options on 7 figures of stock, only to see the price collapse before they were able to sell. The taxes they owed because of that eclipsed their net worth several times over.
It's an excellent idea if you can do it - but sometimes you can't - e.g. If you are in the 6 month lockup period following an IPO or grant or other SEC rule 144 event. It runs afoul of said law to even hedge with options or on the open market.
No, because the exercise is taxed as income at the time of the exercise. If you sell it, there's not _more_ tax to be paid, because your gain after the exercise is zero. If you sell it after some, you'll pay long-term capital gains rates on the delta between your sale price and your exercise price.
Exercise-and-hold is a bad idea for most people in most cases.
AFAIK You're taxed on receiving stock as if it were income. This is regardless of if you sell it today, tomorrow, or never.
After that you're only taxed on gains. If you sold on the day of reception, then your gains/losses are likely minimal. Eg, receive at 50 sell at 50 = 0 gains/losses. Sell at 51 and you have $1*N gains. Those gains are taxed at a higher rate until a year after the stock appeared in your account. I think the difference is ~10% (35 vs 25 or so).
So there are definite tradeoffs between holding for the year vs selling immediately. This part is no different than buying/selling on the stock market.
I was going to say this exact same thing. I was writing off 'losses' from stock losing value from 2001 to 2012 at $3,000 a year. It would have been longer except that you can, in some cases, offset gains made later against those losses. And yes, all under the auspices of 'alternative minimum tax' for which I have a special place of loathing in my heart for whomever thought that was a good idea.
Do you know (remember) the mechanics of how the AMT affected this? Were you given stock that you didn't have a chance to sell? My understanding that only the initial grant of stock and the subsequent selling are taxable -- and didn't realize the AMT affected this.
Note, the tax code changes every year and I'm not an accountant, just a victim :-)
Whenever I have exercised an option, my taxes have included an AMT calculation based on adding in the difference in value between exercise price, and market price, of those options as additional ordinary income. When the AMT tax calculation yields a 'tax owed' number that is larger than the non-AMT version (which it always did when exercising shares to make down payments) the IRS asked for the bigger number. Meaning that even if I had not sold the shares I exercised, the IRS wanted me to pretend that I had and pay tax on that money that I was pretending to have received. In exchange for doing that, the tax basis becomes the market price at the time of exercise.
If you don't actually sell the stock (because, for example, you are waiting for escrow to close), and the stock value goes down significantly, you can reach a point that the value of the stock drops below the tax liability you incurred by exercising the stock option in the first place. In some cases the stock can become worthless. (my best score has been $120/share stock going down to $0.52 share) If you realize this is going to happen before the tax year is over you can dump the stock take the loss and it all works out in the wash (loss cancels gain). If you cross over a tax year boundary then you owe the tax anyway (even though you don't have a way to pay it) and when you sell the stock in the following tax year you get a 'loss' but you don't have any gains to offset that against and you can't just take it out of the taxes owed. You can however write it off, $3,000 per year against your ordinary income.
Ahh. By the time this information filtered to me in 2001/2, it became -- exercising options is always a taxable event. So that's the rule I live by and always make sure that there is a way to get cash simultaneously. I didn't realize it was because of the AMT.
Periodically, the board of directors will go through a process for determining the value (aka the market price) for stock options. If you exercise your option and the exercise price is less than the current valuation price, then you will experience a 'taxable event.' I would guess that you'd be hit with the AMT in the US if computing the tax based on that exercise value was higher than your non-AMT computed tax. But you would want to check with your accountant.
Some companies allow you to file an 83b election, which is to exercise all your stock immediately, and as it is worth exactly what you are paying for it, no taxable event, and then take ownership of it as it vests. A person might choose to do that because in the event of going public or any time when the common stock becomes liquid, you would only pay long term capital gains rather than short term gains. The downside is that if the company exits where the common stock is worthless (not an uncommon occurrence for startups) then you would lose that money you paid originally. (but you could write off that loss, $3,000 a year, against future income :-)
You might want to exercise options before a new priced round (series B, C, D, etc) or before an S-1 filing. Yes, this exposes you to some adverse treatment (AMT for ISOs, and the risk of paying income tax on shares that later crash or become worthless), but it also establishes an ownership date (for the LTCG holding period) and a basis (which will presumably be higher in the next priced round or IPO, even though they're illiquid now.
(And as kalkin observes, if you're leaving the company with in-the-money options.)
Well, it is not uncommon for options to expire after you leave a company if they are not exercised. So if you take a new job and don't want to throw away your options...
According the article this is not true. The tax event is turning the bitcoins into currency or spending them.
So, the issue could be you have $1,000,000 of bitcoin, and you spend it. You now owe capital gains on the difference in price between when you bought and sold. Now, even if you have the $x00,000 in bitcoin to cover this, you better convert it fast (like simultaneously).
Or, never spend bitcoin directly -- convert enough to dollars to buy and pay tax, then spend the dollars.
Strange. Why don't they treat the cost basis as your cost of production? That is, if you spend $X to mine the bitcoins, and sell them for $Y, why not tax you on $(Y-X) rather than Y minus "whatever the market said they were worth then"? $(Y-X) is your true dollar-denominated realized gain.
It seems pretty backwards compared to any other sort of creation. If I build a house, my basis is how much I spent building it, not how much my neighbor's house is worth.
I don't think this has anything to do with basis. The difference is that mining the coin is considered a tax event -- so you pay tax on the mined value -- with the cost being deductible. This makes sense because the coin is liquid and can be sold in part without reducing the utility of the remainder.
That is not true of a house. It isn't as liquid and it's hard to sell part of the house to cover tax.
How does this work when mining in a pool is nearly continuous? You earn 0.000000x btc per share in a pool, and you might earn a share every few seconds.
What exchange do I use to determine the value of the btc?
It's likely that the taxable event would occur when you can control the bitcoins. For instance, many pools have a minimum payout and you can't withdraw any until you meet that minimum. Based on other IRS rules, the taxable event would occur when you reach that withdrawal minimum.
As for the exchange to use for the value, it would probably be legitimate to use an average of a few exchanges, if the prices are wildly divergent.
Should emphasize that whatever valuation will be expected to be reasonable and done consistently (so don't pick different exchanges for different payments or whatever, and probably don't pick Mt. Gox, and so on).
Well in the limit it would tend to an integral, and, assuming you have fixed hash power, approach the time and inverse network difficulty weighted average price.
This seems insane. If I build 3 chairs I do not include the market price of 3 chairs on that day in my gross income, I sell the chairs and recognize the income generated by the sales.
That's not true. If you build 3 chairs and don't sell them by the end of the year, you pay inventory tax on the 3 chairs, i.e. you pay taxes on them without selling them.
This is why stores that sell physical goods to a blowout sale at the end of the year.
If I haven't sold the chairs then I haven't recognized any income. Even if I had to value my inventory then I would value it at the lower of cost or market and in the case of Bitcoin that would be cost which would be computer depreciation and electricity, much less than the market value on the day of mining.
Should I file a Schedule F (income from farming) for my herb garden? I actually looked through the instructions for schedule F and I don't find any clear basis to allow me to not file it.
In practical terms, I'm not worried, as I suspect that I'd have a net loss, but assuming a net gain (that the fair market value of the parsley and sage I got from the herb garden exceeded my out-of-pocket costs to run the garden), I think I have to file a Schedule F per the regs.
For the record, it seems perfectly consistent to treat BTC as capital property; it doesn't seem reasonable to treat them as ordinary income.
You should ask a tax lawyer or an accountant. But a "garden" is unlikely to be a "farm" within the meaning of the federal code, especially if it's just a hobby activity rather than a bona fide business intended to make money. (See http://www.irs.gov/pub/irs-pdf/p225.pdf, which notes that a farming business requires a profit intent.)
As for treating BTC as capital property--they are, under IRS decree--capital property for all US FIT. However, like all other capital property when received as compensation they are also income and get taxed like income. BTC doesn't get special rules just because it's digital.
If I spend $10 buying a disposable planter and herbs, and over the course of the year, I harvest $20 FMV of herbs, I have made a profit. Profits from a hobby activity must be reported as income. Time permitting, I will ask my CPA/EA when we go over my taxes. (I'm quite certain that I spent more gardening than the value of the food I extracted, and hobby losses are not deductible, so I'm quite sure I'm clean...)
I'm not suggesting that BTC should have special rules because it's digital, but rather questioning whether mining BTC should be treated as compensation for personal labor (ordinary, active income), treated similarly to a dividend or interest payment, or treated as an outcome of a business activity (like raising beef cattle, food crops, or extracting energy from wind/solar). To my mind, the activity seems more closely aligned with the last group, and pretty far removed from compensation for personal efforts.
(None of this applies to me personally, as I've never owned a BTC, but these topics strike
It is possible for compensation to also be business activity income. Compensation, tax-wise, simply refers to getting paid to provide labor or a service. Whether that service is a business activity of the service provider is a separate question. (Labor is generally not a business activity, and generally employees are treated as providing labor to their employer).
IOW, mining is compensation, but if it is a business activity of the miner, then they can deduct their losses/expenses against their mining gains. Someone who only mines as a hobby (i.e., they don't put much effort into it or attempt to maximize profits or minimize losses) doesn't get to do that even though they are also providing a service.
Taxes are typically paid on profit. BTC are not the only things with cost to acquire and carry (e.g. Cattle) -- and I believe those costs are taken into account.
"Under the ruling, purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of income for the coffee shop."
So if the coffee shop leaves the "property" as bitcoins instead of converting it over to dollars, and the value of those bitcoins falls before cashing-out, they're stuck paying tax on the $2 worth of income despite potentially no-longer having the funds to cover those taxes.
This is not an anomalous case in taxing business income. A few startups asked me to do work on a barter basis. (Can you do a week of marketing work for us if we build you an iPhone app?) I told them that, if I were to agree to do that, I'd be legally obligated to value my work at it's market price and file an informational return to the IRS showing that amount of money given as payment for services rendered, which they'd be taxed on exactly as if I had paid them the equivalent sum in cash. (i.e. They'd pay thousands out of pocket despite never receiving a cent.)
Wait, are both parties responsible for paying taxes in this case? In the normal case the party receiving payment for services rendered is the one that pays income taxes. Here both are providing and receiving a service at the same time.
If the barter is for services (I mow your lawn if you do my taxes), then yes, both parties would owe income tax on the fair market value of the services -- it would be the same as if they had paid each other the same amount in cash.
If the barter is an exchange of goods for services (I'll do your taxes in return for 10 dozen eggs from your farm), then the party that received the goods in exchange for their services owes income tax on the fair market value of the service provided. The party that provided the goods would owe income tax on the capital gain of the goods (fair market value minus the cost paid, or basis).
If both parties are exchanging goods, then it gets more complicated. In some cases (I trade you the deed for my apartment in the city for the deed for your beach house), the IRS deems it a "like-kind exchange", which is NOT a taxable event -- the basis of the old items carries over to the new properties. However, if I exchange my apartment for your car, then it's not a like-kind exchange, because the items exchanged are not of like kind (makes sense?), and both parties pay capital gains (or can claim a loss) vs. the fair market value of the exchange.
To add to the fun, one can do a delayed like-kind exchange by storing the proceeds with a "qualified intermediary", a form of escrow agent. This is often done with real estate, since it means that the counterparties don't have to be willing to swap deeds. To give a specific example, I could sell my apartment in the city, deliver the proceeds to a qualified intermediary, and use them later to buy a beach house, and it would be treated as a tax-free exchange by the IRS (if the prices of the two properties are equal and some other criteria are met).
>> However, if I exchange my apartment for your car, then it's not a like-kind exchange, because the items exchanged are not of like kind (makes sense?), and both parties pay capital gains (or can claim a loss) vs. the fair market value of the exchange.
You probably can't claim a capital loss for a car as you can only claim it for things you hold for investment purposes. Since the car's depreciation is expected to be because of personal use you can't claim loss on it whereas if it were to increase for some reason (memorabilia) you'd have to pay gains.
Gains from trade are theoretical numbers, based on the shapes of the supply and demand curves. As long as those numbers are positive, trade still happens. When zero, the traders are indifferent to the trade. So when things like monopoly pricing, taxes, and price discrimination com into play, a certain quantity of trade will simply not happen.
That value is not something you can tax directly. It's more like happiness than cash. In the barter, the traders walk away with the same value of goods, but greater happiness. I'm not sure what dollar value the IRS places on happiness, but based on their behavior, I'm pretty sure it is $0 per smile.
Therefore, neither trader in a normal barter should realize a taxable gain.
In barter, both parties believe that the value they walked away with is greater than the value they put into the deal. In principle, that's exactly what the IRS wants to tax. A currency system should generally preclude any barter by assigning reliable values to both parties' goods, such that the one whose stuff is assigned a higher monetary value by the market will be unwilling to make the trade, since they could do better by just selling their stuff and buying the other party's. (A raw trade could still happen where the market value of each party's offering is somewhere within the bid/ask spread of the other's.) But that's independent of what "barter" is. Barter is just trade unmediated by a currency. You can realize taxable gains through barter in just the same way that my uncle once paid his rent for a month by selling an art object he bought at a garage sale for under $100. Despite being mediated by cash, that was a highly uneven trade, and barter is no different.
In a happy coincidence for the IRS, assigning monetary values to everything makes it trivial to assign a value to the trade for the gaining party to pay tax on. Again, not relevant to what barter is.
Given that the IRS can operate under any rules that the government pleases itself to create, regardless of any connection to reality, I don't think anyone there even attempts to discern whether a given rule is actually generating revenue or just fruitlessly destroying commerce.
As you say, anyone with enough cash available would always prefer settling with two trades using money instead of one barter trade. So really, the barter tax is only levied on people who don't have the money to pay it and on tax avoiders. The tax avoiders find another loophole; the poor people remain screwed.
If a coffee shop is accepting bitcoins in exchange for coffee, they are already exposed to the FX risk that bitcoins will fall in dollar terms before they can be liquidated.
In other news, the number of coffee shops which accept bitcoins is indistinguishable from zero in practice.
This is an important point. If bitcoin had been used more as a currency, rather than investment speculation, the bitcoin community would have a much stronger case to argue that it is a currency.
It probably wouldn't have changed the IRS decision since this is the first regulatory post warning shot, but bit coiners only have themselves to blame.
It needs to be perceived by the outside world as a currency and not like a ponzi scheme that is full of thieves and brigands, because like it or not, that appears to be the general public's and the medias opinion to date.
Well, capital gains would be a different set of taxes, but this is essentially how other currencies work, as well. If you earn income, you earn it at the exchange rate at that time--even if the exchange rate takes a dive in the future.
My initial thought is that they'd be able to deduct the loss since the bitcoin is being treated as property and not currency. The trade of property for property is done at market value and any subsequent trade is as well, leading to a loss.
I imagine a managed wallet like Coinbase would really help here. They could easily create a report on exactly how much you owe in capital gains. Managing this yourself could get a bit messy.
Please don't store most of your bitcoin in Coinbase. If Coinbase ever goes under, you'll lose all your bitcoin. It sucks when someone else loses your bitcoin for you.
It's insanely different from having your money in banks. A bank is backed by the government. If a bank goes under, you still get your money. If Coinbase goes under, you get nothing or very little.
Funds from Coinbase should be evacuated to your own secure cold storage wallet immediately after you purchase them. You should never hold a balance higher than 0BTC for any length of time on Coinbase. Follow this advice and you'll have your money forever. Don't follow it and you'll lose your money the moment Coinbase suffers any serious theft, a technical disaster, a rogue employee, or the founder steals coins.
(I speak from experience, having lost a massive amount of money when Mt. Gox went under for one of the above reasons, which I probably won't get back.)
That's not true. If I had kept my funds in a secure cold storage wallet, I'd still have them.
There are plenty of techniques for keeping your coins safe. Just find one and use it. I've heard Armory is pretty good.
Coinbase is far more dangerous in comparison, because they can go under at any time for any reason. Human greed is a thing. Always remember that Coinbase has to rely on some employees to implement their systems, and those same employees can write some code to steal money from their systems.
Sorry, you're right, I didn't provide enough detail.
If the average user can figure out how to use bitcoin, then they can figure out how to use Armory. Most people have an old laptop or computer that they can afford to keep disconnected from the internet. If it's not connected to the internet, then it's not susceptible to hacks. It also offers a way of doing secure backups, so that if your computer is lost in a house fire, you'll still have your coins.
Even if they don't have an old computer, spending $100 on one off of Ebay or whatever is possibly the best insurance payment they could make, because it's just a matter of time until any bitcoin exchange dies. Not only do you have yourself to worry about, but if you have children then you'll want them to inherit your wealth. Hard to do if your wealth vanishes because your preferred exchange went under.
> If the average user can figure out how to use bitcoin, then they can figure out how to use Armory.
I don't agree. Using coinbase is vastly easier than setting up Armory and managing your own security on your own PC.
> Most people have an old laptop or computer that they can afford to keep disconnected from the internet.
They won't understand they need to; they can't even stop opening exe attachments in their email and running them, you seriously overestimate the average user.
> If it's not connected to the internet, then it's not susceptible to hacks.
Way over their head.
> It also offers a way of doing secure backups, so that if your computer is lost in a house fire, you'll still have your coins.
Doesn't matter, you lost them at the word "install".
Tell that to users of Mt. Gox or the many smaller sites that have lost bitcoins to hacks.
Coinbase is probably better secured than that, but I wouldn't trust any Bitcoin bank at this point. Personal computers are bad too because of malware, but I'd say the average consumer would be considerably safer with a safe.
Do you need to have it managed? Why not just have a service where you put in your addresses and it looks through the blockchain to find all the transactions you performed, etc. I believe as long as it keeps historical prices it could get very good results even if each BTC transaction doesn't log how much USD-et-al was involved.
Good point. Coinbase is also an exchange so it knows exactly how much you paid in and out BUT there's no reason why a service couldn't integrate to an exchange's API and do the same thing.
How would they know when I mined the coins before I sent them there to be sold about 3 days later?
Another question is, how can I figure it out?
Back when software mining was profitable and difficulty levels were high 2 or low 3 digits, I just let the thing free run for months as a "nice"-d process. So I'm not even sure when I mined them, other than "a long time ago" and then got rid of them late last summer/fall.
The main thing that's a pain (extrapolating from stock) is if you buy and sell a lot. The tax is on the gain, but which one did you sell -- you need to keep track of each price you bought (and how many) and offset the amounts against sells.
I think you are allowed to average, but this might not be beneficial with big swings.
I don't see how this law could be enforceable. Hiding bitcoins from the IRS seems to be trivial and lying about the real acquisition value as well. This is very different from stocks where all trades are overseen by the SEC. You can't just go to a neighbor's house and pay for stock in cash without telling anybody else.
The same way cash transactions are trackable, which is to say they are not. In either event you can choose to evade the taxes but it's probably not a wise bet.
They aren't trackable, but when you pay cash for a $90,000 car and a $350,000 boat the fact that you've clearly under reported something is observable and to my knowledge sufficient information to prosecute for tax evasion.
How would that be any different then if you paid Bitcoins for a car or a boat? Once you convert it into something tangible it's easier for the IRS to figure out.
Well, the blockchain records all transactions, and when they took place: http://blockr.io/ So if the IRS is auditing you, then it would be easy for them to cross-reference to that.
But until I tie a wallet address with the physical world (like credit card or such), then they have no way of knowing that I own those coins. Also it will not be possible to determine from the blockchain only which amount of USD was paid for the said bitcoins, only that the transaction was on a particular day and that the bitcoins where worth, on average, a certain amount on that day. Furthermore, btc exchanges are not regulated and many are on foreign soil (out of reach by the IRS) so this average is mostly bollocks
A lot of people used to think this about Swiss bank accounts, until the US government compelled them to hand over their account records. Now a lot of Americans are on the hook for years of back taxes, and potentially for criminal tax fraud...
If you severely underreport your income, the period of time for which the IRS can go after you never ends. That means, theoretically, they could go after you when you're 90 for income you didn't report in 2013/2014.
All this has given me a thought. If in the video game based economy for TF2 you receive a hat that can be traded on the marketplace or traded to others, do you have to consider that a taxable event? If you have something rare and it's potential value goes up, is it a capital gain? Is the depreciation similarly a loss?
And so now a business structure incorporating both Danish and US companies is probably possible, such that Bitcoin can be used to avoid taxes on dollar and euro income.
On one hand this makes sense. The IRS is trying to avoid early adopters from cashing out millions by purchasing goods to avoid paying capital gains tax.
On the other hand, this is debilitating for people who want to use BTC for day to day transactions. Imagine the paperwork involved. <- opportunity for a wallet app which tracks gains/losses
What is so hard about looking through the blockchain and backtracing all of your trades at a later date?
You know your own public and private key, so you can find all of your transactions and the date at which you've received or sent off BTC. Come tax day, you run a single program over all your transactions and you should be set.
There's no need to go "cloud" on this one, a simple offline blockchain app would solve the problem.
You need some sort of data source for what prices were at various points. This could be offline, but is likely to be big. Still, substantially easier problem than a lot of tax-related reporting.
IANA Accountant, but I would guess until/unless the IRS has blessed some particular entity, you can use any public-facing exchange but you should probably be consistent.
"using mixers is against the law (its money laundering)"
I think that's likely the case, and I think if it's not yet the case it will be soon, but do you know if this has actually been prosecuted (or otherwise made legally clear) anywhere yet?
You are either secure, or not secure. There is no in between. BTC is a permanent public ledger that can be analyzed for the rest of time. Without mixers (or similar techniques), it becomes possible to figure out lots of facts.
Similarly, your transactions can be tracked and analyzed because its all public information.
--------------------
And yes, people have been prosecuted for money laundering through mixers. (ie: Silk Road seizure + prosecution). So don't play the ignorance game, learn about the current state of affairs and understand the risks you're taking.
"You are either secure, or not secure. There is no in between."
First, no, everything is in between. You're never "secure", you're secure against certain classes of threats.
Second, I didn't say "secure", I said "anonymous". Leaving someone a handwritten note is more anonymous than meeting them face-to-face and producing ID, even if they could potentially hire handwriting experts and find you.
"BTC is a permanent public ledger that can be analyzed for the rest of time. Without mixers (or similar techniques), it becomes possible to figure out lots of facts."
Certainly. Even with mixers, it's possible to figure some of it out - I've said many times, "you're never leaking less information than you think". Even so, this sort of thing requires someone do the analysis, which is far easier to automate if you've got a big long list of (btc account, TIN) of a large percentage of actors in the system.
"So don't play the ignorance game, learn about the current state of affairs and understand the risks you're taking."
I own no bitcoins, and have never used a mixer. I'm not "playing the ignorance game", I'm trying to cure my ignorance. Don't be a dick.
This is exactly why a sales tax would make things so much easier. Who care about historic price points of when you bought and sold BTC, let alone the historic electricity costs and pool fees when you mined it. You buy a milk shake, you pay taxes. Want food, etc. to be taxed differently? Still easier than figuring out if you are operating a railroad/fishing farm in Alaska while running a BTC mining rig to heat your house using sustainable energy from your newly installed solar panels.
I am warily a supporter of a national sales tax to replace the income tax, but there are a few problems with it:
- Making it non-regressive, let alone as close to progressive as our current system, is damned hard. FAIR Tax-style check-cutting probably isn't enough.
- The tax would have to be high enough that black market sales would be extremely tempting. It's comparatively easier to monitor and regulate ~150 million workers, each with a small number of "tax events" per year, vs. hundreds of billions of taxable transactions.
- A sales tax has the potential to be at least as complex and distorting as the income tax, and probably moreso. Politicians likely won't be able to resist the urge to make favored products cheaper (or cheaper for favored constituents), and the levers available will be much more direct, as you won't have to wait until April 15 to see, say, your electric car credit.
"Making it non-regressive, let alone as close to progressive as our current system, is damned hard."
Its not really important or difficult. The state I grew up in has a long list of poor people exemptions by industry. Everything in the grocery store except hot deli food is tax free, for example. Tuition, medical care, bunch of other poor people things all tax free... As a poor person the only taxes you'll likely ever pay are the 100% or so gasoline sin tax and sales tax on a car. 5% depreciation on a new car is a fraction of driving it off the lot, and for used, especially for poor people, there's a wink and nod that if you're not involving a bank just don't submit anything completely ridiculous, and they don't enforce sales tax at all on family sales because they know we'd just avoid it via gift tax if they cracked down and other than divorce situations you'll never get family members testifying against each other.
Its important to keep the tax rate reasonably low compared to the "real world poor folks" inflation rate (not the made up one). Another way to think about it, is I live in a civilized (non-california) area and our cost of living is much lower. So you can express our 5% sales tax as living about 18 months in the future, or as living about 1/20th more like Californians. Its just not a big deal.
Now if you want a euro style 50% then the big problem isn't so much the poor as all the people trying to evade that kind of tax rate. We already have plenty of problems with petroleum fuels and tobacco products, imagine those kind of problems with "everything".
As a European, I wonder what you're referring to. My aggregate total tax, including VAT (I'm in the UK, so the VAT rate is 20% for standard rated goods, but like in your case there's lots of zero rated goods; I believe the top VAT rate in the EU is 25%) is ~36% on a salary that puts me well into the "1%".
(VAT accounts for "only" about 4 percentage points of that, as the amount of my post-income-tax income that goes towards non-zero-rated products is not all that high).
Marginal tax rates in many European countries can be around or exceeding 50%, but you'd have to be ludicrously wealthy with a useless accountant to actually pay anywhere near that, even including VAT, unless you spend all your money on drinking and driving.
I fail to see how this could be complicated. Assume poor person spends 100% of their income and all of it is taxed, so send them a "psuedo-basic-income" check of whatever minimum wage is times the sales tax.
I agree, it seems quite doable. The specific number proposed by FairTax.org for the "prebate" is relatively low, making the overall result somewhat but not very progressive (their proposal is a prebate equal to 23% of the national poverty line, e.g. $2650/yr for a single person with no kids). But that seems like a pretty simple issue to fix: just increase the amount, to whatever level of progressivity you'd like. If you increase it enough, you simplify the tax code and roll out something like a basic income at the same time.
It's true you can't approximate every possible tax curve you might desire using the model of a flat sales tax rate + a flat prebate, but by varying the rate and the rebate size you can approximate enough curves for it to be interesting.
It boils down to redefining the national poverty rate as a certain low fixed consumption/spending, rather than a certain low fixed income. Given that for poor people its pretty strictly income=spending its not a huge change.
I agree. The problems with your point about taxing the workers start at the asymptotes:
150 million workers have relatively little income compared to the top 1% who obtain a very large share of the income. They also have a lot more "tax events" and derive them not from wages but from capital gains.
We currently have 150 million workers and a middle class. Unemployment is going to have to be embraced when one janitor can clean 100,000 sqft building using a few very efficient machines, or a dozen workers can run a car manufacturing facility that produces a new vehicle every 3 seconds. At this level of productivity, which we are going to approach, the form of capitalism that assumes that those unemployed are a fringe group of people between jobs is not going to work. A new system is going to need to be developed, unless population is going to decrease at the same rate as productivity increases.
So the solutions as I see them are:
1. Make the government more productive so the tax wouldn't have to be quite so high. The government uses money in two ways: to run its internal services and to re-distribute the money. The former should be streamlined (making the IRS simple would be along those lines), while the latter can be reigned in by cutting spending to less needed services (e.g.: excessive military spending, tax loop holes, etc.)
2. Make the sales tax progressive by the type of item being sold. This goes hand in hand with your third point and can get complex, but the states already do this: food, clothing, and everything else are all taxed differently. Let's have a 50% tax on tobacco, and a 0.1% tax on food. Note that this is still more efficient than reviewing every single person's return and looking for exceptions.
3. Since the tax is national, there will be less problems than with the state tax in terms of determining where you have presence. Just charge the tax and that's it.
4. Issuing a refund at the end of the year does a person no good if throughout the year they cannot afford to buy food and shelter. To fix this, we need a minimum wage that actually lets someone support themselves. The amount should be re-evaluated yearly or if inflation jumps more than a regular percentage, and should rise with at least inflation. As we approach the productivity asymptote, basic income is going to need to be implemented as well.
Sales taxes are regressive, so much so that combined US state taxes are also regressive, being largely funded by sales tax. Refer to the big square in the middle of https://xkcd.com/980/
Simple taxes is a justice issue. A simple tax code will always be more fair than an arcane one.
If we're worried about the cost of living of people with incomes below a certain level, the best solution to that problem is a solution to that problem, such as an earned income tax credit, a guaranteed income, food stamps, health insurance supplements, and the like.
Almost none of the complexity of the tax code has anything at all to do with it being progressive. The progressiveness comes from the rate structure, which takes under a page to specify.
Almost all of the complexity comes from dealing with what to tax, not how much to tax it.
I agree and you misunderstand. I was saying that, as far as the tax code is concerned, complexity can be treated as orthogonal to progressivity.
I also think that complexity is a justice issue since it favors those with inside knowledge, lobbyists, and the resources to have full-time tax specialists at the expense of everyone else.
This second point is a big deal. It's why we see headlines about how multinationals are legally paying ridiculously low tax rates. It's a headline because it's not fair on its face, despite how legal it is.
The trouble with a refund is maybe the person can't afford to pay (price of goods + taxes) in the first place. And it seems strange to collect sales tax, then redistribute the money as food stamps, to reduce the burden from the sales tax.
Or why not inflationary tax? We already have it, but if it was made the sole tax, we could get rid of whole bureaucratic industries for processing tax. Inflation encourages spending which is good for the economy.
How could wages possibly keep up with the inflation that such a scheme would create? If they don't keep up, the government needs to print more money to provide more benefits to keep people from starving, and you have a pretty vicious circle.
We are already partially taxed by inflation. I think about 1% per year. Minimum wage should be matched to inflation and living costs.
Obviously it could cycle out of control if the amount of money printed wasn't regulated. But it could be a decent method to cut no-value-add industries (IRS, accounting).
Job mobility could be higher if you didn't have to file with the government every time you got hired. So the worker would have more leverage over the employer if they did not keep wages sufficient.
Additionally, there are many untaxed workers right now that we would then be taxing if inflationary or single tax was used. Ex, waiters, other tipped jobs, sketchy corner store that only take cash, illegal immigrants who work under the table
Presumably the process of figuring out the bankruptcy will involve either giving people some of their value back or letting them know they aren't getting anything.
“It’s challenging if you have to think about capital gains before you buy a cup of coffee,” he said.
This is exactly why we need to quit caring what the IRS, Fed, Treasury, Inland Revenue, etc. think of Bitcoin, and focus on it's use (along with Tor, tumblers, and other technologies) as an untraceable, anonymous crypto-currency that lets us avoid dealings with the IRS and agencies of their ilk.
Will this work against "mainstream" adoption of Bitcoin? Maybe. Who cares? Personally, I'm not interested in Bitcoin as yet another way to incur additional entanglements with corrupt, evil and bureaucratic government agencies.
Government is damage, and we, the hackers, should be working on ways to route around that damage.
Let me know how that works out for you when the IRS wants to know how you bought that house, car, and boat with all the money you never reported. When the IRS shows up at your door and your answer is "hahaha sorry, it's all untraceable and anonymous, you can't know how much i own!", I'm sure they'll throw their hands up and walk away in defeat.
I'm sure they'll throw their hands up and walk away in defeat.
That should certainly be our goal. We're hackers, we're better than this. Again, we should be looking for ways to route around the damage, rather than embracing it.
Interesting, but unsurprising. The more interesting aspect is that unlike tangible property, bank accounts or stock transactions that can be audited, this seems practically unenforceable on the IRS's part.
In short, despite what many seem to think ?? -> Anything they do / will do / or try to do is simply a hack. The problem they have isn't going away - they'll eventually need increasingly draconian legislation to monitor bitcoin transactions.
It will be (almost entirely) up to trust in the long run.
The problem that techies don't seem to realize...is that the system has always been about trust from the very beginning.
It was only within the past decade and a half that the IRS even acquired the ability to to spot discrepancies in returns based on filings from different taxpayers (due to the increase in e-filed return. Before that, enforcement relied almost entirely on random audits and tip-based investigations.
Not only when they're exchanged for regular currency, but for anything else conspicuous. The IRS regularly catches people underreporting cash earnings by noticing they're living way above their official means: someone bought two cars and a vacation home despite no significant source of income reported. If you buy the cars and the vacation home with bitcoin, it'll be the same deal.
To avoid scrutiny, you'd have to either not spend the bitcoin at all, or only buy inconspicuous things with it, perhaps intangible things like streaming-video subscriptions and videogames.
I thought the way these things normally work is that someone notices that your standard of living doesn't seem to match what they know of your income, and that news makes its way to the IRS (possibly via local law enforcement?).
The IRS requires that you send them a form every year where you voluntarily tell them your income and sign it, swearing that it's true or risk penalties of fines or jail.
As for cash and cocaine, you track the items that it's being spent on.
If you buy a burger with bitcoin, then, well, noone cares if you didn't pay taxes on that; but if you buy a car or a mansion with bitcoin (or bitcoin-derived resources), then the item is visible, and they can audit your income and purchases to trace the source of that money (and untraceable source = your problem).
They have gotten really good at finding money. Even
employees at banks are rewarded by the IRS for turning
in anything they think is suspicious--not just over 10K
amounts-anything the minimum wage worker "thinks" is
suspicious! I'm not bashing minimum wage workers--just
pointing out low level workers can turn the IRS on you.
Personally, If I came into a huge amout of cash. I would
bury it, until inflation really gets moving. If you bury
it, do it sober. True story: I know a guy who buried
800,000 grand in a PVC pipe--while intoxicated on a conacopia of substences. He woke up the next day
and couldn't find where he bured it. When ever I drive by
the house the guy lived in--I feel extremely sad; even
though it wasen't my money--such a waste. What's even more
interesting is the ex wife told the current owners of the
house that there might be close to a million dollars on their property. The owners did not believe, or even do
some test digging? Sometimes, people do tell the truth. I
wish I was never told that story.
>Bitcoin miners would have to report their earnings as taxable income with a value equal to the worth on the day it was mined.
Maybe the rules are more thorough in reality than in this article, but how would the above statement apply to people who mine in a pool? Would only the person who hits the hash have to report the income? Would all of the miners?
Additionally, how does the IRS plan on enforcing any of this? It seems like an anonymous currency would be ripe with disregard for regulators.
Pool mining would be no different. Basically the rule is that you "recognize" the income when you receive the bitcoins, be it through pool mining or individually -- it makes no difference.
Sounds like an absolute tax nightmare. In a pool you are awarded some small amount of coins every couple hours. Mine for a month, and you'll have hundreds or thousands of "bitcoin income" events, each with its own market price.
What's the nightmare there? You need a single simple report (excel sheet?) from the mining pool and just total them up.
Hundreds or thousands of events is nothing special - if your income would come from selling stuff in a tiny shop, you'd likely have that many receipts to report.
Many people have mined across dozens of different pools over the years (and for different currencies as well), and many of those pools are now defunct.
I believe you just stated the new killer feature for mining pools. Miners will presumably dump pools which make their taxes harder for pools which make them easier.
Am I missing something or would this be nearly impossible to track?
You buy some bitcoin here and there and occasionally transfer some to a wallet from which you pay for items. The price of bitcoin is rising and falling constantly, such that when you buy that cup of coffee, you could either be realizing a capital gain or loss of X amount.
How on earth would you track this without losing your mind? And, how would the IRS enforce this?
If you obtained stock prior to 2011, and sold it, the IRS has no idea what the cost basis is, so this is voluntarily reported by the filer (and this will determine your capital gains). Of course, if you fudge this number to the point it is noticeable, you're looking at between a 20% and 100% penalty, or possible civil fraud.
Bitcoin is really no different. It doesn't matter if there's no easy way for the government to keep track of every taxpayer's BTC holdings, because if the IRS determines at a later time that you have provided inaccurate information, you're in trouble. Maybe one day exchanges will provide 1099s for sales, but until then, it's the same rules as any other unreported income.
You don't have to use any particular approach, you can choose to match up purchases and shares however you wish (FIFO, LIFO, per-sale tax optimization). You just need to make sure you track what you're buying and selling, so that every purchase and sale are matched.
As of 2011, your broker does this for you -- and different brokers offer different levels of sophistication in their tracking. Some only offer FIFO and LIFO, others will do more complex optimizations for you.
For purchases before 2011, you need to save info on your purchases lot-by-lot and match them up yourself. This has screwed me several times, when I can't remember when I bought a certain stock and can't put my hands on the appropriate statements at tax time. Royal pain.
If a user has a reasonable knowledge of bitcoin, they can't. They can monitor it only when it hits the existing financial structure. If you don't cross through that, they (in effect / in most cases / under normal circumstances) can't really see it.
Well, since the ledger is public, if you manage your coins yourself, all they need to know are the address(es) that are yours. They can look up what's in them with a copy of the ledger.
If your bitcoins are in an aggregated account like Coinbase (or the now-dead Mt. Gox), they'd probably put in bank-like reporting requirements that make the bank tell the IRS how much money you have if you have enough of it.
Umm, just as with any other expensive property - they ask you to declare them; and if you conveniently forget to declare it, but at some time later (say, after 5 years) they somehow find that out, then you go to jail.
Are you sure that you can hide that stash (and all purchases/deals made from it) permanently?
Thank you. I haven't researched the subject. I still think you will be better of dealing with German tax authorities than with IRS. I suspect there are and will be some European countries that treat bitcoins with more leniency.
So we should be tracking our bitcoin in our wallets by age, such that when spending we incur long term capital gain vs short term (if possible)?
Or perhaps use the most recent bitcoin purchased if the value is relatively the same as purchase date, thus seeing no gain (vs say 2 yr old coins which have greatly appreciated).
> So we should be tracking our bitcoin in our wallets by age, such that when spending we incur long term capital gain vs short term (if possible)?
That would have been daunting in the paper-records era, but with Bitcoin, discovering the tax implications may be a matter of running a shell script against a database of transactions.
In modern investment tax accounting, most issues revolve around comparing the present value of an asset against something called its "cost basis", meaning the price paid for the asset when it was purchased. This should be an easy issue to sort out for a virtual currency if proper records are kept.
I wonder what other "proof of work" algorithms also now generate taxable events. Or whether something mundane like using iterated bcrypt2 turns the resulting hashes into property which I have to report to the IRS?
It still doesn't clearly address the question of how those who mine bitcoin should be taxed. I guess your cost basis is a prorated portion of what you've spent on bitcoin mining. Very hard to do the accounting.
If you're mining in a pool, you should have a record of when you got each fractional allocation of Bitcoins. You could then look up the Bitcoin/USD rate at that time from historical data at one of the exchanges. This is going to be one very large spreadsheet.
One benefit is that you can probably batch rounds together and only count the bitcoins as "realized" when they are sent from the pool to you (at payout). This way you won't have to figure out the rates for each shift.
Theoretically you could probably choose any arbitrary price on the day you "receive" the bitcoins.. which given the nature of bitcoin price fluctuations could be significant.
The coins received from mining are treated as income by calculating the dollar value at the time they were received by the miner.
If they are later sold, the change in value is treated as a capital gain (or loss). The mining expenses would probably be somewhat deductible (but this isn't the same thing as a cost basis).
The thing that is probably going to catch people out is they are going to not pay self employment taxes on the mining income (it's going to be hard to defend as a hobby).
Does this mean that Bitcoin are more legit now and will be picked up by more institutions, or since the IRS doesn't consider Bitcoin a currency, will that stop companies from using it (for regulatory reasons?)
I am confused about bitcoin taxation and mining, I mined coins back in 2011, when they were $7. They matched my costs of hardware and electricity. Are they both income and capital gains (when I sell over a year later)?
Yeah, I'm kind of confused on this too. I mined a few years ago, played around with the coins a bit (lost a few), and have left them in a wallet since.
So, technically I pay the taxes on them in 2011 as income tax (when I 'mined' them), at the price I mined them at, and then I will pay the difference between that price, and the price I sold them at as capital gains?
Can anyone else in a similar situation chime in here?
I think you would need to refile your 2011 taxes, recognizing the income (and probably deducting some of your mining costs, but it isn't obvious that would be 100%). If you sold them that year, you would also figure the capital gain or loss.
In a later year, you would list the capital gain or loss.
Hopefully now that there is some regulation and rules in place, Apple will allow Bitcoin apps. We'll definitely need some since now we have to keep track of a bunch of tiny capital gains and losses.
What does this mean for Mt. Gox users? I know it would be for next year's return and we're not even sure how much has been lost yet since they are apparently still "finding" wallets.
Compared to getting the general public to accept virtual currencies for everyday transactions, shouldn't it be relatively easy to convince those same people to put pressure on the IRS and congress? In fact, this is a particularly good year to begin such an effort, since the Senate is in play in the midterms. If predictions start to indicate an unusually high turnout of virtual currency supporters, it would throw a big wrench into almost every political playbook (which are presently primed for older, conservative demographics).
Unless there is some reason to believe virtual currency supporters make exceptionally large campaign donations, I'm not sure why any Congressman would be swayed by what can't possibly constitute more than a tenth of a percent of the voting population.
Bitcoin supporters would be better served talking directly to their current representatives outside of an election context and even to the IRS.
An organized, vocal minority can still be persuasive without being big donors themselves. But talking directly to current representatives is exactly what I was suggesting.
The U.S. has no property taxes in that sense (a tax on all owned property, more commonly called a "wealth tax"). Some states have a tax called a "property tax", but it applies only to land and buildings ("real property"), not to other kinds of property such as stocks, baseball cards, gold, bitcoin, bank accounts, paintings, etc.
In many locations the taxes on vehicles come in the form of a separate excise tax on 'value' given to the vehicle based on its original value and age, this tax is administered at the City level where I live in Massachusetts.
Are there locations in the US where the general property tax is applied itself to vehicles? Or were you simply stating that things other than land and buildings could be taxed, and not that the property tax applies to them?
Property tax is subtle, but here's what it looks like in a nutshell:
The article talks about treating it as property vs currency. If the IRS chose currency, all realized[1] gains/losses on BTC get treated as ordinary income (lumped in with salary/wages) and get taxed at income rates. For most bitcoiners this would be around 15% if your salary is under $75,000/yr[2] and around 30% if more.
If the IRS chose property your tax rate depends on how long you held it (and some other things, it's subtle. But mostly how long you held it). If you bought and sold within a year it gets pushed into ordinary income as shown above. If you held it for over a year you pay 15%[3] on the gain.
Note that property transactions still kick into gear even if you didn't cash out into dollars. If you bought in at $10/BTC, get a new lambo[4] at $1000/BTC you pay the property tax (capital gains) on the bitcoin gain.
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[1] Gains from when you cash out (cash out price - buy in price)
[2] Upper middle class in most of the country, excepting the very big and trendy urban centers
[3] If you sold those collectible bit coins you'd probably pay 28% on the gain.
[4] So there's this guy, and he's got a brand new Lamborghini and he wants to put a mezuzah in it...
How does this work for a coffee shop that does not exchange bitcoin for dollars? Say they sell a medium coffee for $4.44 (that's the price I pay for my coffee at my normal "spot.") Or you can pay, say, .002 BTC (I'm guessing here on the amount BTC). But let's say if you send them bitcoin that they just keep it or spend it somewhere else that also accepts bitcoin (and preferably that also doesn't cash them out).
Actually, I think I stated that kind of backwards. If I sell you a cow for 2 BTC, then I owe taxes based on the cash value of the cow. Same as if I sold a cow for 10 pigs. But, you can't pay taxes in BTC or pigs, so that is one thing that will always keep USD in use.
That's a good question. You never realized the gain. What tax would you owe if you bought a diamond for $1, it went up to $10, and then got stolen. My guess would be nothing -- but I am not an accountant.
Well crap. I bought them for about $50 in Feb 2013.
EDIT: Now I don't know what to do. This is kind of confusing. I bought 1.82 BTC in Feb 2013, traded, played around with them, and lost some. Then I sold what I had left to Gox USD about 5 months ago ($500) and repurchased 2 BTC during the "withdraws are disabled" period a few weeks ago. I'm going have to read more about this I think.
I'm not a lawyer or a tax advisor... but I'll tell you what I think so that you can kick-off your research.
You spent $50 and then sold them for $500. That is a $450 short-term capital gains tax. If you held onto them for more than a year, then it'd be a long-term capital gains tax. (But since you were actively trading, its definitely going to be taxxed at the higher short-term rate)
You then re-bought the 2BTC and totally lost them. That would be a capital loss (which if reported, will lower the amount that you are taxed)
Don't take my advice: Forget about it. Don't spend many hours trying to report a relatively small loss the IRS presumably doesn't know about, especially of a new type of property the IRS might be very interested to know (if only via an audit) how much more you have possession of.
Really good question. I would guess that the states issuing MSB licenses are going to keep doing whatever they've been doing. This is taxation guidance, not necessarily a definitive ruling that Bitcoin shall be treated as property by every entity for all legal purposes.
Hypothetically, if a person still had Bitcoin drawn from a btc faucet (by that person), would that count as a gift, treasure trove [+], or something else?
I can't tell if this is good or bad. But, does it strike anyone else as odd that the IRS ignores that bitcoin _is_ actually currency? Can they even declare it to be property when the reality is that it is currency?
> But, does it strike anyone else as odd that the IRS ignores that bitcoin _is_ actually currency? Can they even declare it to be property when the reality is that it is currency?
"Property" is a statement about a legal relationship between a person and some (tangible or intangible) thing.
"Currency" is a statement about an attribute of a thing idnependent of its legal relationship to any person.
Whether a thing is "currency" and whether it is someone's "property" are orthogonal concerns. It can be either, both, or neither. The fact that it is one does not prevent it from being the other.
As I understand it, the main difference is that, if it were currency, you’d need to go though a lot of regulation to process it, keep it and change it with dollars.
I doubt the IRS can influence SEC and the Financial commission into the finer points of Legal tender. What they say is: no matter that, these things are like stock, and we feel the right to tax your profits on trading them.
Sounds reasonable to me.
Put otherwise: it sounds like when a lawyer (or The Dude) says that you are “an asshole”. Most lawyers don’t really have the moral standing to accuse anyone of that, but what they are saying is: my qualifications are telling you what is legal and what isn’t, and this unsavory action isn’t illegal. IRS is saying: BitCoins are not just to pay for your groceries, they are a way to store and accrue value; they have no standing on how convenient they are or should be to buy groceries.
Collectible antique coins are also currency -- a buffalo nickel is still legal tender, but you'd be a fool to use it in a bubble gum vending machine. Nonetheless, the IRS treats them as property, for purposes of taxation.
What does this mean if a person bought a Bitcoin for $400 last year and now it is worth $583.03. What is the proper way to record this on a tax form? Will they have to pay tax now or when they sell the coin?
It sounds like no taxes would be collected at this point according to this:
"Do I need to file or pay taxes if I own Bitcoins?
Not if you bought Bitcoins or any crypto-currencies with your own money. However, if you traded, sold, or used any to purchase something, then you might. If you were given Bitcoins as payment, as a salary, or as a gift/donation, this is income and should be reported as any other income you earn.
If you sold any, spent any or even traded one coin for another, then this is a tax event. This probably means you either gained or lost some money on the of the coins you just disposed. Gain or loss, you are supposed to include the sale on your tax forms and include the profit or loss you made. This is taxable as capital gains."
You don't itemize your property on any tax form. If I bought AAPL stock some time in the past, but haven't (yet) sold it, I don't report that position to the IRS.
would this ruling encourage more Bitcoin hoarding?
>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 on property sold within a year of purchase.
This is one of the many equally valid options for e.g. calculating the yen/USD conversion if you happen to have many yen transactions which are approximately equally distributed throughout the year. (The Treasury Department has a handy web page listing yearly averages for reference, but you're allowed to use any number which is reasonable and consistent. One of the best reasons to keep good books is that you can try several reasonable methods and then consistently adopt the one which is most favorable to your interests. Welcome to taxes, if that being OK is counterintuitive.)