Topic: 1099 on Bitcoin income for contract work? (Read 3831 times)

lol. fight fight fight. a lawyer and an accountant.

You are calling me ungrateful for asking for information on a PUBLIC FORUM? Well that's nice. I can see where the rest of this thread is going to go.

I thought there where good people out there trying to build UP the bitcoin community. Now i see it is all about greed.

OP asks for accounting/legal advice, gets referred to 31 page document written by a lawyer that costs less than $5, reveals himself as ungrateful, to say the least.

blakdawg, The rest of your examples and hypotheticals are premised on ownership of these mythical (unduly inflammatory?) bitcoins. I think you are conflating two issues: (1) ownership of unspent outputs and (2) value of unspent outputs. Obviously, unspent outputs have value as determined by the market. But the air we all breath and oxygen within it has value, and some people pay for it at oxygen bars, but even though you use and consume it or otherwise exercise dominion or control over it you do not 'own' the air and oxygen.

When answering a question one should be careful of any logical problems such as a negative pregnant. A negative pregnant which appears in pleadings will often elicit a request for further and better particulars, or an interrogatory. For example, if there are 5 cookies and A ate cookies 2 and 4 then if C asks A 'Did you eat all the cookies?' and A answers 'No, I did not eat all the cookies.' then A's answer is inaccurate and A should have answered 'No, I did not eat all the cookies but I did eat cookies 2 and 4.'

What you have not established is whether there is ownership of unspent outputs.

So, first, what are you asserting someone is 'owning'?

In other words, if I ask you "Do you own any bitcoins"? then what is the correct answer and why?

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One possible answer would be: No, I do not own any bitcoins because bitcoins do not exist. And a good criminal defense attorney would want to establish this as the correct answer because it reduces or even eliminates the amount of available facts for a prosecutor to work with.

By analogy: Did C murder A? No, A is still alive.

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Or another possible answer would be: No, I do not own any bitcoins because bitcoins are unspent outputs recorded by address in the longest blockchain of the Bitcoin.org open-source software program which is governed by an open-source software license.

By analogy: Did C murder A? No, C was driving a truck. A was struck by a truck. A died.

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Or another possible answer would be: Yes, I own all bitcoins because the Bitcoin.org open-source software program provides for a free and unlimited distribution of the software so long as I include the license. (This would be the same track to go down if someone attempts to compel production of any particular wallet's private key. And compulsory production of private keys is the subject of a potentially precedent setting Fifth Amendment case and EFF brief. In England if you do not provide a private key then you can be thrown in jail for two years. Which begs the question, what if you do not know the private key they assert you know or possess?)

By analogy: Did C murder A? Yes, C murdered A and B and D and E and everyone else.

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Another possible answer would be: Upon information and belief I do not understand what a bitcoin is or possess enough information to either confirm or deny whether or not I own any bitcoins.

By analogy: Did C murder A? Upon information and belief I can neither confirm nor deny whether A is dead.

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The bottom line is that money and currency are the most complicated of all goods in the marketplace and the Bitcoin software protocol is an apex production and the result of the cumulative learning from branches of knowledge such as physics, chemistry, computer software, mathematics, cryptography and networking which has resulted in solving the double-spend problem that vexed computer programmers. And currently there are no definitive legal answers.

I am enjoying this Subject

Perhaps it just stung because you're having a harder time maintaining the fantasy in the face of meaningful criticism? I don't know anyone involved here (at least not by the names they're using) well enough to have personal ideas about them.


Ok, cool. Bitcoins are 'air guitars' or 'unspent outputs' a/k/a Fairy Money. If you believe BTC's have no value, please put your moneyair guitars where your mouth is and send 100 BTC to this address:

1NjgvNBhqJyDGkTF7BeNPGW16XVHdHm8j2

We'll all be able to watch that on the blockchain and see if you actually believe that these are "unspent outputs" with no actual value and title that's speculative at best.

You also might want to go post on the threads about the various Bitcoinica losses and point out that the people who think they have lost something because they have lost their BTC's have actually lost nothing, because BTC's have no value, and they didn't have good title to the BTC's. This will save people a lot of trouble and heartache - a lot of people are pretty worked up because they think that hundreds of thousands of USD worth of value have been misappropriated. What they didn't realize is that they voluntarily exchanged something of value (effort/goods or actual funds) for air guitars, and all of the real value was gone at that moment, and the fact that they don't have quite as many air guitars or "unspent outputs" as they used to is meaningless. They never really had good title, anyway, and they were morons for exchanging something of known value for imaginary computer doodads that nobody really owns, anyway.

Right?

On the other hand, I suspect that you (as well as any tax authority or judge who bothered to look at the issue) will believe that BTC's do have value, because they are readily and easily exchanged for value globally, and there are even several exchanges which helpfully maintain up-to-the-second realtime exchange rate tables between this valueless Fairy Money and various national currencies.

I really don't believe you could make the "BTCs have no value" argument with a straight face. But if you can, please send me all of yours, because I do think they have value.


No, a tax professional would tell you that whether or not the purchase is deductible depends on how it's used. It might be an ordinary and necessary business expense, it might not. (Hint: Where would that expense go on a 1040? Would different taxpayers put it on different schedules? Are there some taxpayers who wouldn't have a schedule to put it on?)


Well, I'll grant you that's an interesting hypothetical. If some guy really did agree to do meaningful work in exchange for a free download of WordPress (which is available to everyone, globally, for no consideration) then you're probably right, there's no income and no expense for anyone. The performance of the service would probably best be characterized as a nontaxable gift.

But that hypothetical is of limited utility to us in this conversation because nobody does that in the real world. People who do work want to get something of value in return - like, say, money or goods or services. If someone does some work and they get BTC in return, I don't think there's any real similarity to your WordPress example because there is no source of BTC's that distributes them freely without limitation. If the BTC faucet somehow broke and gave people any number of BTC's they wanted at any time, then I agree that someone who was working for BTC would best be considered a volunteer (or the grantor of a gift); but if someone figures out how to generate an unlimited number of BTC's and they start handing them out to anyone who wants them, we're done here anyway.


See, here's where my bullshit meter goes right off the scale - if the previous argument (BTC's have no value, or BTC's have no value until they're turned into something else) holds water, why would anyone need to deny anything? Legitimate planning is designed so that it can be disclosed, completely and fully, to the relevant authorities and there's no "you can't prove it's really me" crap going on.

This reminds me a lot of the idea that was popular about 15 years ago that nobody would ever be convicted for anything involving the Internet because it would be too hard to prove which human being was actually responsible - it's all just bits on the wire, and who the fuck knows who's at the other end, right?

And then 10 years ago people thought that you could do pretty much anything you wanted on Ebay without thinking about tax, because Ebay is like a giant garage sale, and everyone knows that even if you get some cash for your stuff at a garage sale, there's no income because everyone takes a loss at everything at a garage sale, and besides, Ebay names are things like "PonziMaster6969" and who the fuck is that, and it's gonna be a lot of work for IRS to subpoena Ebay and Paypal and they probably won't bother because the IRS is lazy, and besides, maybe it was the dog who sold that stuff on Ebay (can dogs even have income?), or the neighbor, or some creepy guy using your open WiFi hotspot, so we don't really know what happened, so it can't be taxable, right?

That hasn't really worked out very well.


Yeah; and if I put all my money from my job in my left pocket, but then sometimes I put some money from my secret job in my right pocket, I don't have to put that secret job money on my tax return BECAUSE IT'S A TOTALLY DIFFERENT POCKET, DUH! If the IRS asks "how much have you got in your pocket", I'm only gonna tell them about the left pocket. What are the chances that the IRS agent is gonna know about pockets, and that my pants might have a bunch of them. Even if they know about four-pocket pants, or five-pocket pants, I have a pair of pants with SIX pockets. SIX! There's no way IRS is gonna know about my six pockets, I'm home free!

Do you really believe this stuff?


That's a nice collection of tax buzzwords, but what does any of that have to do with BTC? People have been doing those things for years and years with our old-fashioned banking system.

I will agree that BTC might make some of the cross-border or inter-company transfer issues easier for smaller entities, because the cost and time of international transfers can cause a lot of friction making it impractical to use some strategies unless the actual amounts involved are big.

But BTC isn't changing the nature of the transactions, just the economic level at which it's cost-effective to implement them.


So, I agree that would be true in what I believe is the incredibly unrealistic scenario where some anonymous programmer or web designer works only for BTC, manages that BTC directly with a live "fat client" wallet, and never spends any of it; and as long as the paying entity doesn't have reporting obligations or other workers who become disgruntled and turn into informants, or the worker gets paid small amounts by lots of individuals.

The problem is that's not a very exciting business plan, or life - because as soon as that person wants to spend some of their BTC, they've got to participate in the other financial system, and that other financial system is full of cross-links with the tax authorities.

I suppose that person could exchange BTC locally for cash in an anonymous transaction, if they live/work in an area with others who are interested, and then they could spend that cash on low-profile things they enjoy that won't attract attention or show up on lists of expensive purchases.

And, to be clear, what we're talking about now is tax evasion at an activity level that's low enough to avoid notice, not earning income tax-free.

Even that isn't a giant change in the nature of our economy or taxation - it's making off-the-books employment a little easier for knowledge workers, so they're on a par with restaurant and construction/landscaping workers, but that's also happening because of the growth of the Internet generally.

But all of that is predicated on an actual use of BTC that seems at odds with what's happening in the real world - perhaps this forum presents an unrealistic view of reality, but I get the impression that a lot of people aren't handling their BTC with traditional fat clients on their own PC's, they're transferring funds back & forth between bank accounts and online exchanges and other currencies and trying to find ways to make money move as quickly and as easily as possible between an online exchange and a traditional bank account, which are two different entities who are absolutely going to comply with an IRS subpoena and will cheerfully hand over everything that's asked for and probably more. If you look at the level of detail that's disclosed in the various Bitcoinica postmortem threads, it's pretty clear (if it wasn't already) that the exchanges have perfectly good records showing what happened, and when, tied to E-mail accounts, IP addresses, and bank accounts.

So you can say that in a hypothetical world BTC has eliminated the need for intermediaries who are subject to subpoena and that a transaction is private between the two parties involved - but that's only true if both parties are careful and conservative, and those are not words I would use to describe a lot of the people operating in the BTC environment. In the real world, I see intermediaries all over the place - the only question in my mind, if the tax authorities or law enforcement get interested, is whether they're going to get those records by seizing the US-located servers, or by issuing a subpoena to the operators.

Sure used personal words.



It would be helpful for a tax professional to understand the technology and how it works.

First, 'bitcoins' are not an alternative currency but instead air guitars. One interesting twist with BTC is whether, if with anyone, or how title vests to 'unspent outputs'. Keep in mind that there are no 'bitcoins', which are just an abstraction, but instead just unspent outputs recorded in a free open-source software program on hundreds of thousands of computer that is governed by the following license.


For example, tax professionals would agree that if you paid USD via a credit card to either download or access via a SaaS Turbotax then Intuit would have income and the user could claim a deduction as an ordinary and necessary business expense. But if you download a free copy of WordPress then you would not have 'income' even if it were in trade for a service due to the illusory nature of the contract because it lacks consideration.

Second, there is plausible deniability created by anyone with the private key being able to exercise control over 'unspent outputs' which complicates the issue. Were the unspent outputs associated to the public key that Bitcoinica regularly exercised dominion and control over moved to a different public key by a Bitcoinica agent or by some other actor? So likewise one could claim they did not sell a good or perform a service in exchange for any 'unspent outputs' which can be sent and received without the consent of anyone except for whoever has the private key which could be obtained through brute force techniques.

So even if 'ownership' of 'bitcoins' were established or conceded then there are still plenty of issues with regards to always using a different public key address to receive 'change', tax arbitrage opportunities from jurisdiction or person/entity such as with deferral for overseas earnings or shifting tax brackets, transfer pricing, 2503(b) gifts, etc. For application of the relevant law reasonable minds will differ even among credentialed professionals.

So, I disagree with blakdawg that the legal and tax issues and how they could be applied can be extremely complicated and novel.

Third, establishing a case with evidence has not even been talked about. Doing so could be an absolute nightmare. A few of my friends work within the tax departments for the large accounting firms and they are often required to point out where reasonable issues exist on the tax returns. In effect, they wave the red flag for where the IRS should look which helps make the decision of whether to audit or not. FACTA has been implemented largely with the purpose to wave red flags where to look with individuals. Same with the requirement for 1099s for any expense over $600 (which was later repealed). Keep in mind that IRS agents are measured based on how quickly they settle cases and how much tax revenue they generate. There are limited resources, with chronic underfunding, so agents often go where they are going to be most profitable.

Currently, the sheer nature of a Bitcoin audit would be extremely costly in both time and dollars and most likely not yield very much additional revenue since the economy is so small. But you can be assured that if Bitcoin becomes more widely adopted then large multi-national companies will begin using it creatively so they can keep their preferential tax rates like Google's 2.4%.

With the Bitcoin protocol being both the blood (USD, EUR, etc.) and the veins (credit cards, bank accounts, wire transfers, etc.) it eliminates the need for third parties that facilitate value transfer which could provide helpful records when served with a subpoena. Thus, the IRS will either need to be a party to the transaction, which would be infeasible, or be involved with an informant.

For all of these reasons I think the conversation between Jon Matonis and Max Keiser about Bitcoin is particularly interesting and, probably, prescient with regard to the tax future.

So I should set up a BTL miner and count it as a business expense and loss? Interesting.

Good - it wasn't meant to offend. It's hard to know when, in the course of a new project, it's worth investing in infrastructure. If you spend too early, you kill your new thing with unnecessary expense and hassle. If you wait too long, you may regret choices made earlier without full understanding of their implications.

Pretty much nobody hits it right on the nose, we do the best we can and hope for the best.

I don't think the legal/tax issues raised by BTC are particularly complicated or novel - the technological twist is new, but people use alternative/foreign currencies and barter transactions all of the time, and have done so forever. But a tax professional doesn't need to know how to mint their own BTC's to help you, they just need to understand what it is that you're doing.

The biggest obstacle I see is the fantasy that because something happens on the Internet or via computers, that it's somehow not subject to ordinary laws, or that it's inherently so obscure and confusing that LEO's and tax authorities will be way too stupid to even notice. That is an attractive fantasy but it is wholly untrue and a pretty dangerous assumption upon which to build a business/livelihood.

And, frankly, most people would probably do better looking at BTC mining/trading as a business and deducting related expenses and losses, versus thinking it's their secret black-market income source, where they spend $2000 to end up with $500 in mysterious Internet money.

I did not take blakdawg's statement personally at all. It was a general statement and I wasn't sure what to make of it.

Thank you for your added comments.

unclemantis, I do not think blakdawg's statement was intended to be taken personally.

He is merely illustrating the differences people have when it comes to weighing the value proposition that skilled and competent tax and legal service providers offer which is not a whole lot unlike insurance. It is a balancing act between (1) the cost of the service provider, (2) the probability of a negative occurrence happening and (3) the potential cost of that negative occurrence.

Those people that hire the tax and legal service providers are generally those that find an ounce of prevention is worth a pound of cure.

Personally, I have always been one to buy an ounce of prevention in the hopes of preventing a pound of cure. The last lawsuit I got out of we won on summary judgment with prejudice and the judge still did not give us any attorney's fees ($65,000). But tax and litigation is just part of the cost of doing business. Making money the legal way, and not having to worry about looking over your shoulder, is generally a lot easier and less stressful than doing it a shady way; just look at the Monex whistleblower example.

I am really not sure how to take what you said. Should I be insulted? Flattered? Confused?

I appreciate the thought but I am not taking new tax clients.

My experience has been that people don't want to pay a lot of money for bad news - it's fun to argue on forums about fantasies about how getting paid in bananas or PonziCoins means that one isn't earning income, but the simple facts suggest otherwise (e.g, would you do the work if you weren't getting the bananas? are the people handing out the bananas giving them to people in proportion to the work that's done?).

Similarly, there's always some goofball who's ready to pipe up with "I've been evading taxes for years and I haven't gotten caught yet, this proves that all taxes are a giant scam!".

So I can try to get those people to pay me a reasonable hourly rate to educate them about how the tax system works - but the end result is double unhappiness on their part, once because they have to pay me and once because I tell them things they don't like (e.g, they have to pay some tax on their income). This doesn't work out so well, even though in a rational world you'd think people would prefer to pay 1X to learn how to do things right, rather than 20X to get bailed out of trouble later.

Or, they can continue living in a fantasy world until one day they get a scary letter from the IRS or their bank account is empty, and then they will call me, and they will be happy to pay me what now looks like a comparatively small fraction of the wealth that they think they're about to lose or have already lost; and when I tell them that they can keep some of their money instead of the IRS keeping all of it, that looks like good news to them, not bad news.

So, people can knock themselves out organizing their economic lives around information provided by lunatics (which are usually fantasies) or the tax authorities, which is a little like a criminal defendant getting legal advice from the prosecutor. Have a great time.

All of the statutes, cases, regulations, IRS guidelines, etc. are available to the public for free and you can go get them yourself and seem capable enough.

But if you want assistance in this highly technical area then have you considered retaining an attorney or CPA?

I understand it may cost about $1,000 to pay for their initial research to learn this area of tax law before they can even begin to apply it to your situation and I would make a recommendation of one that already has experience in this area but all the ones I know currently have enough work and are not taking any new clients. Perhaps blakdawg is taking additional clients and will send you his client contract.

http://www.irs.gov
http://www.law.cornell.edu/uscode/text/26

In particular, Publication 525 (not legal authority, just a guidebook published by IRS) re Barter:


I think it would make more sense for the people who wrote that BTC tax guide to publish it for free and become known as people who know tax, law, and BTC rather than being known as the people who are always trying to sell a book nobody's read. But it's a free country. 

To close the loop on your first question, there are two distinct obligations: the person who pays for services must issue a 1099 at the end of the year. The person who is paid for providing services must report the income on their tax return. These two obligations are independent and legally unrelated. This means that the service provider must report the income even if they don't get the 1099. And the recipient/purchaser must file the 1099 and send a copy to the service provider, even if the purchaser knows the service provider is going to shred it immediately. "But I never got [or, you can't prove I got] the 1099!" is not a defense.

I refuse to pay for this information. Can someone else send me to PUBLIC INFORMATION? Thank you.

Addressed here:
 - http://en.bitcoin.it/wiki/Tax_compliance#Are_bitcoins_taxable_if_I_earned_them_by_doing_a_service_for_someone_else.2C_or_received_them_in_exchange_for_something.3F

I'm assuming you meant the IRS form 1099?  Or specifically, the IRS form 1099-MISC?

That is what is sent to the IRS (and a copy to you) to report payments to independent contractors and others where required to do so (generally when payments for the year total $600 or more).
 
Regardless of whether or not this income was reported on a 1099, you still might be required to report it.

The amount that would likely be reported would be the exchange rate (weighted average, or last price, or something in that ballpark, as long as it is applied consistently) at the time the bitcoins changed hands.

Instead of a 1099, this payment might also be reported using the tax forms for barter payments instead, but I would be that 1099s would suffice.

No, you are not correct.

Before you start analyzing you need to know the applicable rules. The guide I pointed you towards gives an overview of the landscape with over 100 legal footnotes from statutes, cases, etc. so you can learn the rules along with some brief examples of application of the rules.

From my logical thought.... Bitcoin isn't considered income until conversion of BTC to USD since BTC is not a recognized currency of the IRS.

Am I correct? I should check out that page you linked up today.

The easiest and safest answer would be that assuming you are a US Person and a cash base taxpayer then the income would be recognized at the time it is received and valued at the 24h hour average price of bitcoins at the time of receipt. It would be the payor's responsibility to file the 1099 form.

Of course, due to the nature of bitcoins there are significant opportunities to be creative and we discuss some of them in A Lawyer's Take On Bitcoin And Taxes.