Topic: Bitcoin accounting and taxes - page 2. (Read 20359 times)
Another good one can people who lost funds in mybitcoin.com collapse write that off as a catastrophic loss?
Here's a good question for the accountants.
If I were to have had 350 bitcoins in my wallet in June when the price was over $30 (and am in the U.S,) would I be required to file an FBAR?
If I were to have had 350 bitcoins in my wallet in June when the price was over $30 (and am in the U.S,) would I be required to file an FBAR?
Quote
United States persons are required to file an FBAR if: The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.
- http://www.irs.gov/businesses/small/article/0,,id=148849,00.html I don't think (solo) mining itself would be considered taxable income. You are not receiving the bitcoins from someone else, you are creating them yourself. Income is something you receive from another person/business/entity in return for something. If you make furniture, the creation of the furniture is not a taxable event, the sale of it is. So I would argue that mining bitcoins doesn't generate income or any taxable event, until you sell the bitcoins, or use them to buy something (in which case the transaction would be treated as a barter).
Now if you are in a pool, that is potentially a different story. It probably could be interpreted that you are offering your services to the pool and they are paying you in bitcoins, in which case any payment you receive from the pool would be taxable income based on the FMV of the bitcoins you receive.
Now if you are in a pool, that is potentially a different story. It probably could be interpreted that you are offering your services to the pool and they are paying you in bitcoins, in which case any payment you receive from the pool would be taxable income based on the FMV of the bitcoins you receive.
The alternative view (and one expressed for non-tax explanations) is that you aren't mining anything. Bitcoin always has and always will have exactly 21 million coins. They all exist. When you mine a block the network is paying you 50 BTC for your service in securing the network. So mining is a service and you are being paid a fee of 50 (or whatever current value is) BTC per block
Honestly it will take some legal precedents before anything is known for sure. What ultimately matters is what the IRS thinks is a taxable event and when the event occurs. If the person involved in the event disagrees then what matters is who the courts side with.
I think that until an official ruling on Bitcoins is made, the best and simplest route to go is to just record income when (and if) Bitcoins are turned into USD. This is assuming you are accounting for Bitcoins creating through the mining process.
...And a corollary, it seems likely, would be once an official ruling *is* made on *Bitcoins* it might turn out to be time to focus more on alternatives on which no official ruling exists... (How far would one need to slip on which slippery slope to achieve that, hmm?)
-MarkM-
I think that until an official ruling on Bitcoins is made, the best and simplest route to go is to just record income when (and if) Bitcoins are turned into USD. This is assuming you are accounting for Bitcoins creating through the mining process.
...And a corollary, it seems likely, would be once an official ruling *is* made on *Bitcoins* it might turn out to be time to focus more on alternatives on which no official ruling exists... (How far would one need to slip on which slippery slope to achieve that, hmm?)
-MarkM-
I think that until an official ruling on Bitcoins is made, the best and simplest route to go is to just record income when (and if) Bitcoins are turned into USD. This is assuming you are accounting for Bitcoins creating through the mining process.
If you make money trading Bitcoins, then that income (loss) should be reported as capital gains (capital losses) when the Bitcoins are sold.
If you make money trading Bitcoins, then that income (loss) should be reported as capital gains (capital losses) when the Bitcoins are sold.
There's all this talk about how Bitcoins are intangible.
Stocks are intangible as well...they can be traded on the company books without anything tangible trading hands. Bitcoin works much like stock, I suppose the only thing that is missing is that the tax laws don't accommodate any concept of stocks that can just materialize out of thin air, rather than being issued. And on the other hand, anybody can make their Bitcoins tangible (besides buying my coins) simply by printing out a paper wallet and sending their bitcoins to it.
The way I see buying and selling Bitcoins is like capital gains.
The way I see doing work Bitcoins, or selling things for Bitcoins, is like ordinary income. Since bitcoin transactions are hard to prove and would just be noise in an audit, I see little wrong with using the final sale price of those Bitcoins as the amount of the income. (Besides, short term capital gains are practically equivalent to income anyway, so trying to account for the value of the BTC when earned versus sold is a moot exercise).
The way I see mining is that it's an activity most similar to earning ordinary income, rather than acquiring capital assets. There are equipment and energy costs. It seems senseless to deduct such expenses against acquisition of an asset, it makes much more sense for those expenses to go against creation of something that gets sold for income.
Regardless of what I think, I would love to be a fly on the wall the first time someone sits face to face with a tax auditor and discusses Bitcoins. Seems to me, an auditor isn't going to want to take a lesson on block chains and hashes during an audit from the subject of his audit. Imagine the auditor's eyes glazing over as you hand him a stack of printouts off Block Explorer and told him, "this is the best I can do - that's just how Bitcoin works - see, even CBS/CNN/whatever confirms that." I would guess he would much rather look at bank accounts or what goods and services you might have received as a basis for deciding what tax you might owe, do all the math in USD, and call it a day.
Stocks are intangible as well...they can be traded on the company books without anything tangible trading hands. Bitcoin works much like stock, I suppose the only thing that is missing is that the tax laws don't accommodate any concept of stocks that can just materialize out of thin air, rather than being issued. And on the other hand, anybody can make their Bitcoins tangible (besides buying my coins) simply by printing out a paper wallet and sending their bitcoins to it.
The way I see buying and selling Bitcoins is like capital gains.
The way I see doing work Bitcoins, or selling things for Bitcoins, is like ordinary income. Since bitcoin transactions are hard to prove and would just be noise in an audit, I see little wrong with using the final sale price of those Bitcoins as the amount of the income. (Besides, short term capital gains are practically equivalent to income anyway, so trying to account for the value of the BTC when earned versus sold is a moot exercise).
The way I see mining is that it's an activity most similar to earning ordinary income, rather than acquiring capital assets. There are equipment and energy costs. It seems senseless to deduct such expenses against acquisition of an asset, it makes much more sense for those expenses to go against creation of something that gets sold for income.
Regardless of what I think, I would love to be a fly on the wall the first time someone sits face to face with a tax auditor and discusses Bitcoins. Seems to me, an auditor isn't going to want to take a lesson on block chains and hashes during an audit from the subject of his audit. Imagine the auditor's eyes glazing over as you hand him a stack of printouts off Block Explorer and told him, "this is the best I can do - that's just how Bitcoin works - see, even CBS/CNN/whatever confirms that." I would guess he would much rather look at bank accounts or what goods and services you might have received as a basis for deciding what tax you might owe, do all the math in USD, and call it a day.
There is a slippery slope in virtual goods and how difficult they are to "make" and how many (and which instances) of which might turn out to be valuable.
If I run "make" on a Makefile that generates individually distinguishable magic swords or game tokens or orcish slaves or whatever, that might take less resources per item to "make" than if my Makefile fired up a merged mining of all publicly known blockchain currencies plus a few hundred private ones I figure I might as well merge into the merge just because I can, as speculation, on the off chance that someday I might find a buyer for some finite quantity.
Once upon a time a magic sword sold for lots of money.
Years ago legislators were trying to argue that if your character happens somehow upon a magic sword, you maybe ought to be taxed as if it were worth money, because historically once upon a time one magic sword sold for quite a bit of money. (Maybe also, many magic swords have some times sold for some money.)
If my makefile makes MAXLONGINT magic swords just by filling sizeof(MAXLONGINT) bits with 1s instead of 0s, and one player one day buys one for some amount of money, are all the others worth that much each?
So it is very slippery. There are some DeVCoins on sale on an exchange. Suppose no one buys any at the same nanosecond as you find a block. Does that mean they were not saleable at that nanosecond?
What if none sold that week? Month? Fiscal year?
There might be some point where the number of coins minted per fiscal period falls below the amount sold in that fiscal period, which for bitcoins might be in the past by now but for tomorrow's new coin offered on a new exchange might take forever to reach.
As long as less are bought than are made, it surely is unreasonable to claim any that were not sold were or are worth as much as those that did manage to find a buyer.
If I put hundreds of hours of my time into programming something and don't sell it, how much is it "worth"? Can the fact that a very similar in function sequence of bits sold by a competitor sold for lots of money and sells for lots of money regularly indicate that mine is worth just as much?
If the order book has only X number of orders wanting to buy, only that many in total are presumably worth that much. Whose unsold ones will be assumed to have been the ones that could have fetched that price? Who ever does jump in and actually accept that as the value has filled all demand at that price, leaving everyone else's unsaleable at that price.
Such reasonings seem to have led most Canadians I have consulted on the matter to figure if what you make doesn't manage to get to the market and get bought, then it is just hypothetical speculation that some day you or your heirs or assigns might convince someone to buy it.
Thus so far the theory I have been using here in Halifax Nova Scotia Canada is all the many permutations of bits that I crunch in my computers are just bits of data, and only if someone pays me to manipulate those bits or set or unset those bits or transmit or process those bits are they income - and even then they are not income, they are proof of work - proof I performed a service. It is when they pay me actual real tangible goods or real legal tender that I have income...
-MarkM-
(I guess when I give someone bitcoins for something, that thing is income to me; and some day someone will give them something for them, maybe, if anyone still likes them by that time, in which case they get some income, and the net effect is they gave me something in return for someone else giving them something, which might all some day come around in the course of going around...)
P.S. I could argue that the ones *I* make are worth *millions* of dollars thus that is why I have not sold them: lack of a buyer willing to pay that much for them. SO like a novelist making little this year while not having sold the novel, my potential income from creating it is in the future: I am making bitcoin futures for myself, not bitcoins being sold this year... I guess we should compare to futures market instead of today market? Hmm. Thus most folks consulted throw up their hands and suggest if I sell, when I sell, then I'll have something to be taxable... meanwhile I incur research and development and tool and utility expenses like any other author of sequences of letters glyphs bits words stories chapters novels etc... Until I sell I am running at a loss in fact...
If I run "make" on a Makefile that generates individually distinguishable magic swords or game tokens or orcish slaves or whatever, that might take less resources per item to "make" than if my Makefile fired up a merged mining of all publicly known blockchain currencies plus a few hundred private ones I figure I might as well merge into the merge just because I can, as speculation, on the off chance that someday I might find a buyer for some finite quantity.
Once upon a time a magic sword sold for lots of money.
Years ago legislators were trying to argue that if your character happens somehow upon a magic sword, you maybe ought to be taxed as if it were worth money, because historically once upon a time one magic sword sold for quite a bit of money. (Maybe also, many magic swords have some times sold for some money.)
If my makefile makes MAXLONGINT magic swords just by filling sizeof(MAXLONGINT) bits with 1s instead of 0s, and one player one day buys one for some amount of money, are all the others worth that much each?
So it is very slippery. There are some DeVCoins on sale on an exchange. Suppose no one buys any at the same nanosecond as you find a block. Does that mean they were not saleable at that nanosecond?
What if none sold that week? Month? Fiscal year?
There might be some point where the number of coins minted per fiscal period falls below the amount sold in that fiscal period, which for bitcoins might be in the past by now but for tomorrow's new coin offered on a new exchange might take forever to reach.
As long as less are bought than are made, it surely is unreasonable to claim any that were not sold were or are worth as much as those that did manage to find a buyer.
If I put hundreds of hours of my time into programming something and don't sell it, how much is it "worth"? Can the fact that a very similar in function sequence of bits sold by a competitor sold for lots of money and sells for lots of money regularly indicate that mine is worth just as much?
If the order book has only X number of orders wanting to buy, only that many in total are presumably worth that much. Whose unsold ones will be assumed to have been the ones that could have fetched that price? Who ever does jump in and actually accept that as the value has filled all demand at that price, leaving everyone else's unsaleable at that price.
Such reasonings seem to have led most Canadians I have consulted on the matter to figure if what you make doesn't manage to get to the market and get bought, then it is just hypothetical speculation that some day you or your heirs or assigns might convince someone to buy it.
Thus so far the theory I have been using here in Halifax Nova Scotia Canada is all the many permutations of bits that I crunch in my computers are just bits of data, and only if someone pays me to manipulate those bits or set or unset those bits or transmit or process those bits are they income - and even then they are not income, they are proof of work - proof I performed a service. It is when they pay me actual real tangible goods or real legal tender that I have income...
-MarkM-
(I guess when I give someone bitcoins for something, that thing is income to me; and some day someone will give them something for them, maybe, if anyone still likes them by that time, in which case they get some income, and the net effect is they gave me something in return for someone else giving them something, which might all some day come around in the course of going around...)
P.S. I could argue that the ones *I* make are worth *millions* of dollars thus that is why I have not sold them: lack of a buyer willing to pay that much for them. SO like a novelist making little this year while not having sold the novel, my potential income from creating it is in the future: I am making bitcoin futures for myself, not bitcoins being sold this year... I guess we should compare to futures market instead of today market? Hmm. Thus most folks consulted throw up their hands and suggest if I sell, when I sell, then I'll have something to be taxable... meanwhile I incur research and development and tool and utility expenses like any other author of sequences of letters glyphs bits words stories chapters novels etc... Until I sell I am running at a loss in fact...
bumping dead thread because as tax day approaches, I'm sure many other people will be interested in how to deal with money made through exchanges. Thoughts? Beuller?
[snip]
... the case of tax treatment of a bitcoin upon discovery, there really isn't a good precedent in my opinion. It is very possible that your music analogy will be the correct treatment, at least in the beginning, as
Please continue...... the case of tax treatment of a bitcoin upon discovery, there really isn't a good precedent in my opinion. It is very possible that your music analogy will be the correct treatment, at least in the beginning, as
LOL, IRS, brb?
I can see the Gawker headline: "First Bitcoin heartattack!"
(maybe he got the test result?)Anyway, useful info, thanks. For me it's still not clear though when you're trading on an exchange whether every single transaction is taxable, or only your eventual balance. (I'm kinda assuming the tax office will view this similar to trading on the stock market, so what are the rules there?)
Please continue...
FYI, there's now a Bitcoin wiki article addressing taxes:
- http://en.bitcoin.it/wiki/Tax_compliance
[snip]
... the case of tax treatment of a bitcoin upon discovery, there really isn't a good precedent in my opinion. It is very possible that your music analogy will be the correct treatment, at least in the beginning, as
Please continue... ... the case of tax treatment of a bitcoin upon discovery, there really isn't a good precedent in my opinion. It is very possible that your music analogy will be the correct treatment, at least in the beginning, as
Mining gold and mining bitcoins might sound similar because they are both "mined", but from a tax perspective they are not similar at all. You cannot "mine" intangible personal property.
In the event that you are running a gold mine, the simple answer is you would be taxed on the value of the gold you mined, less the cost to mine it.
Of course, I understand that the use of the word "mine" in reference to bitcoins is just a convenient analogy. However, the from a financial point of view, there is more similarity. There is something of value waiting to be discovered. I discover it and thereby increase my net personal value.In the event that you are running a gold mine, the simple answer is you would be taxed on the value of the gold you mined, less the cost to mine it.
More correctly, however, I don't actually give myself the coins. It is the network that gives me the coins by accepting the block I generate. Right? The decision to award 50BTC to me is distributed over the whole network. There are many next blocks "out there" waiting to be discovered, I find one, lay claim to it and the annexed reward, and the network as a whole approves.
Suppose, let me think, that I create music, and sell it. How is that taxed? Music is fairly intangible. Or what if I sell something artistic, like picture - firstly what if it's a real painting on canvas, then what if it's just a digital image stored on computer? How would that be taxed?
There is similarity, but according to tax law mining specifically refers to extracting natural resources such as oil, coal, gas, etc.
Art or music that is created is not a taxable event. It would not be taxed until it was sold. Depending on how widely bitcoins are adopted, it is very possible that they will be treated the same. However, if bitcoins really take off then mined bitcoins could be taxed upon mining. This is especially true if they become a 'pseudo-currency'.
Now, in the case of tax treatment of a bitcoin upon discovery, there really isn't a good precedent in my opinion. It is very possible that your music analogy will be the correct treatment, at least in the beginning, as
Mining gold and mining bitcoins might sound similar because they are both "mined", but from a tax perspective they are not similar at all. You cannot "mine" intangible personal property.
In the event that you are running a gold mine, the simple answer is you would be taxed on the value of the gold you mined, less the cost to mine it.
Of course, I understand that the use of the word "mine" in reference to bitcoins is just a convenient analogy. However, the from a financial point of view, there is more similarity. There is something of value waiting to be discovered. I discover it and thereby increase my net personal value.In the event that you are running a gold mine, the simple answer is you would be taxed on the value of the gold you mined, less the cost to mine it.
More correctly, however, I don't actually give myself the coins. It is the network that gives me the coins by accepting the block I generate. Right? The decision to award 50BTC to me is distributed over the whole network. There are many next blocks "out there" waiting to be discovered, I find one, lay claim to it and the annexed reward, and the network as a whole approves.
Suppose, let me think, that I create music, and sell it. How is that taxed? Music is fairly intangible. Or what if I sell something artistic, like picture - firstly what if it's a real painting on canvas, then what if it's just a digital image stored on computer? How would that be taxed?
Also the cost basis of financial instruments is either determined through FIFO or specific identification. LIFO is not an option.
I edited my original post, above, to reflect this. Please read it over, and critique it. On the other hand, while shares are totally fungible, bitcoins are not, at least when it comes to LIFO/FIFO.
For each spend transaction, it should be possible, at least in principle, to figure out which of your receive transactions it/they came from. Whether the IRS would care to enforce this, or deem the LIFO/FIFO question a matter of local policy, is unknown.
For each spend transaction, it should be possible, at least in principle, to figure out which of your receive transactions it/they came from. Whether the IRS would care to enforce this, or deem the LIFO/FIFO question a matter of local policy, is unknown.
Bitcoins are certainly fungible. Fungible just means that they are a commodity that can be substituted. Just because you can specifically identify the acquisition or disposal of a particular bitcoin doesn't mean that one is any more or less useful or valuable. I can specifically identify exactly the same information with stocks, bonds, options, etc.
Also the cost basis of financial instruments is either determined through FIFO or specific identification. LIFO is not an option.
Pub 550 has more details here
http://www.irs.gov/publications/p550/ch04.html
I don't think (solo) mining itself would be considered taxable income. You are not receiving the bitcoins from someone else, you are creating them yourself. Income is something you receive from another person/business/entity in return for something.
If you make furniture, the creation of the furniture is not a taxable event, the sale of it is. So I would argue that mining bitcoins doesn't generate income or any taxable event, until you sell the bitcoins, or use them to buy something (in which case the transaction would be treated as a barter).
Now if you are in a pool, that is potentially a different story. It probably could be interpreted that you are offering your services to the pool and they are paying you in bitcoins, in which case any payment you receive from the pool would be taxable income based on the FMV of the bitcoins you receive.
If you make furniture, the creation of the furniture is not a taxable event, the sale of it is. So I would argue that mining bitcoins doesn't generate income or any taxable event, until you sell the bitcoins, or use them to buy something (in which case the transaction would be treated as a barter).
Now if you are in a pool, that is potentially a different story. It probably could be interpreted that you are offering your services to the pool and they are paying you in bitcoins, in which case any payment you receive from the pool would be taxable income based on the FMV of the bitcoins you receive.
That may be the generic definition of income, but not the tax definition. You are using a furniture analogy, but that is not valid here, as furniture is tangible personal property, and would be treated as inventory by someone manufacturing them. Bitcoins are either going to be considered intangible personal property, or most likely some type of financial security. They cannot be considered inventory, because that has to be tangible.
Really it depends on what happens to bitcoins going forward. If we assume they become a new type of currency or means of exchange, they will probably be treated more along the lines of a financial instrument. If they don't become a new type of currency or means of exchange, it probably doesn't matter as their value in that case would probably fall to immaterial levels.
As for the pool analogy, I agree.
What if you consider mining bitcoins just like mining gold? Suppose I find gold on my property and start to mine it, and make a tidy profit. How is that taxed?
Mining gold and mining bitcoins might sound similar because they are both "mined", but from a tax perspective they are not similar at all. You cannot "mine" intangible personal property.
In the event that you are running a gold mine, the simple answer is you would be taxed on the value of the gold you mined, less the cost to mine it.
On the other hand, while shares are totally fungible, bitcoins are not, at least when it comes to LIFO/FIFO.
For each spend transaction, it should be possible, at least in principle, to figure out which of your receive transactions it/they came from. Whether the IRS would care to enforce this, or deem the LIFO/FIFO question a matter of local policy, is unknown.
For each spend transaction, it should be possible, at least in principle, to figure out which of your receive transactions it/they came from. Whether the IRS would care to enforce this, or deem the LIFO/FIFO question a matter of local policy, is unknown.
I see your point, and don't know the right answer. Two counter arguments for you::
1) "Under new Code Sec. 1012(c) that goes into effect for sales on or after January 1, 2011, accounts are treated separately for purposes of determining the basis of stock. For sales prior to that date, accounts are aggregated. " By analogy, Bitcoins mined last year would all be treated as a pool, even though you can account for them separately.
2) The Bitcoin Client (supposedly) sells off smallest first, treating all of your money as fungible. Sure, I suppose you could write your own client, or use two wallets, or whatever. But it seems like for the standard 1-wallet user, trying to analyze which actual coins were sold would be a nightmare. (Not to mention that 2 different coins with two different basis dates could be lumped together in a transaction, and change is returned to you... how are you going to account for the basis of the change? Pro-rate it? Seems overly complex!)
Good discussion though!
What if you consider mining bitcoins just like mining gold? Suppose I find gold on my property and start to mine it, and make a tidy profit. How is that taxed?
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