Topic: Bitcoin and Taxes - Not that complicated (Read 2625 times)

Particularly in areas of law as unsettled as anything relating to Bitcoin, I think it's useful to keep in mind Oliver Wendell Holmes' prediction theory of law (http://en.wikipedia.org/wiki/Prediction_theory_of_law):


That's pretty close to right except that Bitcoiners are the "good men" (peaceful traders engaging in voluntary exchanges) and we're trying to predict what the "bad men" (a band of armed thugs who care little for ethics or lofty conceptions of natural law) will do to us and how much of our stuff they'll steal.  My guesses are, respectively, nothing good and as much as they can.

Yes. They would form your tax basis. (Assuming you didn't already deduct them as business expenses or hobby losses of course.)

Can you deduct the cost of hardware and electricity from the sale?

I believe that in the United States, at least, you don't have to. You should be able to defer any taxable income until you sell or otherwise dispose of the coins. The cost of your mining, assuming you can't tax deduct it, should form your tax basis in the coins. You should be able to treat it as either a business if it meets the criteria for a business, otherwise, mining costs should count as hobby losses and bitcoin sales revenue as hobby profits.

Do these really treat things purchased to consume the same as things purchased as an investment that will be held unmodified and later resold? And is there really no distinction between Bitcoins that are mined (roughly equivalent to making something yourself, I would think) and things that are purchased at market value?

In some cases such as FBAR in the US, GST (Canada) or VAT (EU) I do agree that the actual legal status of Bitcoin can be very tricky; however with income taxes the legal status may turn out to be moot because the tax treatment is that same regardless of the legal status. To quote your example: If one received income in the form of (1) a World of Warcraft Ultimate Sword of Doom, (2) a London Tube card or (3) a Zara gift card, the treatment for income tax purposes would be the same; however for the purposes of FBAR  (US), GST (Canada) or VAT (EU) the treatment would be different.

There's also a wiki article on the topic:

 - http://en.bitcoin.it/wiki/Tax_compliance

I think you missed the point the court made which is the difference between a question of fact and a question of law.

And those issues of fact and law as applied to Bitcoin, which are extremely thorny legal issues due to the underlying novel and nascent technology involved, are precisely what the other legal conclusions turn on.

For example, do US persons have to report on the FBAR: (1) a World of Warcraft Ultimate Sword of Doom, (2) a London Tube card or (3) a Zara gift card?

Not likely, Maybe, Probably.

Here are a few large issues when it comes to Bitcoin; MIT license, plausible deniability which raises huge issues of fact, air guitarability which raises huge issues of law and the decentralized nature. All of these provide extremely fruitful ground for tax efficiency and potential precedent setting litigation.

I posed this question to my accountant back in 2011. (Australia)

Basically, it does not matter if use cow shit as a form of money.  The Tax Man wanted to know what the Australian dollar value was at the time of transaction.  

Due to Bitcoin's volatility and variety of market places, he recommended I pick the "best" price during the month for reporting purposes.

PS: He noted that any type of security required to secure Bitcoins was a tax deduction.  Paper wallets, USB sticks, engraved blocks... whatever.

When it comes to a GST or a VAT the distinction between a "virtual currency", "money" or a "commodity" is crucial; however this is not the case at all for income taxes.

I have argued that if a tax authority attempted to levy a GST, VAT or similar type of tax on Bitcoin, it would actually turn Bitcoin into a legal way of avoiding the GST or VAT, since in order for a GST or a VAT work it cannot apply to money.

Does anyone else find it ironic that this thread has "not that complicated" in its title?
Irony aside, any sober and mature discussion of this important topic is welcome. My unqualified opinion is that in most jurisdictions barter exchange is regulated and taxed; the important distinction here is that bitcoins are virtual currency,commodity, or whatever else you decide the call them. Hence, applying regulations is not straigh forward. If it were simple, most of us would have been paying sales tax whenever we traded them for fiat.

 

Well, I'm not going to censor my own comment solely because it defies some orders written in some pieces of paper.  And what I do (or stop doing) is not exactly a matter up for popular vote.

So how do we resolve this difference of views?  :-)

+1

I suggest that advocating illegal activity has no place in this thread, nor on this forum.

I have a solution to the Bitcoin and taxes thing.

1. Realize that Bitcoin makes it impossible for organized criminals to steal from you through inflation.  That is, in and of itself, a great improvement over the previous situation.

2. Have a public address that will be "taxable", and do perhaps the majority of your business through there, reporting taxes from this business etcetera etcetera.

Keep a second set of books (addresses, etc, one per customer), and use them to evade taxes -- for those people with whom you have developed a trust relationship, give them a 10% or so discount on the condition that they keep their transactions with you on the DL and go through a mixer.  If one of them sells you or rats you out, well, (a) he'd be incriminating himself, (b) you will know beyond a doubt because of evidentiary discovery, and then you can use this information to rightfully defame this rat.

Result: You make extra money, they make extra money, and the organized criminals can get fucked.  Everyone who is good wins.  If you do this right, you and your customers manage to cooperate to defund the organized criminals, and everyone benefits.  If enough people do this, the halving (or more) of the loot that the organized criminals get to steal every year will seriously impact their ability to continue controlling everyone, if not just flat out bring them down.

Save this extra money, because you'll get to spend it or gift it, the very day that the influence of the organized criminals ends.

TADAAA!  Problem solved.  This is a time-tested strategy -- we do this shit in the Third World all the time.

That is what I am doing.


My understanding is that the most common source of tips to the CRA or the IRS etc. to catch tax evaders is former business partners, business associates, employees, customers, spouses, significant others etc. So TOR may have little practical benefit in this case.

So, If I've mined some coins in the past years, I should declare a value gain euqals to the value in $ when coins have been mined, and pay taxes on it, sold or not ?
Someone posted something here, that bring me a question : As the bitcoin block chain includes all transactions, can any of those transactions be linked to me ?  Is there any IP adresses in the blockchain that could lead to someone ?

If someone mine on TOR, and mined coins are stored on a wallet that does'nt exist as a file, this someone can earn bitcoin and not have to fear to pay taxes on it !  is it true ?

I can't imagine the Canadian taxman comming to me, ordering to pay X$ for BTC I've mined in the past years !  This sounds really bad to me..

The trouble with this analogy is that the ordinance in question covers all sorts of pets from fish to snakes to elephants. So arguing if the dog is a dog or a prairie dog becomes moot. Arguing whether Bitcoin is a "commodity" or a "currency" or a "foreign virtual currency"  or "money" or even a "security" does not change the fact that income earned in Bitcoin is taxable.

Found a fun court's quote that is quite applicable to Bitcoin and bitcoins:

Not so much controversial as just flat out wrong. Additionally, a professional financial planner is not credentialed in this area. If you want advice you can legally rely on then seek out a tax attorney who retains a CPA.


BlackHeartFund, I think this is a very conservative way to operate and would recommend it. Unfortunately, your accountant likely did not thoroughly research the topic because Bitcoin and taxes results in some pretty thorny legal and tax issues. However, the result is likely that you will only be slightly overpaying taxes due so I doubt it is that big of an issue.

For those who want to operate extremely conservatively Bill Rounds, a practicing CA attorney, put together A Lawyer's Take On Bitcoin And Taxes which is a 31 page primer and has 108 legal citations. And really it is just a basic guide to save you about $2,000 worth of research from your accountant/tax attorney.

Additionally, it makes several extremely conservative assumptions, which would be legal conclusions and are not currently found in the law, that result in several reasonable ways to treat BTC. In almost all cases, the result is a slight overpayment of taxes due, having an extremely defensible position and the legal reasoning backed up by plenty of sources.

If you wanted to be particularly aggressive with your taxes then you could challenge some of those presumed assumptions. Ironically, one particularly aggressive approach is actually one most likely to be chosen by a tax court because then the court would not have to decide a legal issue which is a presumption of several other methods.

Currently, there are lots of unsettled issues with regards to Bitcoin and taxation and there are several extremely conservative approaches to take.

Great responses here, thanks you guys!