Topic: Bitcoin and Taxes - Not that complicated - page 2. (Read 2609 times)

In the United States, at least, the reverse is true. You can use hobby losses to offset hobby profits. Of course, you can't just deduct hobby losses. Otherwise, my hobby would be driving expensive cars and eating expensive food and every car I bought or meal I ate at a nice restaurant would be tax deductible.

For example, if you raise prize cows as a hobby, and then you sell one of those cows for $8,000, that is a hobby profit. It is taxable. However, if you spent $4,500 on feed and supplies to raise the cow, you can deduct those hobby losses against the hobby profit.

If you mine Bitcoins as a hobby, you can file your hobby losses so that if you do make a profit when you sell those Bitcoins, you can offset some of those profits with carried over losses.

Correct and in either case the NET profits are taxable.  For some strange reason some people in the US think a "hobby" profit isn't taxable.  Both business income and hobby income are equally taxed as regular income (unless the biz is incorporated).   The only difference is the IRS doesn't see losing money in a hobby as a taxable event.  Essentially the worst of both worlds: taxes on net profits, no deductions on net losses.

The same applies to gambling.
Gambling as a hobby
 - taxes on net profits.
 - no deduction on net losses.

Gambling as a biz (yes it is possible a professional poker player for example)
- taxes on net profits.
- deductions on net losses.

You'd have to talk to a tax accountant to be sure, but I believe that in the U.S. the IRS sees the difference between a "hobby" and a "business" as a matter of profit motive.  If you can demonstrate to the satisfaction of the IRS that you are engaging in the activity with a profit motive, then it can be considered a business and you can deduct any losses from other income you earn.  If you can't demonstrate to the satisfaction of the IRS that you are engaging in the activity with a profit motive, then the IRS considers is a hobby, and you can only deduct losses up to the total of your hobby income (losses incurred with the hobby offset income from the hobby, but not other income).

I am not sure if I agree with this...what happens if we lose money with our hobby, then the reverse shoulf be true...in any case, take a look at this interesting story...

http://www.canada.com/ottawacitizen/news/story.html?id=74e47320-ecf5-496d-a23f-e6440ece5134

The powers that be will be angry with Bitcoiners either way because it's going to remove the ability they have to underhandedly tax you through inflation

I agree with the contributors here. Specifically, even if one views their BTC-generating activity as 'just a hobby', it is technically considered as business income and must be reported. For Canadians:

http://sbinfocanada.about.com/cs/taxinfo/f/hobbybiz.htm

One side-effect benefit of reporting BTC income (beyond the obvious legal requirement) is that legitimate business deductions can be made against that income. The main ones being hardware depreciation and electricity costs.

Great contribution. I've been saying this all along. Those of us who are operating legally pay taxes on BTC gains the exact same way we would with any other currency. Certainly a lot of people use BTC to avoid taxes, but for legitimate corporations operating within the confines of the laws and regulations of a state, there is nothing complicated about paying taxes on BTC.

Our accountant had never heard of bitcoin, but was able to work with it in about two minutes. Smart BTC financial services companies, and anyone who makes a profit from BTC, will pay their taxes to the penny. No doubt at some point our industry will have a lot of government scrutiny... if it doesn't already. Everyone who will survive long term will have complete records of all transactions, and tax returns to prove everything was paid.

No because there is income tax and there is also capital gains taxes (don't you love the IRS they tax you coming and going).  

So hypothetical situation (for educational purposes only consult a tax adviser for detailed tax advice):
In 2010 someone generated 10,000 BTC.
Value at the time of production was $0.06
Miner's costs were $500
Today (2012) miner sells 10,000 BTC for $10 ea.

So in 2009 the miner incurred an income of $600 (10K * $0.06).  If the miner was operating a business he could deduct his $500 costs and have a taxable income of $100.   Regardless the coins acquired now have a BASIS of $0.06.

If miner sells today for $10.00 ea he has a capital gain of ($10.00 - $0.06)* 10,000 = $99,400.  Now IF BTC went to $0.01 and the miner sold he would have a capital loss of ($0.01 - $0.06) * 10,000 = $-500.  The capital gain or loss would be recorded on the capital gains worksheet.

Note in this case the value of the coins at production were so low value that while taxes were due if not paid it is unlikely to result in a penalty.  If no taxes were paid then the basis would be $0.00 and thus if sold for $10.00 ea the entire amount ($100,000) would be a capital gain.

The difference is taxable, very likely as a capital gain or loss. It is basically the same as if one obtained the fair market value of the coins in the national currency and then immediately purchased the coins.

What about someone who generated 10,000 btc a few years ago and paid tax on the $600 he made. Can he spend the 10,000 btc as if it is tax free? (Of course not, but what is the answer?) What if coins go to $0.00. Can he get back the tax he paid on the $600?

This is actually the same in Canada. in fact I would be interested to see if there is a jurisdiction where this is not the case.

Income is always taxed when it is earned.

If someone paid you:
$100,000 in dollars,
$100,000 in Euros,
$100,000 in gold,
$100,000 in oil,
$100,000 in BTC

it doesn't matter in all four events you incurred an income of $100,000 (or equivalent) and owe taxes on the income.  Failure to include that income on current year's income tax return would be considered tax evasion.

Now if someone gifts it to you (or it is an inheritance) there will be no taxes due (w/ certain limitations) but once again the IRS would see that as a gift of $100K regardless of the form the gift occurred in. 

That isn't even close to true in the US.  If you earn income in ANYTHING it is taxable when the income is earned.

For example lets say you make a website for me and I pay you in a 1 oz gold coin (hypothetical value at time of transaction $1,700)? What is your tax liability?  By your logic nothing until you sell the coins.  The reality is you have gained income (by IRS definition) of $1,700 at the point I give you the coins.   When you sell the coins you may also incur a capital gain (or loss) but that is independent of the income.    What about unique items?  You build a luxury house for me and I pay you with a Rembrandt original valued at $2.8 million.   Your tax liability?  $2.8 million in income.  It doesn't matter how you get paid, it is income, and it is taxable.


How about pure barter of services?  Your make a website for your dentist and he fills in your cavity.  Once again both of you gained taxable income.  The amount taxed is the "fair market value" of the services.   Income is always taxed at the point it is earned.  It doesn't need to be paid in dollars.  If you receive anything of value for just about any reason it is taxable.  For example say you win a car in a sweepstakes.  Yup you owe taxes on the income value of the car.  $50K car = $50K in income seen by the IRS; have your checkbook ready.   Obviously your casino chip claim is false.  One could simply use casino chips as a proxy (i.e. live in Vegas and pay all your bills by casino chips) and never incur any taxes on casino winnings for life.

More on IRS & Barter:
http://www.forbes.com/2009/11/11/irs-tax-barter-exchange-income-personal-finance-wood.html


http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Bartering-Tax-Center

For a second think about it this way.  If income wasn't taxed until converted to dollars it would be trivially easy to never pay any taxes ever for your entire life by never converting to USD.   i.e. I trade you 1000 shares of xyz inc for 20 oz of gold.  I then take the 20 oz of gold and trade them for a years worth of dedicated server hosting.  The webhosting company trades the 20oz of gold for food at the local grocer to feed his family for the next two years.  Nobody has any income?  Nobody has any taxes?  Really does it even seem plausible the IRS didn't notice this massive loophole.



The only time that taxable events are limited to the time of sale is on capital gains.   So if you purchase a gold coin (or oil futures, or home, etc) for $1,700, and the price of gold goes up to $1,800 how much taxes are due?  That's right; none.  The event is a capital gain and only becomes taxable when the asset is sold.  5 years later you sell the gold coin for $2,000 and incur a $300 capital gain which is taxed based on the year you sold the coin.

Note the two can be combined.  Going back to the website.  Say gold was worth $1,700 at the time the site was made.  You incur $1,700 taxable income.  You pay your taxes, and decide not to sell the coin.  You keep it for a couple years and sell it for $2,000.   You incur a $300 capital gain.  Why $300 and not $2,000.  The $1,700 becomes your basis because it was treated at income at the time you acquired the coin.  On the otherhand say gold tanks to $1,200.  You would have $1,700 income when paid in gold and a $500 tax deductible capital loss on the year you sold the coin.  It is possible both events could occur in the same year but they are independent events.

Good points gweedo and perhaps a real accountant is needed to clarify this. You're correct that until Bitcoin is recognized as a "Currency" (let's use the capital "C" version of the word) it is more like poker chips or pounds of rice or bars of gold.

Any accountants here? If I'm given $100,000 worth of gold or oil or rice, do I report that or wait until it's been sold for a currency?

(In truth, of course, Bitcoin is a commodity-money or commodity-currency, just as gold or silver coinage. This is what Bitcoin properly is by nature, but how the law observes and treats it may be different.)

The fact that we posted about taxes may be somewhat controversial, but we felt it was important that the powers that be not get frightened by the weird new Bitcoin thing. By posting, hopefully we can help sculpt the dialogue in a proactive way.

http://blog.bitinstant.com/blog/2012/11/12/bitcoin-and-taxes-not-that-complicated.html