Topic: How to file your taxes with Bitcoin Income? (Read 13531 times)
I know you can just get a tax deduction on the banks. because you just missed it. That's all I know I do not know yet another way to get you tax.
I am not a professional but I think which information I have to go provide may be helpful. Some software is available which can help you with doing bitcoin taxes, such as Bitcoin.Tax and CoinTracking.Info. If you go for Bitcoin.Tax, first of all, you should upload CSV files from exchanges, and it’s free for up to 100 transactions. CoinTracking.Info doing the same, and it’s free for up to 200 transactions. Its depend on you what type of program let you choose and which type of accounting method you are adopting by after the year has ended.
Here in our country, we don't need to file Bitcoin earnings as income for us to pay the tax because our Bitcoin income will be determine in our local exchanges during our conversion to fiat in which every conversion will be automatically subject to bitcoin tax. So either we earn Bitcoin thru mining, gambling, investment and bounties it will be the local exchanges are the one who will collect the Bitcoin tax for the government.
Depends on the country where you are in. If that countries regularized the use of bitcoin, the amount of tax you can be collected from is dependent on the cash you made from earning bitcoin. The moment you convert bitcoin into cash, the amount of tax will be assessed from the value it was converted.
In The USA, Income is not defined in tax code, try to find it... You won't. If you earned a living through the sweat of your brow, or with electricity you paid for with said life's equity, or equipment you own; this is not "income".
The Sixteenth Amendment did not bestow additional powers to Congress to tax than it had before the amendment was ratified in to the Bill of Rights; See the Brushaber case, Stranton case, and the Flint case.
So Subtitle A of Title 26 only deals with Foreign persons earning US derived income, which is profit from investments; see the Pollak case.
The Sixteenth Amendment did not bestow additional powers to Congress to tax than it had before the amendment was ratified in to the Bill of Rights; See the Brushaber case, Stranton case, and the Flint case.
So Subtitle A of Title 26 only deals with Foreign persons earning US derived income, which is profit from investments; see the Pollak case.
All that matters is cashing out but none of these sites collect any information or anything... I thought over 600 they are supposed to have you on file? Maybe that's just 1099 independent contractor forms
yeah I would put in the ledger if it were mining, the note, infused capital but if it were purely exchange trading 'basis or cost basis ' would be more widely accepted. I would think infused capital would show that it was a startup cost such as a'mining 'rig before listing as an expense under accrual method and taking depreciation on the rig yearly until the set time( and the btc received as revenue against that infused capital to show profit)
my belief is that whatever coins are converted into dollars and withdrawn minus infused capital = amount of taxable income before operating costs (expenses of doing business)
...since did not put capital into the gox acct then the full amount 'converted' is taxable at your percentage
not as dividend though, only as 'converted' revenue from mining- with no trading in between ...w trading in between the first buyout to cash would be starting amount toward infused capital and would be recorded separate in a ledger from mining operation or extra capital gain above themining. or accumulated altogether with no infused capital amount as an expense.
ex. I put 1000 fiat in*(infused capital) I turn into 1500 fiat...cash all out... 500 is taxable bcz 1000 was infused not profit
this is not lawyer advice take with a grain of password salt...
btw there two types of accounting method..... need to choose one before operating...cash method or accrual
...since did not put capital into the gox acct then the full amount 'converted' is taxable at your percentage
not as dividend though, only as 'converted' revenue from mining- with no trading in between ...w trading in between the first buyout to cash would be starting amount toward infused capital and would be recorded separate in a ledger from mining operation or extra capital gain above themining. or accumulated altogether with no infused capital amount as an expense.
ex. I put 1000 fiat in*(infused capital) I turn into 1500 fiat...cash all out... 500 is taxable bcz 1000 was infused not profit
this is not lawyer advice take with a grain of password salt...
btw there two types of accounting method..... need to choose one before operating...cash method or accrual
What you suggest could be done for trading income -- which is what you describe in your example. The IRS does allow for this kind of treatment for situations where valuation isn't clear or there are a series of related transactions. I do believe you have to pick a method though -- can't use one for one set of transactions and then another method for a different set. However, I don't think that this approach would work for mining income from what I can tell. What you call infused capital is actually known as your basis.
my belief is that whatever coins are converted into dollars and withdrawn minus infused capital = amount of taxable income before operating costs (expenses of doing business)
...since did not put capital into the gox acct then the full amount 'converted' is taxable at your percentage
not as dividend though, only as 'converted' revenue from mining- with no trading in between ...w trading in between the first buyout to cash would be starting amount toward infused capital and would be recorded separate in a ledger from mining operation or extra capital gain above themining. or accumulated altogether with no infused capital amount as an expense.
ex. I put 1000 fiat in*(infused capital) I turn into 1500 fiat...cash all out... 500 is taxable bcz 1000 was infused not profit
this is not lawyer advice take with a grain of password salt...
btw there two types of accounting method..... need to choose one before operating...cash method or accrual
...since did not put capital into the gox acct then the full amount 'converted' is taxable at your percentage
not as dividend though, only as 'converted' revenue from mining- with no trading in between ...w trading in between the first buyout to cash would be starting amount toward infused capital and would be recorded separate in a ledger from mining operation or extra capital gain above themining. or accumulated altogether with no infused capital amount as an expense.
ex. I put 1000 fiat in*(infused capital) I turn into 1500 fiat...cash all out... 500 is taxable bcz 1000 was infused not profit
this is not lawyer advice take with a grain of password salt...
btw there two types of accounting method..... need to choose one before operating...cash method or accrual
The way I did it last year (I had enough mining income to warrant and enough ordinary income that I am in one of the classes the IRS likes to audit) is as follows. The CPAs in the room can tell me how off base I was.
Mining output = Ordinary Income reported to IRS on Line 7 of 1040 by calculating the value on the date (I use Mt Gox weighted average unless they are unavailable in which case I use BTC-E value half way between daily high and low) it was transferred into my wallet.
The value calculated above provides my cost basis of the BTC I own (I never buy on exchanges, but if I did this would be there as well). When I sell them the profit from my cost basis (if any) are calculated as the difference between my cost basis and the sales price. Thus I must keep records of the individual cost basis of each BTC I receive separately (and thus it pays to make transactions large and few) and allocate them individually to each sale. This value is reported as Cap Gains on Schedule D and 1040 Line 13 to the IRS and I pay cap gains (currently short term as I have not held any BTC long enough to qualify as long term) tax on that value.
Mining output = Ordinary Income reported to IRS on Line 7 of 1040 by calculating the value on the date (I use Mt Gox weighted average unless they are unavailable in which case I use BTC-E value half way between daily high and low) it was transferred into my wallet.
The value calculated above provides my cost basis of the BTC I own (I never buy on exchanges, but if I did this would be there as well). When I sell them the profit from my cost basis (if any) are calculated as the difference between my cost basis and the sales price. Thus I must keep records of the individual cost basis of each BTC I receive separately (and thus it pays to make transactions large and few) and allocate them individually to each sale. This value is reported as Cap Gains on Schedule D and 1040 Line 13 to the IRS and I pay cap gains (currently short term as I have not held any BTC long enough to qualify as long term) tax on that value.
This works -- and I think leaves you completely covered with the IRS, as acting in good faith, no matter how they ultimately decide on the proper treatment for Bitcoin taxation, is a huge plus.
The way I did it last year (I had enough mining income to warrant and enough ordinary income that I am in one of the classes the IRS likes to audit) is as follows. The CPAs in the room can tell me how off base I was.
Mining output = Ordinary Income reported to IRS on Line 7 of 1040 by calculating the value on the date (I use Mt Gox weighted average unless they are unavailable in which case I use BTC-E value half way between daily high and low) it was transferred into my wallet.
The value calculated above provides my cost basis of the BTC I own (I never buy on exchanges, but if I did this would be there as well). When I sell them the profit from my cost basis (if any) are calculated as the difference between my cost basis and the sales price. Thus I must keep records of the individual cost basis of each BTC I receive separately (and thus it pays to make transactions large and few) and allocate them individually to each sale. This value is reported as Cap Gains on Schedule D and 1040 Line 13 to the IRS and I pay cap gains (currently short term as I have not held any BTC long enough to qualify as long term) tax on that value.
Mining output = Ordinary Income reported to IRS on Line 7 of 1040 by calculating the value on the date (I use Mt Gox weighted average unless they are unavailable in which case I use BTC-E value half way between daily high and low) it was transferred into my wallet.
The value calculated above provides my cost basis of the BTC I own (I never buy on exchanges, but if I did this would be there as well). When I sell them the profit from my cost basis (if any) are calculated as the difference between my cost basis and the sales price. Thus I must keep records of the individual cost basis of each BTC I receive separately (and thus it pays to make transactions large and few) and allocate them individually to each sale. This value is reported as Cap Gains on Schedule D and 1040 Line 13 to the IRS and I pay cap gains (currently short term as I have not held any BTC long enough to qualify as long term) tax on that value.
I'm not a CPA, but I do my best to understand the "shape" of unconventional assets and therefore how they fit in to the tax code. Talking US tax code here. I'm honestly trying to think this through, about halfway there I think.
I disagree, at least at this point in history, that bitcoin mining rewards should be taxed as ordinary income at the time they are generated. This is because they're as much commodity as currency right now. Consider this:
I have obtained BTC through exchanges. I have obtained BTC through mining as well. In both cases, I've been doing so to grow an investment position. I have decided that cryptocurrency is the most attractive high-risk investment for me at this time, so whatever liquid funds I don't need as "safety net" savings in USD, I want to put into this one way or another.
I decided to go with a substantial investment in mining hardware, because this not only allows me to profit off of increase in exchange rate, but also helps fortify the Bitcoin network itself, thereby reducing risk, however incrementally.
So, I tend to view the bitcoin rewards from my mining efforts as earnings for an age-unrestricted annuity.
This leads me to believe the best time to declare any holding at least for this use case (Bitcoin as an investment commodity) would be when exchanging it back to USD, valued at the current rate at time of exchange. This could be taxed partially as income, partially as capital gains, to reflect any increase in BTC/USD exchange rates since the inception of the mining 'annuity.'
The last italicized part would address the biggest challenge of all this in my view, which is determining average cost basis for the BTC holdings at USD conversion time.
CPA(s) in the room, any glaring problems with this?
I disagree, at least at this point in history, that bitcoin mining rewards should be taxed as ordinary income at the time they are generated. This is because they're as much commodity as currency right now. Consider this:
I have obtained BTC through exchanges. I have obtained BTC through mining as well. In both cases, I've been doing so to grow an investment position. I have decided that cryptocurrency is the most attractive high-risk investment for me at this time, so whatever liquid funds I don't need as "safety net" savings in USD, I want to put into this one way or another.
I decided to go with a substantial investment in mining hardware, because this not only allows me to profit off of increase in exchange rate, but also helps fortify the Bitcoin network itself, thereby reducing risk, however incrementally.
So, I tend to view the bitcoin rewards from my mining efforts as earnings for an age-unrestricted annuity.
This leads me to believe the best time to declare any holding at least for this use case (Bitcoin as an investment commodity) would be when exchanging it back to USD, valued at the current rate at time of exchange. This could be taxed partially as income, partially as capital gains, to reflect any increase in BTC/USD exchange rates since the inception of the mining 'annuity.'
The last italicized part would address the biggest challenge of all this in my view, which is determining average cost basis for the BTC holdings at USD conversion time.
CPA(s) in the room, any glaring problems with this?
If you own a copper mine and dig copper is it characterized as an investment or a business -- rhetorical question.
Salaries paid in bitcoin, mining rewards received in bitcoin, are probably taxable as ordinary income in the US. Bitcoins that you have purchased for dollars are probably taxable WHEN SOLD for dollars at long-term capital gains rate IF you have held them for the minimum holding period.
But here's a harder question. What happens if you buy some btc for dollars, then exchange those btc for litecoin after six months (before holding period ends), then sell the litecoin at a profit after 12 months (after the holding period is satisfied). Is the transaction taxable (a) at marginal income tax rate upon exchg of btc of ltc, at the appreciated value of the ltc received minus the dollars originally paid for the btc, then again upon sale of ltc for dollars; OR (b) not taxable until final sale of ltc for dollars, then at long-term cap gains rate of appreciated value of ltc?
One possible way we could get to (b) is by considering the exchange of btc for ltc as a like-kind exchange under IRC 1031 (http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031). Not entirely clear whether it qualifies. I would like to think that it does. Partly this is b/c of the difficulty of exiting a position to pay the tax at the intermediate step. The other reason is that it would be very difficult for the IRS to police intermediate exchanges of crypto-currencies.
But here's a harder question. What happens if you buy some btc for dollars, then exchange those btc for litecoin after six months (before holding period ends), then sell the litecoin at a profit after 12 months (after the holding period is satisfied). Is the transaction taxable (a) at marginal income tax rate upon exchg of btc of ltc, at the appreciated value of the ltc received minus the dollars originally paid for the btc, then again upon sale of ltc for dollars; OR (b) not taxable until final sale of ltc for dollars, then at long-term cap gains rate of appreciated value of ltc?
One possible way we could get to (b) is by considering the exchange of btc for ltc as a like-kind exchange under IRC 1031 (http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031). Not entirely clear whether it qualifies. I would like to think that it does. Partly this is b/c of the difficulty of exiting a position to pay the tax at the intermediate step. The other reason is that it would be very difficult for the IRS to police intermediate exchanges of crypto-currencies.
I agree with your take on salaries and mining rewards. As other's have noted you have to pay taxes on barter income as well and it is valued at the date of the transaction. So, in a parallel fashion, I'd imagine that at the date of the transaction you, the employer, have to value the salary paid in BTC and pay the payroll taxes in USD that corresponds to the USD value of the BTC on that date. By the same token, you (the employee) have to pay payroll taxes -- the employer would actually deduct this from your "salary" -- and ultimately Federal and State income taxes if due. I'd argue that the same would be true of mining income with the exception that you could deduct related business expenses.
With respect to trading btc=>ltc=>USD case, I'd be inclined to think it was more similar to forex trading than a 1031 exchange. Consequently, you'd either calculate the gains/losses on a transaction by transaction basis or use the performance formula set out by the IRS. Given the volatility of these "crypto-currencies" and the difficulty in establishing a value, I'd argue that the performance formula is the only way to go here.
I'm not a tax CPA and we all know that these questions don't actually have an IRS sanctioned treatment right now. What I'm fairly confident about is that if you report it and get it wrong then the worst thing that can happen to you is that you will owe penalties -- which could quite likely be waived since there were no regulations at the time you filed. On the other hand, if you end up overpaying, then you can file an amended return and get the funds back once the treatment is clear. If you don't report it at all, then a tax evasion case could potentially be made against you. It's like that old chestnut about how much salary a S corp owner has to pay themselves. The IRS says it must be a "reasonable" salary but doesn't define "reasonable." There are rules of thumb and case law but nothing definitive. So, tax accountant treatments vary.
These are certainly things I'm researching and I'll report back if I learn anything definitive...
- Sam
I'm not an accountant by any means but here's my take:
You don't need to pay taxes on any crypto-currency until you convert it into an actual currency. Don't bother trying to value it for the government based on a random website somewhere in the world (gox, etc.). Until the government says "here's how we officially value this item" I'd value it at $0.
However if you sold x BTC and turned it into $100,000 USD you'd probably be wanting to inform uncle sam about it then. Would be hard to argue that you didn't make money then as you're not going to convince the US government that the USD is worthless.
You don't need to pay taxes on any crypto-currency until you convert it into an actual currency. Don't bother trying to value it for the government based on a random website somewhere in the world (gox, etc.). Until the government says "here's how we officially value this item" I'd value it at $0.
However if you sold x BTC and turned it into $100,000 USD you'd probably be wanting to inform uncle sam about it then. Would be hard to argue that you didn't make money then as you're not going to convince the US government that the USD is worthless.
I'm not a CPA, but I do my best to understand the "shape" of unconventional assets and therefore how they fit in to the tax code. Talking US tax code here. I'm honestly trying to think this through, about halfway there I think.
I disagree, at least at this point in history, that bitcoin mining rewards should be taxed as ordinary income at the time they are generated. This is because they're as much commodity as currency right now. Consider this:
I have obtained BTC through exchanges. I have obtained BTC through mining as well. In both cases, I've been doing so to grow an investment position. I have decided that cryptocurrency is the most attractive high-risk investment for me at this time, so whatever liquid funds I don't need as "safety net" savings in USD, I want to put into this one way or another.
I decided to go with a substantial investment in mining hardware, because this not only allows me to profit off of increase in exchange rate, but also helps fortify the Bitcoin network itself, thereby reducing risk, however incrementally.
So, I tend to view the bitcoin rewards from my mining efforts as earnings for an age-unrestricted annuity.
This leads me to believe the best time to declare any holding at least for this use case (Bitcoin as an investment commodity) would be when exchanging it back to USD, valued at the current rate at time of exchange. This could be taxed partially as income, partially as capital gains, to reflect any increase in BTC/USD exchange rates since the inception of the mining 'annuity.'
The last italicized part would address the biggest challenge of all this in my view, which is determining average cost basis for the BTC holdings at USD conversion time.
CPA(s) in the room, any glaring problems with this?
I disagree, at least at this point in history, that bitcoin mining rewards should be taxed as ordinary income at the time they are generated. This is because they're as much commodity as currency right now. Consider this:
I have obtained BTC through exchanges. I have obtained BTC through mining as well. In both cases, I've been doing so to grow an investment position. I have decided that cryptocurrency is the most attractive high-risk investment for me at this time, so whatever liquid funds I don't need as "safety net" savings in USD, I want to put into this one way or another.
I decided to go with a substantial investment in mining hardware, because this not only allows me to profit off of increase in exchange rate, but also helps fortify the Bitcoin network itself, thereby reducing risk, however incrementally.
So, I tend to view the bitcoin rewards from my mining efforts as earnings for an age-unrestricted annuity.
This leads me to believe the best time to declare any holding at least for this use case (Bitcoin as an investment commodity) would be when exchanging it back to USD, valued at the current rate at time of exchange. This could be taxed partially as income, partially as capital gains, to reflect any increase in BTC/USD exchange rates since the inception of the mining 'annuity.'
The last italicized part would address the biggest challenge of all this in my view, which is determining average cost basis for the BTC holdings at USD conversion time.
CPA(s) in the room, any glaring problems with this?
You do understand that a Tax refund is a REFUND of money you already paid out of your paycheck. If you file taxes and you get nothing back... YOU DID A GOOD JOB! You paid what you were supposed to and don't need to pay any more.
Most thieves don't return anything so ...
Salaries paid in bitcoin, mining rewards received in bitcoin, are probably taxable as ordinary income in the US. Bitcoins that you have purchased for dollars are probably taxable WHEN SOLD for dollars at long-term capital gains rate IF you have held them for the minimum holding period.
But here's a harder question. What happens if you buy some btc for dollars, then exchange those btc for litecoin after six months (before holding period ends), then sell the litecoin at a profit after 12 months (after the holding period is satisfied). Is the transaction taxable (a) at marginal income tax rate upon exchg of btc of ltc, at the appreciated value of the ltc received minus the dollars originally paid for the btc, then again upon sale of ltc for dollars; OR (b) not taxable until final sale of ltc for dollars, then at long-term cap gains rate of appreciated value of ltc?
One possible way we could get to (b) is by considering the exchange of btc for ltc as a like-kind exchange under IRC 1031 (http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031). Not entirely clear whether it qualifies. I would like to think that it does. Partly this is b/c of the difficulty of exiting a position to pay the tax at the intermediate step. The other reason is that it would be very difficult for the IRS to police intermediate exchanges of cryptocurrencies.
But here's a harder question. What happens if you buy some btc for dollars, then exchange those btc for litecoin after six months (before holding period ends), then sell the litecoin at a profit after 12 months (after the holding period is satisfied). Is the transaction taxable (a) at marginal income tax rate upon exchg of btc of ltc, at the appreciated value of the ltc received minus the dollars originally paid for the btc, then again upon sale of ltc for dollars; OR (b) not taxable until final sale of ltc for dollars, then at long-term cap gains rate of appreciated value of ltc?
One possible way we could get to (b) is by considering the exchange of btc for ltc as a like-kind exchange under IRC 1031 (http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031). Not entirely clear whether it qualifies. I would like to think that it does. Partly this is b/c of the difficulty of exiting a position to pay the tax at the intermediate step. The other reason is that it would be very difficult for the IRS to police intermediate exchanges of cryptocurrencies.
I could certainly comment on those issues. I'll even include a basic thought process here for the first question to provide some evidence of my qualifications. Payment of payroll in Bitcoin would appear to require an immediate valuation of the compensation on the date paid. The source of the valuation is probably a bit flexible, but consistency would likely be the rule that would be most important. Thus if you valued with Mt.Gox once, you should probably do so every time (unless you can document a very specific reason why you change, such as the site is not available on the date). Might make sense to build a formula that does a weighted average of multiple sources just to try and smooth out some volatility.
You would report the dollar-value estimate as compensation and withhold an amount of cash valued at the required tax table rate. If you're trying to pay only in Bitcoin though (no cash portion of payment), you'd need essentially build an employment agreement that included an "employer buy back" of the right amount of Bitcoin to withhold for the tax. I.e., employee is to be paid 10 bitcoin, withholding requirement is 1 BTC, you agree to buy (for cash) the one bitcoin back immediately at payroll, thus providing sufficient cash to cover the employee's withholding.
The amounts granted as compensation and withheld would then feed directly into the appropriate W-2. Of course, this is all assuming a W-2 employee, if you're looking at 1099s it would be far simpler.
Great analysis, I'm persuaded enough to pursue further. Sending PM.
As an E.A., I agree with the above analysis of the treatment and implementation of a bitcoin payroll system. I would add, make sure you have a record of your bitcoin payroll "checks." Since bitcoin is pseudo-anonymous and there is little evidence of bitcoin transfers, you would need to have a system where the employee and employer both sign some kind of statement on each pay date that states the amount paid in bitcoins paid, the salary rate, the amount of hours worked,the withholding amounts. Basically everything that is reflected in a regular W-2.
I'm not an expert in payroll taxes, so I would raise this question. Are there any special issues relating to your plan to pay employees in bitcoins when it comes to filing W-2 and form 941? Would you simply convert all bitcoin payments into USD, at the time of payment, and report all earnings and withholding as USD as usual?
I sent a PM a couple of days ago to frankAcct366, and accompanied it with a bitcoin tip. No reply yet.
I could certainly comment on those issues. I'll even include a basic thought process here for the first question to provide some evidence of my qualifications. Payment of payroll in Bitcoin would appear to require an immediate valuation of the compensation on the date paid. The source of the valuation is probably a bit flexible, but consistency would likely be the rule that would be most important. Thus if you valued with Mt.Gox once, you should probably do so every time (unless you can document a very specific reason why you change, such as the site is not available on the date). Might make sense to build a formula that does a weighted average of multiple sources just to try and smooth out some volatility.
You would report the dollar-value estimate as compensation and withhold an amount of cash valued at the required tax table rate. If you're trying to pay only in Bitcoin though (no cash portion of payment), you'd need essentially build an employment agreement that included an "employer buy back" of the right amount of Bitcoin to withhold for the tax. I.e., employee is to be paid 10 bitcoin, withholding requirement is 1 BTC, you agree to buy (for cash) the one bitcoin back immediately at payroll, thus providing sufficient cash to cover the employee's withholding.
The amounts granted as compensation and withheld would then feed directly into the appropriate W-2. Of course, this is all assuming a W-2 employee, if you're looking at 1099s it would be far simpler.
Great analysis, I'm persuaded enough to pursue further. Sending PM.
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