Topic: How Will the IRS Tax Bitcoin? - page 3. (Read 5152 times)

MrMirkin

I think your example is different in a couple of ways.  First, you are making bananas as a business and they would likely be treated as inventory and not as an investment.  As such, there would be no capital gain or loss when you sold them (and your gain or loss would likely be ordinary income, not capital gain or loss......).

And I don't think if you exchanged your bananas for something other than fiat (like maybe one of my oranges) it would make any difference on wither or not the income tax was applied to the trade - inventory or investment property.  It would be taxed at that time.

This was settled with the barter clubs of the 1970s..... trades are taxed at the fair market value of the property traded - usually the value of what you gave and, if this was not something that could be valued (no market, etc.) at the value of what you received.  I am quite certain it does not need to involve fiat on either side of the transaction for it to be taxed....... so in that part of your suggestion, yes, I suspect you are incorrect.

There are some VERY RARE exceptions for 'like kind' exchanges which your accountant can fill you in on - both under a code section (Section 1031) and where the property exchanged is near identical (like BTC for BTC - and this is in the Regulations).  There are narrow exceptions, however.....

bob

I guess capital gains only makes sense if you're trading on the market place, buying bitcoins and holding them for future value.  Then, if you sell your appreciated/depreciated capital at any point you calculate the gain/loss.  On the other hand, if your main purpose is to sell merchandise and convert it into fiat, then pay yourself a salary, it would seem to me you would be subject to all the norms of running any other business that creates income through normal means.  If you're mining coins this seems like it would apply also.  Hey, don't take my advice though, I'm not a tax pro.  It's a complicated question.

Bob, I look at it a little different...  Take this example.

Imagine there is a company that makes frozen banana machines.  I purchase a banana machine and produce my own frozen bananas.  I then find a group of people who are willing to accept payment for my goods in frozen bananas.  Im no tax expert, but it seems to me that the IRS has no control over my frozen bananas in this barter system and only when it changes to fiat and I start selling them, then I pay sales tax/business taxes.  Now even if I do decide to sell them, seems i should only pay sales taxes/biz taxes.  I dont see where a capital gains tax comes into play here. Even if i produced TONS off banans when the price was lower.. Or if the great banana shortage of the 30s comes back and they skyrocket.  Its still a banana, not fiat...

Is this an incorrect assumption?

If the correct metric is "the time at which you can spend the coins," then it is after 99 confirms if it is a coinbase payout, or immediately otherwise. That is the point at which a transaction spending the output can make it into a candidate block being mined.

Hey maaku.....

Agree with you that, if you choose to treat the mining income as taxable when you get the coins then the basis is going to be the price when the block was mined.  

Can't say what exchange to use.... and how you determine the price for the day you get the coins (the spread is so large.....), but I am still struggling on what day you really get the coins.... what is the SPECIFIC time you can spend the coins.... is it after 6 confirms?  And if so, how is the ability to spend the coins triggered - is there a verification if you try to spend them that you are the owner and the six confirms has occurred?

It may seem like splitting hairs - but at the volatility we are seeing these past few months, it can make a material difference in what you report......

your thought s appreciated.  And touche greenlion!

The real long-term question might actually turn out to be "How will the IRS survive Bitcoin".

Seriously? Have fun in prison.

There is a group focused on tax issues now.  There are an incredible number of issues out there to be answered but the IRS is not ready to draw the line.  _wayfarer_, it looks like the Winlklevoss Bitcoin Trust documents, certainly drafted by attys., sides with you on looking at it like a capital asset where it is held for investment.  We won't know the 'right' answer until the IRS chimes in.  I hate guessing when it comes to taxes...... but we may have to unless the IRS says something soon.....

MrMirkin, I suspect there are a few bitcoin miners who would not agree with the suggestion that they didn't put $$ into it.... especially the more recent miners who are investing in ASICs.  For those who mine, the biggest issue appears to be when you have to report your 'earnings.' Do you report them when you successfully have a block added to the block-chain (and therefore got your coins and the transaction fees)..... or when (and if) you sell them or use them to purchase something.

If you visit the mining forum there is much discussion about expenses - and whether you can deduct them when they are incurred or must treat them as a cost of acquiring the bitcoin (and, therefore, think of them as the "purchase price" of the mined coins).  

This will be quite important to many given the rise in value of BTC.  It is also an area that only your accountant can help you determine, because the 'right' answer (guess) may also depend on whether your BTC activity is considered a hobby or for profit/as a business....

I think most everyone would agree that you account for your income or loss when BTC are sold or used to purchase something.  What is not clear is if you treat a mining allcation as income when you get it.  The IRS could go either way here.  They may say it was taxable when you got your 50 coins (now 25).  They could even treat the reward element of mining different from the transaction fees.  In one you got an award from mining, in the other you got kind-of a 'commission' from the transactions you included in the block.  

I don't think the transaction fees are giving anyone a lot of heartburn today as they tend to be so small.  But in the basic design of bitcoin by Satoshi - once we reach maximum currency at 21M the transaction fees will be THE mining reward.

Until the IRS weighs in it's a best-guess world for us all.  I suspect the more conservative will take recognize income from mining when their coins were awarded.  Others will not.  For those who had blocks accepted early this year when the coins weren't at the $700 level this will not be near the challenge as it is for those who got mined coins in the past few months......

BTW anyone wanting to join in on the group assessing the tax issues pm me.

bob

Why do you think that the IRS has any claim on any part of your Bitcoins?

Talk to a real accountant/lawyer. But it seems likely to me that the cost basis would be the price at the time the block was mined / share paid out.

To me it only makes sense as a capital asset, so like any other unrealized capital gain, you should only be taxed when and if you trade it in for profit.  Hey, I'm no tax expert, so don't take my advice, but that's my gut.  If and when it ever becomes a real currency, meaning you can use it for buying tons of things without ever changing it for fiat, they'll put a stop to that quickly since you could avoid all tax completely if you're paid only in coins.  Until that happens, I'll treat it as capital gains.  I'm careful to never pull out more fiat than I put in for now, I'm not a short-term profiteer, unless it's to gain more coins

Well what im wondering is if you just only mine, never put $$ into it, it doesnt seem you would ever have to pay capital gains? From what I understand, capital gains are only if you purchased the product..  What do you guys think?  Seeing as I didnt "invest" but rather "produced" the product?

Tell that to the IRS, lol. Have fun in jail.

bitcoin does not exist on the material plane and is subject to no human authority

you can not tax an idea

nation states have no jurisdiction in realms of the mind, and I declare war on any who would claim such

Despite a recent plunge, bitcoin has had a banner year. Now comes the hard part—figuring out the taxes on it.

For the uninitiated, bitcoin is the most prominent of several "virtual currencies"—money that exists only online and isn't backed by any government. Released in 2009 by an unknown person or group going by the name Satoshi Nakamoto, bitcoin is maintained by a decentralized network of computers, called "miners," that process and verify transactions. As of Friday afternoon, the value of all bitcoins in circulation was nearly $8 billion, according to CoinDesk.

This year the price of a bitcoin has risen from about $13.50 to about $650 on some exchanges, down from a November high of about $1,200 just before concerns arose that China will crack down on the virtual currency.

Experts say, however, that there's no agreement on a host of fundamental questions for U.S. taxpayers holding or using virtual currencies. "People who invested in bitcoin or used it to buy goods or services this year have gains or losses, but no rules for reporting them," says Omri Marian, a professor of law at the University of Florida in Gainesville. "What should they do in April?"

Among the pressing issues: When should bitcoin be considered a commodity, a currency or a capital asset for tax purposes? Are bitcoin transactions similar to barter? Is bitcoin subject to the same stringent tax rules as secret offshore accounts? And how will U.S. officials keep bitcoin, which is even more anonymous than cash, from being used to promote tax evasion or money laundering?

So far, the Internal Revenue Service hasn't ruled on or addressed such issues directly. An agency spokesman released the following statement: "The IRS continues to study virtual currencies and intends to provide some guidance on the tax consequences" of transactions involving them. The agency is also "aware of the potential tax compliance risks posed by virtual currencies," he added.

Meanwhile, bitcoin investors and users should be aware of some thorny basic issues. If bitcoin is a capital asset like a stock, says David Shapiro, a principal at PricewaterhouseCoopers in Washington, then long-term capital gains and losses—those on assets held for more than a year—would qualify for a top federal rate of about 24%. But losses above $3,000 could only be deducted against other capital gains.

If, on the other hand, bitcoin counts as a currency (like euros or yen), then gains will be taxed at federal rates on ordinary income up to 43.4%, Mr. Shapiro says, and losses will be fully deductible against ordinary income like wages.

In its preliminary filing, the Winklevoss Bitcoin Trust—a public fund registered by brothers Cameron and Tyler Winklevoss, of Facebook fame—said it intends to treat bitcoin as a capital asset instead of a currency, unless the IRS rules otherwise.

Clearly, someone could have a taxable gain or loss in bitcoin when it is sold or given away. But there could also be a taxable gain or loss when bitcoin is used simply to purchase goods or services, says Mindi Lowy, a tax director at PricewaterhouseCoopers in New York. "The fact that using bitcoin to buy something could trigger taxes will come as a surprise to typical consumers," she says. Most people, after all, don't think of spending money as an act that could generate taxable gains or losses.

Taxpayers may also have difficulty tracking a bitcoin's "cost basis," which is the price used as the starting point for measuring taxable gain or loss, says Ms. Lowy. Unlike with assets such as stock or mutual funds, there's no institution keeping bitcoin records, and taxpayers may not even know they need to do so themselves.

Also up in the air: whether offshore-account reporting rules apply to bitcoin. Taxpayers with $10,000 or more in non-U.S.-based financial accounts often have to report the accounts to the U.S. even if they don't generate income, or else they risk severe penalties.

A spokesman for FinCen, the U.S. Treasury Department unit charged with preventing financial crimes, says this question is "under consideration and will be made in consultation with the IRS," but it's unclear when.

The IRS could face a bigger headache if bitcoin and its kin replace tax havens as the venue of choice for tax evaders, Mr. Marian says.

"Virtual currencies possess the traditional benefits of tax havens: anonymity and no tax," he says. While rules now taking effect are putting pressure on governments and financial institutions to end offshore tax evasion, he adds, "virtual currencies pose a threat to this recent success because they don't depend on banks or governments."

Mr. Marian says that he and many other specialists are "stumped" as to how the IRS will rule on bitcoin. He says his own sense is that it's a commodity similar to gold, because there's a finite supply and it's a store of value. He adds that some bitcoin transactions may be akin to barter—which has its own tricky tax rules.

In the absence of guidance, advisers are telling clients that bitcoin income, gains and losses should be declared to the IRS.

"If you take a reasonable position, they probably will accept it," says Jonathan Horn, a certified public accountant in New York. He plans to advise his clients to file foreign account disclosures if they meet certain thresholds and hold bitcoin through an entity that isn't located in the U.S.

Taxpayers who have bitcoin and flout the tax rules, Mr. Horn warns, "are opening themselves to penalties, interest and possible fraud prosecution."

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Write to Laura Saunders at [email protected]

http://online.wsj.com/news/articles/SB10001424052702304773104579268322915488180