Topic: Is the IRS ruling final? Where is the legal / technical analysis? - page 2. (Read 4243 times)

all is fair in love and tax court. if the IRS wins, then they win fair and square and the taxpayer pays the tax assessment. most people won't go to tax court unless they have a semi strong argument. the IRS loses or settles the majority of tax court cases.

you want to find out my tax court strategies? My retainer is $50K, bitcoin accepted here. SE taxes paid. then capital G/L calculated

This sounds good and all, but what if the case(s) are lost against the IRS? Then the IRS has won and they have gained from doing it, and they will do it again and again...

I don't see how the IRS would lose that case if the tax avoiding citizen didn't pay their taxes. That makes the citizen guilty doesn't it?

What makes you feel so confident that they would lose as you portray in your example?

Is it because it will be unprovable how much the citizen owes due to the anonymous nature of the blockchain? (In the future, I expect FULL anonymity features)

I don't do my own heart surgery or program my own computer so you should stop doing your own taxes.

Being a fellow tax professional, I think you know the answers to your questions, but it's good to illuminate the masses on this forum who are not familiar. 

This is what will happen...

In a few years, the IRS will audit a taxpayer for under reporting income. This taxpayer will be claiming he only has 5k of income, yet he lives in a million dollar apartment and drives a tesla, without any discernible sources of salary wage income. The IRS field agents have heard of these people, they are called bitcoiners. Under pressure, the taxpayer will admit he has been mining bitcoins, trading bitcoins, spending bitcoins. The IRS will impose capital gains rules on this income, according to n-14-21. The taxpayer realizes he might have a better tax treatment if he took another supportable position (google that term boys and learn something). The IRS stands by n-14-21 and we go to tax court. Tax court is not like a regular court where lawyers grandstand and try evidence and facts. Tax court is much more analogous to arbitration where each side presents their argument and a federal tax court magistrate decides the best solution. Perhaps the taxpayer hires me, and I make a convincing argument in front of the tax court and this taxpayer will then receive the beneficial tax treatment that all the silly bitcoiners are trying to get with a petition to the IRS. FYI, no where in the IRM is there a chapter regarding online petitions to change IRS rulings. The IRS will have to abide by the tax court ruling in this case only. Tax court does not set precedent for any other taxpayers. So the next bitcoiner hears about the tax court victory of yours truly, and decides he wants to take the same supportable position. The IRS once again goes to tax court against the second bitcoiner and we win again. Now the IRS has suffered two defeats in tax court. Eventually a revenue manager will see all these defeats and decide it isn't worth it for the service to fight these cases again and again and lose again and again...to me.

So that my friends is how to change this ruling. You go to tax court and look for a favorable ruling from a magistrate. Then you do it again and again and eventually the IRS figures out this bitcoin thing is a money loser for them and then they will go after some other thing for revenue. There's also another venue you can pursue, federal appeals court. But that's a story for another night.

There are indeed alternatives and I have some in mind.

My $.02.

Bad news only for [edit: law abiding] US citizens.

Good news for everybody else as it makes mining in the US less profitable thus takes the American mining competitors off the market. Cheap second hand mining rigs ahead for Europeans and Asians I guess.

So go IRS, go!

Joe

Don't forget this part:

Q-9: Is an individual wh
o “mines” virtual currency as
a trade or business subject
to self-employment tax on the income derived from those activities?

A-9:
If a taxpayer’s “mining” of
virtual currency constitutes a trade or business, and the
“mining” activity is not underta
ken by the taxpayer as an employee, the net earnings
from self-employment (generally, gross in
come derived from carrying on a trade or
business less allowable deductions) resulting from those activities constitute self-
employment income and are subject to the
self-employment tax."

Bad news.

My $.02.

Legal tender is not what you think.
Legal tender means that everyone is forced by law to accept it.
it is bad law. It is used for junk currencies and should not be needed for bitcoin.

From IRS Notice 2014-21 (that LostDutchman linked to):


I don't need an accountant to understand that.  I'm not an accountant or a tax professional, but the IRS notice was written in plain english and as someone who does their own taxes, it seems straightforward.

There's two separate things, as I understand it:

1) an income generated when the bitcoin is mined based on the market value at the time it was mined (regardless of whether it's ever sold).  This gets reported and taxed as income (could be business or hobby income, but that's a separate question)
2) a capital gain or loss when the bitcoin is sold or spent.  If it was mined, then the cost/basis is the market value at the time it was mined that was already taxed as income.

If you're not selling the bitcoins that you're mining, you still have to come up with the USD to pay tax on the income.

No, you don't have to keep tracking every rise and drop.  You just have to track it at the time it was mined (cost/basis, reported as income), and the time it was finally sold (to calculate a capital gain or loss).

I think that morepeople should actually READ the most recent IRS ruling because there is a lot of misunderstanding!

Go here:

http://www.irs.gov/pub/irs-drop/n-14-21.pdf?utm_source=3.31.2014+Tax+Alert&utm_campaign=3.31.14+Tax+Alert&utm_medium=email

A few relavant quotes from the document:

"Q-1: How is virtual currency
treated for federal tax purposes?

A-1:
For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.

Q-2: Is virtual currency treated as currency for purposes of determining whether
a transaction results in foreign currency gain or loss under U.S. federal tax laws?

A-2:
No. Under currently applicable law, virtual currency is not
treated as currency that could generate foreign currency gain or
loss for U.S. federal tax purposes.

Q-3: Must a taxpayer who receives
virtual currency as payment for goods or
services include in computing gross income
the fair market value of the virtual currency?

A-3:
Yes. A taxpayer who receives virtual
currency as payment for goods or services
must, in computing gross income, include the fair market value of
the virtual currency measured in U.S. dollars, as of the date that the virtual currency was received."

"Q-8: Does a taxpayer who “mines” virt
ual currency (for example, uses computer
resources to validate Bitcoin transactions
and maintain the public Bitcoin
transaction ledger) realize gross income
upon receipt of the virtual currency
resulting from those activities?

A-8:
Yes, when a taxpayer successfully “mines”
virtual currency, the fair market value
of the virtual currency as of
the date of receipt is includible in gross income. See
Publication 525,
Taxable and Nontaxable Income
, for more information on taxable
income.

Q-9: Is an individual wh
o “mines” virtual currency as
a trade or business subject
to self-employment tax on the income derived from those activities?

A-9:
If a taxpayer’s “mining” of
virtual currency constitutes a trade or business, and the
“mining” activity is not underta
ken by the taxpayer as an employee, the net earnings
from self-employment (generally, gross in
come derived from carrying on a trade or
business less allowable deductions) resulting from those activities constitute self-
employment income and are subject to the
self-employment tax."

Not at all the way things are being discussed.

This is a barrel of snakes and really endangers a lot of people.

My $.02.

why would anyone consider making bitcoin legal tender as being a good thing??!

legal tender means government controlled, managed, and empowered currency.. bitcoin will and should never be a government currency.

governments can only tax people on the FIAT people receive because FIAT is the governments copyrighted product.
the amount of tax to be taken is based on fiat prices of when the property first became owned by you. calculated against the fiat received at the sell.

what happens inbetween is irrelevant and out of governments jurisdiction.

if you think its a good idea to hand control of bitcoin to government.. atleast let them have grumpycoin instead (randomly picked useless altcoin).

All you need is for one federal judge to overrule this "opinion" and a legal precedent will be set that others will look toward for guidance.  They can make anything a rule.  But a good legal argument will turn that rule into a useless unenforceable document. Problem is, getting a solid enough legal argument.  Property definition is a beginning.  At least they recognize the existence.  Now, the burden is shifted into making Bitcoin a legal tender.  This is the conundrum (and raising the bar from property considerably).  This is a hell of a start if you ask my slightly informed opinion.

wow.. i see you havnt spoken to an accountant.

you pay tax when you get your FIAT for that coin.. you work out the gain/profit or loss by looking at the fiat value of the bitcoin when mined and the fiat you receive when selling.

imagine you mined 1 bitcoin and you paid tax on todays valuation of $450. the tax is paid. what about when the price moves tomorrow. do you pay tax again on a rise. and ask for a refund on a drop. NO no no

now then. when you mine a bitcoin you wait until you have sold the bitcoin for coldhard fiat in your bank, then you look at the price value at the time of the fiat sale and you calculate that against the initial price at the time of mining..

you dont have to keep a log of every $ movement whilst hoarding,  because the maths of adding and subtracting every movement would end up with the same total as just taking the numbers at the start and the end..

i seriously dont know why people are too lazy to speak to an accountant. but then think they have to do lots of work suddenly, when its not needed.

the mind boggles

^ this is the only part that seems frightening. And retarded. It's paying tax on speculation unless you cash out immediately.

So let's say you mine some bitcoins. You are supposed to pay tax the day it was mined and then if you cash out in the future you are supposed to pay tax again on the gains? Insanity?

For miners, the bitcoins mined are now taxed as income using the market price at the time of mining as the basis.  Even if you never sell the bitcoins.

wrong. and try not to quote or use media as yor source.. as they are proven to mislead..
instead fond the source
https://bitcointalksearch.org/topic/white-house-petition-stop-the-irs-make-a-difference-555188
https://petitions.whitehouse.gov/petition/amend-irs-notice-2014-2taxing-virtual-currencybitcoin-property-stifles-new-technologycreates/z7WtKZGY

here is a quote that made me laugh

+1 also to note the skateboard for bike would be considered a fair value swap. meaning no gain or loss.. but (if you were that anal about tax returns) if you sold the bike for $$$$$ later on, then you would show the original price you paid for skateboard and minus that number against the $$$$ you sold the bike.. not worrying about fair market value of the bike or skateboard when swapping in the middle. just the beginning and end numbers are important.

(please note i have excluded some loopholes and tax exemptions so dont knit pick the small stuff below certain thresholds)

When you trade a piece of 'personal property' for another, like say you traded a skateboard for a bike, would you ever document it or ask the other person for their soc#?  In IRS eyes its not MONEY!  Just a tactical way of them saying we 'can' tax it.  But can they enforce it?

True, yet so far the person who started the petition is the only one who has made and effort.
Your mining earnings are going to be taxed as currency and property both and the tracking is burdensome to say the least.

the guy that first promoted the petition and wrote it out. is not a tax expert and from reading what he wrote, he probably has never made a self assessment tax return in his life. there are flaws to his petition and congress would simply laugh at it, and put the petition in the round filing container.. known as a bin.

if there is to be a petition. then whomever wants to do it. should research the IRS wording, check  with an accountant and get someone with good understanding to write a proper petition..

the current petition seems to be just cries and whimpers about hypotheticals. and not intellectual facts. anyone that owns a business or has been self employed, doing their own tax returns can plainly she the lack of experience the petition writer has. i think that he is just trying to get 15 minutes of fame, where nothing gets changed..

There is a petition to get the attention of the White House to get it looked at.  As it stands now miners will likely pay over 40% of mining rewards unless it's fixed.
http://www.cryptocoinsnews.com/news/white-house-petition-amend-irs-notice-2014-2-taxing-virtual-currencybitcoin/2014/03/29