Topic: Time to start thinking about taxes - page 2. (Read 6241 times)

A tax lawyer may tell you that the cost will include all the costs of the mining equipment (depreciated on a schedule) the monthly electricity, rent, and support costs.
Some people lose money mining.  You don't pay tax on a loss.

It should be "0" when you mine it. At least this is certainly the case with speculative altcoins. After that it should just be treated as a commodity with capital gain applications, where you're initial cost was "0" and anything after that is pure profit. 

Regarding mining, there is a matching principle in accounting that suggests that income should be recognized at roughly the same time as related expenses.  So deducting expenses when incurred or paid, but capitalizing the value of mined coins and not recognizing income until the coins are sold would, in my opinion, not likely be upheld in tax audit or litigation.  By far the safest position is to recognize income at the FMV when mined.  Determining FMV is not completely clear cut, given as much as 10% spread in dollar values between exchanges.  Whatever valuation method is used should be used consistently, and it is probably worth seeking valuation advice if the mining revenues are large.  The income recognized becomes the tax basis and then additional gain or loss is recognized based on the change from basis when the coins are sold.  Several methods including LIFO and specific identification may be used to decide which coins were sold.  Whichever method is chosen should be used consistently.

I am a USA CPA licensed in CA and IL, and a certified valuation analyst, and I can be found on LinkedIn or by Google. Here is my circular 230 disclaimer.  This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing.  It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services.  Please contact us if you have questions. 

Folks, at this time the distinction between currency and investment is a grey area to me and both approaches have some support in tax law.  I'm repeating the court case citations I am aware of that lend some support to either approach.  There is no right and wrong here yet until the lawyers in congress, or the lawyers who are now judges give us stronger guidance on what to do with coins that are not associated with countries.  As described in my earlier post each approach has advantages and disadvantages.  Pick one or be consistent with previous years.  Consider seeking advice from a tax expert before changing approaches.

Supporting the currency approach:  In SEC vs. Trendon T. Shavers and BTCST  Judge Mazzant writes “It is clear that Bitcoin can be used as money,”  “It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses.”  Also see IRC 988(c )(1)(C )(ii) “Nonfunctional currency. For purposes of this section, the term "nonfunctional currency" includes coin or currency, and nonfunctional currency denominated demand or time deposits or similar instruments issued by a bank or other financial institution.”

Supporting the investment approach: In California Bankers Assn. v. Shulttz “‘Currency’ is defined in the Secretary’s regulations as the coin and currency of the United States or of any other country, which circulate in and are customarily used and accepted as money in the country in which issued.”  Some other jurisdictions may be taking this investment approach.

I am a USA CPA licensed in CA and IL, and I can be found on LinkedIn or by Google.
Here is my circular 230 disclaimer.  This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing.  It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services.  Please contact us if you have questions. 

OK, IRS publication 17 chapter 14 says personal assets are capital assets (with the caveat that only assets owned for investment purposes can be claimed as losses).  Found this link on another thread:
http://www.irs.gov/publications/p17/ch14.html
So now I can see how people could claim it as capital without calling it a commodity or a security.  Perhaps this is right since it hasn't been recognized as a currency by IRS or US gov...

If you mine bitcoins it is counted as income based on the value of the bitcoins at the time you mine them. Yes, it's a huge pain to keep those kinds of records, but it is the legal way to do it.

Intention/use would make sense to matter.
If you bought bitcoin to speculate (and I guess hold it over a year) it would be capital gains.
If you did an online job for bitcoin, I guess you could claim it as income.
What if it was a gift?
I guess if you kept bitcoin and used it to buy something now that the price is higher it would count as bartering if you didn't change it to fiat?

I guess the middle investor is going to be the victim here. Small amounts will be overlooked, millionaires will go to cash havens/change citizenship to avoid taxes and the middle man is going to have to pay up.

OK, I'm trying hard to understand how an individual who uses bitcoin as it is designed would be able to treat it as a capital asset (although I'm also interested in how multiple people can feel comfortable suggesting treating it as a capital asset based on how it is designed regardless of how an individual uses it [preferrably beyond clinging to a few loosely defined words like "financial institution" or referencing court decisions from presumably local {presumably non-federal, possibly even non-tax, though I didn't attempt to look up the case referenced by steverabincpa} jurisdictions]).

In addition to trying to give me a solid argument for why bitcoin would be a capital asset for individuals, can someone take a swing at the following?

Juan bought a car for $1500 in 2011.  In 2013, he sold it for 5 BTC when BTC were trading at $100.  My understanding is that personal assets aren't treated as capital, meaning there is no capital loss (long term or otherwise) to claim here (which would also be the case if he had actually sold the car for $500).  However, there is no income to claim, either, because he did not receieve more than he paid for the personal asset.

Please correct me if I'm wrong on anything about personal assets (and point me at the appropriate documentation to back up the correction).  Assuming I'm not, how would bitcoin be any different since it isn't defined as a regulated security?

Now, to complicate the scenario (in case someone wants to suggest that Juan should treat BTC as nonfunctional currency while Pablo can  still treat it as capital because Pablo bought BTC as an investment), let's add this to the equation:

Juan also bought 10 BTC for a net $300 expense in 2011 as an investment.  Juan has actual stock market assets as well and uses the FIFO lot tracking method (so he's already using form 8949 and schedule D), and he recently cashed out enough savings bonds from his childhood to have to file schedule B (which is what is used for section 988 [reportable non-day-trader currency exchange] income/losses).  So for Juan, aside from the temptation to treat it as long term capital gain and pay less taxes, reporting it properly using either method isn't an issue.  If juan sold 11 BTC for a net $11,000 credit after the aforementioned transactions (purchase BTC, sell car for BTC), how would he treat BTC on his return?

Frankly, from what I've read so far, I half expect someone here to tell me that Juan should treat 10 BTC sold as long term capital gains of $9,700 and 1 BTC sold as nonfunctional currency for an income of $500.  However, I read a lot of section 988 (26 CFR & 26 USC), and while I am no tax advisor/attorney, I am fairly confident that such treatment would be considered "switching accounting methods," which would appear to be frowned upon / not allowed.  Given that, let's assume that Juan doesn't want to try to contact the office of Timothy Geithner to get permission to change accounting methods (especially since Mr. Secretary has publicly said that he thinks bitcoin is a bubble, among other things).  Again, please correct me if I'm wrong (and point me at the appropriate documentation to back up the correction).

Assuming I'm not, for those suggesting that BTC should be treated as a capital asset with short and long term gains and losses, can you point me toward a section of code that discusses income and cost basis for the exchange of securities?  Or, to provide a more explicit example, suppose Juan wanted to trade his car in the first example for Yahoo! stock, and Pablo had actual certificates he was willing to exchange for the car.  Would this be possible, how would it be reported, and where would this exist in the code.

ETA - Also see: https://bitcointalksearch.org/topic/m.3925362 (re: "not a capital asset" from some IRS employee) and share thoughts accordingly.

Reversing the scenario does make a difference.  Although losses are only deductible in one of those three categories, all gains, including those outside these categories are usually taxable.  In your case above however, IRC988(e)( 2 )(B) sets a $200 threshold below which the currency exchange gain on personal transactions are ignored.  From a practical standpoint, a taxpayer is unlikely to get audited over the taxes on a single $50 unreported gain. Common things that do cause taxpayers to get audited are tips from ex-wives and ex-employees. 

This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing.  It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services.  Please contact us if you have questions. 

Thank you for the response/explanation.  Let's reverse the scenario, though, just in case it makes a difference.
Obviously this is much less likely, but if Juan withdrew $500 CAD and it debited his account $450 USD and then he was able to exchage the $500 CAD for $500 USD upon his return at his local branch, would that $50 gain be reportable as income (and where)?  I ask because it's still not "incurred" in a trade or business, and it's still not from a transaction entered into for profit.  That having been said, if this wouldn't be reportable, would it be because it wasn't a transaction entered into for profit, or would it be because the dollar amount was below a certain threshold?

Worth a read if anyone hasn't seen it already:

http://www.bitcointax.info/

The000Dustin, unfortunately the situation described above sounds similar to the example in IRS Rev. Ruling 74-276 where exchange loss of an overseas employee was not deductible because it was not "(1) losses incurred in a trade or business, (2) losses incurred in a transaction entered into for profit, though not connected with a trade or business. and (3) certain casualty and theft losses."  (see also IRC165( c ) and Treas Reg 1.165-1(e)( 2 ) )

Business expenses ideally are reimbursed by the employer who deducts them on their business return, or as an unreimbursed employee expense on Sch A.  Unincorporated nonemployee businesses deduct exchange loss on Schedule C or E or F of the owner. "Losses incurred in any transaction entered into for profit, though not connected with a trade or business;" I would report as a negative component on 1040 line 21 OTHER INCOME.  And of course investment losses go on Sch D.  Be careful with travel related exchange losses however, as other travel specific limitations may apply.

I hope these comments were helpful.  This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing.  It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services.  Please contact us if you have questions. 

I really want to know how currency exchange works for a typical individual, can you tell me how one would deal with the following scenario, on a federal income tax level?
1) Juan drives up to Canada
2) Juan withdraws $500 CAD from an ATM using a US/USD-based debit card
3) Juan's checking account balance is reduced by $625 USD
4) Juan's need for the cash vaporizes and he drives back to the US with it
5) Juan goes to his local bank branch and exchanges the $500 CAD for $575 USD
Obviously Juan lost $50 in these transactions.  It sounds like you are suggesting that would be a claimable loss.
If that is correct, I would love to know how Juan would claim this loss.  If it is incorrect, please refer to my prior posts in this thread and help me understand or find a document that indicates when/how to know one can claim such a loss.  If the rules for losses are different than gains, please point me toward information affirming that as well.

"It's strange to start out the comment with "the rules seem pretty clear," because I was thinking just the opposite. "  - Yes, agreed, it is still murky.

Why file anything at all?  Because it starts the clock on the statute of limitations, limiting the ability of tax authorities, in the indefinite future, from targeting you with future forensic technologies, for many years worth of compound interest and penalties, or taking even stronger measures against you.  And because it is the right thing to do. IRC 6501(c)( 1) False return. In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.  See also 6501(c)( 2) Willful attempt to evade tax ; and 6501(c)( 8 ) Failure to notify Secretary of certain foreign transfers.   

"And then there's the question to file anything on a schedule D in the first place.
One approach may be to just file it under "other income" and pay income rates. "
Given the lack of standards for presentation of bitcoin income, I would be much more concerned that numbers are reasonably accurate than to presentation.

The investment approach has the advantages of lower long term capital gain rates and perhaps deferred realization of gains in some exchanges, but losses are capital losses which are harder to utilize.  In contrast the currency approach more readily realizes gains at ordinary income rates, but any losses are ordinary and easier to realize and carryforward as NOL. 

If the dollar difference between the two approaches is large, the taxpayer (or their advisor) may want to pay to obtain a private letter ruling from the IRS on this issue.  I have searched but am not aware of any such rulings to date.  I would not recommend changing between methods without consulting a CPA or tax attorney, and I also recommend professional advice when choosing between LIFO, specific identification, or other methods of timing trading.

Supporting the currency approach:  In SEC vs. Trendon T. Shavers and BTCST  Judge Mazzant writes “It is clear that Bitcoin can be used as money,”  “It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses.”  Also see IRC 988(c )(1)(C )(ii) “Nonfunctional currency. For purposes of this section, the term "nonfunctional currency" includes coin or currency, and nonfunctional currency denominated demand or time deposits or similar instruments issued by a bank or other financial institution.”

Supporting the investment approach: In California Bankers Assn. v. Shulttz “‘Currency’ is defined in the Secretary’s regulations as the coin and currency of the United States or of any other country, which circulate in and are customarily used and accepted as money in the country in which issued.”  Some other jurisdictions may be taking this investment approach.

So far I have been writing about BTC for individuals, not for businesses.  If you have a Bitcoin based mining or trading business then your tax basis may not be cash and your functional currency may not be the dollar, and your situation becomes MUCH more complicated.

There are several other compliance reporting issues US taxpayers with bitcoins should be aware of, particularly if you transact bitcoins outside a brokered exchange:  FATCA, FBAR, Forms 8300 and 1042-S.

I am a USA CPA licensed in CA and IL, and I can be found on LinkedIn or by Google.
Here is my circular 230 disclaimer.  This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing.  It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services.  Please contact us if you have questions. 

The only country I have seen that has gone and made a clear and rational ruling on Bitcoin is Germany, they have it declared private money and have a tax placed on it, others have a more friendly approach to it but they seem to be all taking a wait and see approach. I emailed the Bank of England recently and I actually got a response, they pretty much were doing exactly the same thing, I emailed them asking about whether they considered it a positive thing etc. to gauge what their future response will be but I haven't received a reply yet, most likely because it's Christmas and they all just want to get home.

I think we're only going to see many of the countries move until we get a substantial amount of capital going into Bitcoin.

Yes ETFs are always reportable.  Yes ETFs exist for foreign currencies, and yes those are CFTC controlled.  (So this also means if you trade OTC in a currency in the volume of an ETF currency basket that OTC currency trade is reportable as if it were a security)
No consumability is not a necessary element for either securitization or incorporation in an ETF and it isn't any "classification" as a commodity that puts it under this governance.  What makes it reportable through the CFTC ruling is trading the equivalent of a securitized basket through an SEC controlled ETF.

With the Winklevoss fund, trading 25K coins would be a basket and trigger their rule, though there may be much lower thresholds under other rules depending on what regulations appear.

You answered this.You didn't discuss this at all.Aren't ETFs always reportable because they are securities?  Don't ETFs exist for foreign currencies?  Do they fall under the CFTC rules?  If not, what makes bitcoin a commodity that does?  Commodities can generally be consumed (products of agriculture are eaten, oil is burned, metals are used in the production of other non-commodity other goods), right?  How would one consume bitcoin?

Then how does your post relate to this thread about taxes in the United States?  Or did you just spam our thread to get more exposure for your signature advertisers?