Topic: Time to start thinking about taxes - page 3. (Read 6241 times)

Btw china issued a regulation notice that it signed by pretty much every official economic authority in the country and mentions nothing about taxes.

I don't think mining would be the proper legal term by any means, but assuming it would, then you would be producing a commodity, otherwise, considering that a finite number of bitcoin will exist, one could argue that they already do exist, and as such, nomenclature aside, you are finding/recovering unclaimed currency, which would be income when you find it.  I'm not recommending this, but here is another argument for it being income: when mining, you are providing (proof of) work for pay (mined coin and/or fees), it just happens that the entity controlling that pay is a peer to peer network that will always net 0 income and loss.

I thought the FinCen statement a while back pretty much indicated it was a currency.  I could have misunderstood, though.  One could certainly argue that money and currency aren't equal.  Here's some food for thought, though, do precious metals dealers have to register as money transmitters for selling commodities for cash?  I know there were some recent law changes for coins, and I think those laws revert next for year, but in general, is gold "money" in the eyes of FinCen, does money=currency in their eyes, or do we really not know?  Moreover, does the IRS care what FinCen thinks?

Let's assume it's currency for further discussion based on FinCen talking about it and saying spending it doesn't make you a money transmitter.  When you buy something and reside in US states that charge sales tax, you are supposed to pay sales tax on that purchase at the end of the year if you didn't do so at the time of the transaction.  US taxes (and state taxes in the US) must be paid in US dollars by law, and the sell price must be converted to US dollars (which is generally done at the time of purchase by your credit card company if you buy in some other currency).  I'm not sure if/how that applies to barter, but assuming barter isn't taxed as sales tax, I'm guessing bitcoin would be considered currency to states that have sales tax unless the IRS didn't allow states to treat it differently than the federal government (and they had some reason to treat it differently than currency).  Considering that some people are already paid in bitcoin, I'm thinking the IRS will want to treat it as currency to collect income tax.

That having been said, if you trade currencies regularly on an exchange in order to try to make a profit, what do you have to do?  I'm thinking that's capital gains/losses even though it is currencies.  My understanding is those exchanges have to convert to US at midnight each for some tax reason, so holding overnight leads to some expenses, and this would mean currency trading isn't historically something that can be done "long term" (over a year in a position).  On the other hand, if I go to Europe and withdraw some Euros from an ATM on a day that the Euro happens to have temporarily crashed, then come home and convert the Euro to USD for a gain vs what I withdrew (even after ATM and exchange fees), was that a capital gain even though it wasn't really an investment and I'm making an exchange for equal value?  Does anyone actually claim capital losses when they travel and have to convert currency?  Realistically, such exchanges are practically a guaranteed loss, and I don't know that it can be claimed (one would like to think the IRS can't have it both ways).  Regarding all of that, I only tried once, and not really hard, but I didn't find much in IRS publishings about currency exchange in general.

So if BitCoin is currency, I think the real question is, for currency exchange, does intent matter (investment vs exchange to spend / local currency) to tax law, and what tax law applies?  If it is a commodity, then the procedure is out there and followed by anyone who trades securities, but yeah, it could put you on someone's radar.

Anyway, does anyone have any input (answers/corrections/thoughts) regarding my currency exchange questions?

Okay, I get that buying Bitcoin and then selling for a profit probably falls under capital gains.

What about mining?  Say I started with 0 bitcoin, bought some mining equipment with fiat, and mined 1 bitcoin.  If I cash that out, is it capital gains?  Other income?

With my situation, it gets even weirder.  That bitcoin that I mined has never been exchanged for fiat, but instead has been invested into things like CEX and CryptoStocks.  In addition I have a 2nd bitcoin that I bought for $200 that is also invested in these ventures.

I don't plan on cashing any of it out before the end of the year, in fact my mined coins all get reinvested into something.  But I have no idea on how to treat this stuff with regards to U.S. taxes.  Mining in particular is unique in that I'm "creating" either a commodity or a currency, (depending on how you view Bitcoin) as well as performing a service (collecting a fee for confirming transactions).

If you buy mining equipment now, you will probably not ROI. Factor in all the expenses and costs of storage, electricity, maintenance, repairs, cooling and you're at negative. Since you can prove you lost money, you shouldn't have to pay taxes.

But if you do make money, you should pay the proper taxes. Higher taxes just means you made more money.

Greenspan agreed that it is not a currency today on Bloomberg.
http://www.bloomberg.com/news/2013-12-04/greenspan-says-bitcoin-a-bubble-without-intrinsic-currency-value.html

But what does he know anyhow..

This is true... If I go trade in my old Xbox games at Gamestop for a new one am I required to file that on my taxes? Of course not, but Gamestop has to run sales tax on the transaction. I know it sounds crazy but until regulators define it technically BTC is not a "currency" yet, it is more like a good, and just like if you sell your goods on Ebay for cash you are supposed to report any gains on your taxes, most of the time used goods are sold at a loss so it doesn't matter but anyone flipping ASICs right now for profit should be aware of this... Not saying go out and report it all, just making the point the expectation to report gains and even un-taxed purchases has always been asked by the IRS, nothing new in that regard.

I honestly think that also depends on the level you are cashing out at. Below a certain income level there is a "hobby" exception in the US tax laws that makes the activity exempt from filing. I mean, if you sell a few old sneakers that you found in a garbage can on Ebay for a profit it's a much different situation than selling a Picasso purchased from a grieving widow for pennies on the dollar. Just like mining with 20gh/s is much different than 900gh/s, the bigger guys will probably want to establish an LLC and claim their heavy expenses. We might all want BTC to become a currency that is widely accepted, but until/unless that day comes it's really just a collectible or a good. The common measure of value in relative terms is cash, same way Beanie Babies were valued before demand dried up. Conveniently, there is a perceived shortage driving up the price, the trend is clear over time and it's all the more reason to just hold longer. The main slam BTC took was due to a special cause event of the Feds closing a marketplace, regulation always prevents market efficiency; assuming only common causes moving forward the upward trend will continue unless demand shifts, supply (rate of production) is fixed and works in our favor for a long position.

I guess the biggest distinction is when mining you are arguably producing the good, which makes us in a similar situation to someone making crafts. If you knit 1,000 scarves but don't sell them on Etsy there's no event to report. If you do sell them you deduct all the expenses and the net profit is taxable, many people might just break even with their mining equipment in the short term anyways. Profit is great, and taxes should be paid on it, but you don't have any unless the BTC is exchanged for cash at a net gain.  


Disclaimer: I'm completely aware my various posts/examples are all very similar, but I just enjoy this topic and coming up with different comparisons to support the argument for a position we should remain unified on.

Since there is no regulation everyone here is approaching the subject with common sense and i agree with all of the above. On top of that i think regulators will approach bitcoins with common sense as well so if you are not trying to avoid taxes where is shouldn't be avoided then i think you 'll be fine.

they would have to pay sales tax either way though. that doesn't change as it's already factored into the price.

I think the merchant would have to pay the taxes, from whatever amount you paid them. Sales tax or something.

in that case, if BTC services were to pop up and we could buy lots of services and goods.. we wouldn't have to pay taxes then? as i understand it, capital gains taxes can't be imposed on straight up fiat currencies.. only on non-monetary assets.

If it's not been converted to fiat, it can't be taxed because there are no capital gains, yet.

Tell me about it!

In my jurisdiction, the regulator has been in observation mode for 6 months now without an official position

There is no clarity on how taxation will work

It is a real pain! All I can do is keep the paperwork clean and ready for when I need it

Agreed, honest intentions rarely lead to a bad result.

you are correct that accountants are not always right. Law, and especially tax law, is a lot more art than science. Interpretation and negotiation are a big part of tax advising. In some areas of tax law, and I believe bitcoin taxation is one of those areas, there are no lines. It's much more impressionist art than realism. Just make sure the tax picture you are painting is not fraudulent art.

Thanks, I appreciate the compliment. What I lack in technical ability when rigging up my gear I try to make up for with my econ/financial nerdy-ness.  I used to work in a wirehouse and have been investing for ~15 years. Switched careers a while back to be a designer, much happier with my field but never stopped investing. Freelanced on the side for a while, have always filed my own taxes with the exception of a few times where I needed a CPA to help, but never have cheated or tried to "pull a fast one". I just don't want to see people being overly-cautious to the point where they are shorting their stake in rightfully owned property. If redeeming for US dollars I would say definitely treat it like a currency trade or a stock holding, but if just holding onto BTC or trading for services I honestly do not see any potential benefit or mitigation of risk by claiming something that does not need to be claimed.

With that said, keep receipts for equipment costs and utility bills, and be ready for the day when we might be required to file. If BTC becomes ubiquitous within retail spending the valuation will probably stabilize quite a bit, probably at that point it will be rather clear to establish a small corp or file as a sole-proprietorship. I'm a big fan of fairness, and I don't mind paying my taxes, but overpaying for no reason is simply foolish.

Edit: also, if I bring this to my CPA right now he'd probably be more confused than my mom about what it is. They get paid to make prudent recommendations but are certainly not always "right". If you have a clear approach that makes sense, stick to it and act as if, then when the rest of the world can wrap their head around it we can start asking advice. It's not for us to assume the most conservative self-punishment we can dream up out of paranoia, but rather it is for our government to establish a playing field first and then we play ball. Not picking on anyone but the amount of bad advice in this thread seemed frightening. By all means, if I'm wrong on my logic please poke holes in it, but my understanding is if I milk a cow all week there's nothing to report until I start selling the output (milk) in exchange for dollars. Through trade there might (technically) be la taxable-event to report, but normally small businesses exchange services all the time off the books because the output expense washes with the acquisition. If I keep the milk in my fridge, no income or revenue to report, simple as that. And if exchanging for gift-cards it's on the retailer to tax on the sale of goods, that's their burden; and if they don't it basically comes down to whether you have ever reported your Ebay purchases on your taxes, because that's something we have all been asked to do for years now and hardly anyone does. Just being realistic here- when in Rome... Well, try to remember we are building Rome, maybe...

I like the way you think. Of course as a professional I cannot advise anyone to do anything outside of the law, I will say that the law is very gray in everything that is related to bitcoins and taxation. Of course this causes a lot of questions and unease. But it also creates opportunities as well for those who have the knowledge and are willing to take risk. Taxation is very much like markets, people take risks, sometimes they pay off, sometimes they lose.

Completely agree... simple thing people should ask themselves: Would you pay taxes on a baseball card that has gone up in value? How about artwork or a collectible vintage wristwatch? Of course not! Only exception is if it is sold for a cash profit or loss, meaning it must be sold to realize the gain/loss event. I don't know why anyone would even consider opening the Pandora's box of tax reporting without a report-able event. Bitcoins are like Beanie Babies, only difference is there are several exchange platforms. However, until one of those exchange platforms is used there is nothing to report.

I see a grey area opportunity in exchange for gift cards. Exchange BTC for WalMart gift cards and buy groceries or staple items there. If you sold a $5,000 baseball card for cash you might have some pressure to report a gain, assuming you are an honest Abe type; but exchange that baseball card for merchant services at a place you would spend money anyways, hmmmm... Until we are told how to treat BTC we should treat it as a collectible good, nothing more nothing less. Food for thought, not giving advice but really unless you convert to cash there is no taxable event to speak of and you would be asking for unwanted attention and paying unnecessary taxes.

You can't report any value unless you have bitcoins converted to dollars. I mean report the value based on what? MtGOX? Isn't that ridiculous?

There is no realized capital gain until/unless the BTC is exchanged for a traditional currency. You can buy and hold a stock, the gain is only realized upon liquidation. I see no reason to report anything unless there is a realized capital gain. If you are mining you are producing, you don't have reportable revenue until the produced good (BTC) is sold. Cost basis would be the value from when it was mined, plus expenses associated with equipment and transfer fees.

I don't know why anyone would consider reporting the value of something that swings wildly like this, valuation is a momentary occurrence with BTC. Your significant unrealized gain could flip to become a heavy loss in January, only when realized upon exchange do you have a reportable event.

My $0.02 anyways...