Topic: Time to start thinking about taxes (Read 6241 times)

!!!ALERT!!!
New IRS guidance on virtual currency (VC) released 3/25/14
http://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidance

For most purposes, IRS requires a property approach (Schedule D gain/loss) not a foreign currency approach.

VC is taxable when mined by miners.  VC transactions are reportable.  See the IRS document for details and FAQ.  If you have been doing it differently, consult a tax professional. 

Regarding the scope of IRS rules, they only apply to US taxes.  Although the IRS might wish to be the top tax authority in the US they are not.   They are beneath the constitution, the revenue code (written by lawyers in congress and constantly changing), court case law, and the treasury department.  However in the absence of guidance from these other authorities, IRS rules should be followed.

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.

No, BTC wasn't specifically created for anonymity or tax aversion, and most users are probably not completely anonymous, because being truly anonymous on the Internet is not nearly as easy as you must think it is.  In USA, all income is taxed unless there is a specific rule saying it isn't taxed, so BTC is already taxed, hence the discussion thread about how to properly pay said taxes.  This is probably true in most countries with income taxes.  I'm not a hardcore BTC bull, but expecting its value to drop because it is taxed is pretty funny considering its value didn't drop when silk road was shut down and the public seemed to think "BTC is to remain anonymous and buy illegal goods".

as soon as btc is taxed, the value will sink. The whole point of BTC is to remain anonymous and tax free, correct?

Chris, I can't specifically bless tax returns or strategies I don't look at in specific detail, but what your paragraph sounds generally reasonable.  Among the other things I look at when advising clients include: operating loss carryforwards, eligibility for research credit, use of retirement plans (SEP IRA etc.), full use of self employment business deductions, use of rental income, use of living trusts, interfamily tax strategies, and charitable gifting of appreciated assets. 

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. 

Well, after reading through all of this I'm going to throw out there that I'm going with capital gains (long term in my case) for 2013. The IRS is still "researching cryptocurrencies" so until they provide guidance I'm taking the 'report and be consistent' approach. For me personally the cap gains is essentially tax free because I had losses in a start-up I invested in, so it's going to net to below 0, and had I gone with the bitcoin-as-a-currency classification (income) I would owe a high tax rate and not capture the cap gains netting benefit. If the IRS doesn't like it they can provide guidance or re-calculate it for me I guess.

steverabincpa what do you think?

I would love to see this ^..

I have read all the post and am very appreciative all the informed perspectives. I wish Uncle would step up now and put out some sort of interim guidance at least.

steverabincpa, my use of the term reward refers to the coinbase transaction - and the miner receives this plus the fees.  One could take the position that the coinbase is lottery-like.  I am not particularly inclined to that as outcome is not certain in a number of for-profit activities.  Fishing and crabbing is the first idea that comes to mind. 

Now steverabincpa - just for fun - check out the way the service treats slot-machine play..... with each trip to vegas being a separate 'transaction' that can not be netted with the other trips........ then think how the block-chain works and what a very silly position the service might take if they said each attempt at a block was an independent transaction.  Pretty fun in the abstract....

The transaction fee is another matter.  To the miner I suspect it is income for service - but the amount these days are so small that I doubt anyone cares.......

achillez - if you're still in the thread - the timing for when the coinbase is to be recognized - if you take the position that it is to be recognized when the reward is allocated to the miner - is again pretty interesting - is it the mean value of bitcoin for the day, and we've had $300 day spreads (forget the differences between Mt. Gox and the others) - say you just use the blend CoinBase reports) as would typically be the case for Estate & Gift taxes, with of course special rules for those favorite holidays!  Even more fun, is it when the block is added to the chain, when you are mature at 99 confirmations..... which can span a day.... Who knows without guidance from the IRS.

steverabincpa is probably right in saying pick your poison, be logical and be consistent - and remember pigs get slaughtered.

We ought to encourage the foundation to chime in o this so that we have some support from somewhere other than a forum.

How is the 'reward' different from lottery winnings or a treasure trove (both taxable eg: Cesarini v. United States, 296 F.Supp. 3 (N.D. Ohio 1969)?  In particular, if a US based lottery pool were involved, with the pool as a counterparty, how would the counterparty record (and report) the transaction?

What are the holding periods and how much of a difference are you talking about?
There is a general cost-benefit principle in accounting that we should not spend $10 to accurately measure $1, and in tax enforcement in general the tax authorities spend $1 to collect $10, not the other way around.  Certainly reasonable estimation methods can be used to avoid individual measurement of micro amounts when exchange information is limited.  I encourage you to consult a licensed tax professional about the details of your situation.

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. 

I've been asked (in private) for more technical support for the capital vs. ordinary treatment of bitcoin gain and loss.  I will share my research on this with you all.  Beware, it is somewhat technical.

A) "Is bitcoin a capital asset? ... I don't mind doing some reading "
It depends.  This is a grey area raising a lot of issues depending on the details of the situation.  I don't have a general answer at this time.

If we believe Bitcoin is currency then, since an individual taxpayer's functional currency is the US dollar,  the foreign currency rules IRC988 apply:"Code Sec. 988. Treatment of certain foreign currency transactions
(a) General rule
Notwithstanding any other provision of this chapter -
(1) Treatment as ordinary income or loss
(A) In general. Except as otherwise provided in this section, any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss (as the case may be)."

This is powerful language and "notwithstanding other provisions of this chapter" means that it potentially trumps the IRC1221 rules on capital assets and capital loss.  Section 988 goes on to say:
"(C) Special rules for disposition of nonfunctional currency
(i) In general. In the case of any disposition of any nonfunctional currency -
(I) such disposition shall be treated as a section 988 transaction, and
(II) any gain or loss from such transaction shall be treated as foreign currency gain or loss (as the case may be).
(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."

However, see Rev. Rul. 74-7 where traveler foreign currency reconversion gain/loss not associated with a trade or business was determined to be capital gain/loss.

See also (1985) National Standard Company v. Commissioner: Will the Real Character of Foreign Currency Exchange Gains and Losses Connected with the Disposition of Foreign Debt Please Stand Up? John F. Lyons
http://digitalcommons.pace.edu/cgi/viewcontent.cgi?article=1580&context=plr

Section 1221 defines the term "capital asset" as property held by the taxpayer, regardless of whether it is connected with the taxpayer's trade or business, unless the property meets one of eight listed exceptions: (1) inventory; (2) property of a character which is subject to the allowance for depreciation provided in section 167, or real property used in a trade or business; (3) certain intangible property; (4) accounts receivable acquired in the ordinary course of a trade or business; (5) certain publications of the United States Government; (6) certain commodities financial derivatives; (7) certain hedging transactions; and ( 8 ) supplies of a type regularly consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.

(0) Is bitcoin property?  Perhaps.  "Foreign currency is recognized as "property" as that term is used in the internal revenue laws. Such property meets the literal definition of a capital asset as set forth in section 1221.2" (International Flavors & Fragrances Inc.; 62 T.C. 232 (1974))  

(1) Is bitcoin inventory?   Probably not. "In the manufacturing context, goods subject to inventory are tangible, movable objects." -  Cf. Jim Turin & Sons, Inc. v. Comm’r , 219 F.3d 1103, 1107 (9th Cir. 2000), (although the IRS commissioner has broad power, in the future to require inventory accounting in designated industries; eg see IRS Letter Ruling 9523001 and 9527003).  Also note that property cannot be classified as inventory unless it is held by the taxpayer primarily for sale to customers in the ordinary course of his or her trade or business (Van Suetendael v. Comm'r, 152 F.2d 654 (2d Cir. 1945))

(3) Is bitcoin certain intangible property?  Copyrights, a literary, musical, or artistic compositions, and similar property.  Probably not.

(7) Is bitcoin certain hedging transactions in the course of trade or business.  This is a complex grey area, as hedging in the course of a trade or business is not well defined.   See Lyons cit. above.  However transactions entered into for speculative purposes will not qualify as hedging transactions. See S. Rep. No. 201, 106th Cong., 1st Sess. 24 (1999).

B) Redacted.
C) " prefer to do things right"
I assume that most of us want to do the right thing, not just to avoid penalties and to sleep well at night, but to set a good example to others and to have a functioning society and government that relies on trust not just on enforcement.  Call me an idealist.    As you can see Bitcoin is a grey area in the tax law, and we are best served by not preparing the tax return ourselves, but hiring a (another) licensed professional who will research the specific situation efficiently and accurately and perhaps with less bias than the taxpayer doing it themself.  

When we (tax professionals like me) make mistakes it is perhaps from error or miscommunication vs. from deliberate deceit/fraud, whereas with a self-prepared return the taxpayer is more likely to be considered 100% responsible and perhaps the taxpayer intent is more likely to be questioned.  Having a respected preparer signature on the return is also particularly important if the tax return is to be credible documentation of income for loan or loan refinance.

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.  

For US Tax purposes, would it not be appropriate to divide mining income between the bitcoin 'reward' and the 'transaction fee' associated with the accepted block.  The former involves a very unique economic transaction that we all feel is open for interpretation.  The transaction fee we receive is another matter.  Those generating a transaction either intentionally or there mining software allocates the fee to prompt inclusion in the block when it is constructed. 

thougths?

Well the reason with option1 is a problem is that many of the exchanges (at least altcoins) do not track full history of trades. Many are < 50. For many micro-transfers many traders easily bypass the 50 amount. This is why I think option2 is the only option for most people. Basically track all profits at point of sale - costs, and treat either as a capital gain or income. In this case would declaring it as a capital gain be fair, or taxing as an income be more accurate?

In general, the approach you describe sounds reasonable to me.  I do not think the problem of tracking is quite so "huge".  Eventually when you sell or exchange the coin you will have paid tax on 100% of your realized amount, so the amount recognized at the mining date is just a matter of timing.  Adopt a method that is reasonable and simple to apply and be consistent.  For example you trade primarily on one exchange during a period you might use published trades from that exchange if available to value mined coins in that period (last, w. avg, (high+low)/2 - any would probably be considered reasonable).  Whichever method and periods are appropriate for your situation and volume, write it down and be consistent.  By paying some tax at time of mining you are demonstrating good faith effort to comply in a grey area of tax law.  Where people get in trouble is when they exhibit the attitudes like "I will pay zero tax" or "I will arbitrarily change my methods from day to day or using hindsight to pay the absolutely least amount of tax possible".  Don't do that.  These are the people tax authorities tend to select for enforcement and to set precedents. 

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. 

It's difficult to track profit at time of mining since the price of the coin greatly fluctuates, pools are used, etc..  I figure there's two approaches to take here:

Approach1:
a) at the time of mining any bitcoins acquired should be tax as income at the fair price for those coins at the end of business day (or week - depending on the accuracy of the coins)
b) at the time of selling, any appreciation of the bitcoin capital should be taxed as a capital asset with regular short-/long-term rules applied. This also would apply with any bitcoin that we purchased/sold for a profit
> any equipment costs can be subtracted from the overall profit, I believe this only applies to (1)

Approach2:
a) Only follow (1b) from above, and pay taxes on bitcoin as capital gains when it is converted over to US $
> I don't think you can deduct equipment costs in this case

I'm inclined to follow approach1 but it's going to be a huge problem accurately tracking what was made at the time of mining given the fluctuating prices.
Also an interesting side question is how do we declare taxes on items that we purchased with BTC that were acquired with (1b) ??

Fair enough, not my skin in the game.  I will only add that publication 17 mentions collectibles and they have a higher tax rate.  While I'm not qualified to provide advice, and specific wording may not matter too much when it isn't in a legal document, and multiple people who may or may not be qualified to provide advice say that bitcoin doesn't fall under the collectible category I refer to, I will say that I, personally, would definitely stick with the term asset.

It's fine we agree to disagree, clearly you've got your approach and I have mine. I don't see any taxable event until it's exchanged. At that point you either have to average every payout at the value it was received or come up with some other clever way to establish a cost basis. The value it hits the wallet is cost basis, you don't have a taxable event until it's liquidated, it doesn't exist. I've seen several articles that argue both sides of this too, personally since Uncle isn't telling me explicitly how to handle it then it's going to be treated either like a stock or as a Beanie Baby.

About the pool thing, they only act as a conduit and some charge fees. If they "earn" 25BTC through YOUR equipment doing all the work, and then they payout all 25BTC it's a wash; guess they can report both sides, and technically maybe they should, but there still isn't a gain that I can figure unless they have a fee revenue setup. Now, if they consider the 25BTC payout to miners as a dividend payment it might be different, honestly we can dream these up all day. You need to go with the story that makes the most sense right now, stick with it, and see if we get a clear rule eventually. You might think I'm giving the bad advice, and that's fine, but I'm not putting myself out there as a CPA. I'm just a dude with a kinda cool job and I've been investing and filing my own taxes for 15 years, had to hire a CPA twice actually because I had some complexities... I digress, I'm a regular guy giving my take just a bit surprised at the advice. I have been skimming lately because I'm working on a project, but at a cursory review there were some things that didn't make much sense to me.

I wasn't trying to give the CPA guy a hard time or pretend I'm the expert, apologies if I came off that way, seriously to the guy I originally quoted no disrespect. I just think there is more than one way to handle it right now, and just because someone is a CPA doesn't mean they've filed BTC on a return yet, reasonable doubt- this is the internet afterall... Unless they set clear guidance there's no way I'll be reporting my toy bitcoins on my income taxes, just not gonna happen, at all. I love this shit, seriously, BTC is the coolest and I have a ton of fun setting up my miners, reading about it, chatting about it, the community is great, I truly believe in it: BUT, right now only a small amount of people (most users here) view it as a "currency". Personally, I view it as a collectible right now; and just like all the other collectibles (if) sold at a profit there is a request that you claim it (when/if you SELL it) using purchase price as cost basis and sale proceeds as gross.

Really?!?!  Wow...  If you had an automatic weapon, you wouldn't have any feet.  Even if the "payment" was a "gift," and forgetting the fact that your statements conflict with each other and couldn't possibly be defensible when paired with you quoting a CPA referencing both income possibilities, you are suggesting that the pool had an investment and gave it to you, which would not be a claimable loss, and would make it impossible to legally run a pool.  Pool gets 25 BTC block, it is $25,000 in income, they gift it to miners, they still owe income tax on $25,000 and don't have any money to pay it.  What's next?  Are you going to suggest the pool's receipt of the block was a gift from the miner who found it and pay all taxes on any block your equipment finds for the pool?  Are you going to suggest that the block was a gift from God and the income tax is his responsibility?  Are you seriously going to claim that the basis on the value of the coins at time of receipt without paying income on that basis, or are you suggesting a basis of 0 even though everything referenced by the CPA indicates otherwise?  Just for the record, if it's a video game in January and has 0 value, but you bought it as an investment, there is tax code for disposal of worthless assets to go along with the code for cost basis of assets and paying income tax on assets received.

I am not an accountant or a lawyer, so none of this should be construed as financial or legal advice, but I would read the information he refers to (and certain sections of IRS publication 17) before trying to argue a stance against it.  Also, I probably wouldn't post on a public forum that I won't be paying taxes unless I believed income tax on US citizens wasn't constitutional or legal and believed I could legally defend my position.

I'm impressed you got your certification but I'm puzzled by your position. I mean, most CPAs err on the side of caution so that might explain; and I mean no disrespect by that, it's not a bad thing. My problem with your position is that there is no "taxable event" happening. It's not currency, yet, and we honestly don't know if it ever really will be in the eyes of our Uncle Sam.

I mine with a pool, they pay me a balance in something that can be exchanged for money, but until/unless it is exchanged there is no taxable event to report. Even if someone gifts you a stock there is no taxable event until it is liquidated, and from there you retrieve the original cost basis to determine the realized gain/loss, or step it up to date of death if it's inherited, but the act of receiving is not reportable. If it's not exchanged there's no realized gain or loss. This whole darn thing could become a bad video game at some point, just a worthless "score" not exchangeable for anything. I don't see how you can advise anyone to report a mining payout, the methodology makes almost no sense.

Think about it, say you mine 40 BTC in January and they are worth $40k, but at year end they are worth $4, you expect people to report a $40k taxable event on something that became worthless within the same year? There's nothing to report until it is sold. Damn, this thread has gotten crazy, good luck to everyone hiring a lawyer for their audit defense. I guess we will all take a position and stick with it, pure intent rarely fails and you can always make a case if you had a sound approach. I'm keeping track of expenses, and if I sell BTC I will track that too, but there's no plan to report anything until I can verify a gain or loss. You could say I am treating BTC as a stock, and what I pay on equipment is like my commission fees that are deducted from proceeds; even in a great situation I'll breakeven and wash upon sale with no reportable gain (unless BTC goes to the moon, which in that case I will gladly pay my cap gains tax on the investment IF/WHEN I exchange for USD).

Agreed, it is income at the time of mining.  I am not convinced that BTC mining is like creating artwork for several reasons.  Artwork does not have active markets that can be used to determine price at the date of creation.  While art involves assembling supplies previously owned by the artist, bitcoin mining involves a point in time when the miner has control over something they did not previously possess.  And, perhaps most telling is the matching principle in accounting that income and related expenses should be recognized together.  So I doubt that deducting electric and equipment expenses now, while deferring recognition of revenue will be considered to be consistent.  Then there is IRC83 which requires that deferred compensation (such as stock and options) be recognized at the fair market value when title transfers to the taxpayer, not when the investment is sold.  And IRC988 requires income to be recognized when foreign currency is received for goods or services.

Regarding depreciation, in general for federal taxes, most miner expenses get deducted immediately not depreciated, because the business sets a $2,500 capitalization threshold, expensing anything below this threshold, and then accelerating depreciation of expenses over $2,500 up to IRC179 limits (often $500K).  For state taxes it is possible that some expenses may need to be capitalized and depreciated.  Don't forget to deduct telecomm expenses, training, reasonable business travel and home office expenses.

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. 

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?

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...

how do you prove to them that you've had your bitcoins for over a year to get the 15% rate? i definitely don't want the IRS all over me, but it's going to be kind of confusing.

i bet most people are not reporting what the sell.

Emilia79, you're looking at it from the perspective of a classical economic product, that is currency as minted by a central government. I'm no true believer (tm), but it's unfair to compare a decentralized currently that is slowly asymptotically 'mined' (released quick -> slow) with a government-backed currency as minted in runs. What we're likely going through right now is a volatility and speculation in line with Bitcoin's sudden notoriety (a feedback loop, to be sure), something which will calm down as the Bitcoin economic ecosystem stabilizes.

Regardless, I agree with the sentiments displayed at the senate hearings, namely that all of the existing regulatory frameworks can be painlessly extended to include Bitcoin (with online money transmitters having blazed the trail). Now, where it will get interesting is to see the IRS' negotiation of distributed securities (ie Mastercoin, ColoredCoins, Bitshares). That's going to cause some furor.

All I have to says is that BTC is hardly a currency.

A currency has no such high fluctuations, otherwise you can compare it to DeutchMArk in 1923, or Zimbabwean Dollar years ago.

It's more an exchange authorisation for payments.

US / IRS: has the IRS provided any guidance on virtual currencies yet? If I had to file today my stance would be to file gains as an asset-based capital gain that would be calculated very simply as follows:

Bill bought 1.0 BTC on 6/1/2013 for $10
Bill sold 1.0 BTC on 11/22/2013 for $890 (you can also deduct trade/wire fees, e.g. coinbase)

Bill reports $880 in long terms capital gains (an capital asset held for more than 1 year).

But what the real questions becomes, is how does the IRS classify bitcoin? Searching for "bitcoin" at irs.gov yields 0 results. Is it a commodity or a currency or capital asset? Forbes weighs in here http://www.forbes.com/sites/robertwood/2013/05/02/irs-takes-a-bite-out-of-bitcoin/:

"In the meantime, the tax rules seem pretty clear. If you provide services or sell goods for Bitcoin, you have income. If you exchange Bitcoins for cash, whether you have gain may depend on whether Bitcoin is really currency or commodity. The latter seems more likely, meaning you have gain to the extent of the appreciation in your Bitcoin."

It's strange to start out the comment with "the rules seem pretty clear," because I was thinking just the opposite.

And then there's the question to file anything on a schedule D in the first place. You have to name the asset so is this putting yourself on a federal radar by listing "bitcoin" or "digital currency asset" or the like in column A? If you made a few $K or less it might be a wait-and-see approach but if you made more than that and you're lucky enough to get a field audit they are going to want to know what those $10k+ deposits are.

One approach may be to just file it under "other income" and pay income rates. This may even be preferable for some folks who have no other income. If you file MFJ you get to almost $90k before rising out of the 15% bracket anyhow. But if you're already in a pretty high bracket there's a big difference between LTCG (20%) or short term gain (28%) and the highest income bracket (39.6%) [note that there's an additional 3.8% tax for obamacare I think that affects some people's investment income, which would be added to the long/short 20/28% investment rates:
https://www.fidelity.com/viewpoints/personal-finance/taxpayers-guide)

Anyway, let's kick off the discussion for US-based folks. With BTC up 30,000% in 2 years, you can bet your bippy the IRS is watching. What are people's thoughts (especially accountants!!!   )