Topic: US tax obligations with bitcoin increase in value (Read 8526 times)

It's great to see you taking proactive steps in understanding the tax implications of trading Bitcoin and ensuring compliance. Taxation around crypto gains, especially BTC's increasing value, is a topic that many holders find challenging due to evolving regulations and differing jurisdictional rules.

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Wishing you success on your journey toward secure and compliant crypto growth! #CryptoTax #BTCCompliance

A paper on this topic was just published:
  http://www.jdsupra.com/post/documentViewer.aspx?fid=5ad6627a-30b4-40c7-92c3-3413064f4207 (pdf)

Conclusion:

That's almost certainly the practical reality, especially since the government is almost certainly not interested in the tax evasion in an economy with about USD 1.5m in daily transaction volume.  That said, the average American almost surely commits a thousand federal felonies per year, most of which go uncharged, but the feds retain the ability to charge people and make an example of them.

well i would still object

if you have been picking small yellow rocks on the beach and putting them into your shed would you consider them as "Gross income"?
probably not

but now imagine that there is more and more demand for them so price (in souvenir shop near beach) is rising to $10 per rock, yet you don't sell any of yours, would you try to consult your accountant about them?

i believe that so far from legislation point of view btc is no different than boinc points or farmville coins, although they may have some value to someone they are not backed up by anything so unless you sell them there is no income of any kind

that is my opinion anyway

edit:

interesting times we living though - wondering if state should benefit from hashes that my gpu is calculating

Very true.


Under US law, yeah, actually you do (unless the government has seen fit to explicitly exclude virtual goods).

26 CFR 1.61:


Not commenting on the morality, etc.  Just stating the view of the folks who happen to have more guns than you.

@OP you are not thinking about this in the right way.

Just because its called a bit"coin" does mean it's money.

You can't use it to pay taxes.
It is not recognized as a currency by the BIS
Almost nobody accepts it in payment. Try "paying" your accountant or tax adviser in bit"coins".

By the way, I'm also eating some chocolate "money" as I type this.

BTC are simply a virtual good. Like a lot of people you seem terrified of the law and or government...this should tell you something about the system you live in.

If you held a World of Warcraft character that "appreciated" from $200 to $600 dollar, would you have to declare this? Don't tell me its "illegal" to sell your Warcraft account....it IS however against Blizzards "Terms of Service". Other online games *allow* trading of virtual goods. People in EVE online sell Pilot Extension licenses all the time, and this is endorsed by the Company (CCP). The value of Pilot Extension License changes all the time....you DONT have to declare a "capital gain" in your pretend on-line spaceship to the government.

Bartering is not illegal (yet....lol), you can therefore swap your virtual good "bitcoin", for a real good or another virtual good.....no USD necessary. The only problem is when you decide to "Cash Out"...by doing this you are basically showing that you don't really view BTC as a currency (why the hell would you sell it if you thought it was a useful store of value and appreciating).

If you do cash out into Federal Reserve notes, you've now entered the Feds juristiction, you probably DO need to pay capital gain.

By using bitcoin it helps you see the inherent corruption in the USD system. Everytime a  USD moves, the Feds take a cut of it, in effect they are extracting the value and essence of your life and work. If bitcoin takes off, why would you want to use the crappy Federal Reserve USD system which is designed to steal your wealth and transfer it to the elites.

An interesting point in history, according to Benjamin Franklin, the main reason the British went to war with the States was over the fact that the States was issuing its own currency, thereby cutting London "out of the action" as it were. No British pounds used, no Loans in British pounds, people trading in third party currency...how the hell were the British Elite parasites gonna get their "cut" of the Americas wealth? The sad fact now though is that  under the Federal Reserve, the American elites are just running the same system to transfer wealth from ordinary Americans to themselves.

What's the difference between income and taxable income?

Define "money".

Yes.  Technically any amount of money earned more than about $500 the IRS "requires" you to report it.

I think people should be able to keep 100% of what they earn but maybe you're speaking from a legal standpoint rather than a moral standpoint.

This is the way I see it:

1) If you are buying holding then selling BTC for USD, then you should be liable for capital gains or short term capital gains tax.

2) If you mine and sell the bitcoins for USD, I see this as being no different than business income or hobby income, similar to if you mowed someones lawn for money.

If you classify it as business income, you should be able to deduct the full value of the computer(s) as well as electricity consumed.  You should also be able to get additional money for asset depreciation.

care to explain? define your variables. what do you mean by "crony capitalism" and who are "we"?

GE paid no taxes because they were epitome of crony capitalism.  One of the many things we would like to be done with.

Business 101 most big corp CEO's take $1 salary and pay themselves in dividends and the corporations go on spending sprees at the end of the year. how do you think a huge company like GE gets away with paying 0 taxes?

the corporation is taxed on their total profit at the end of the year. on Dec. 31 buy bitcoins then sell them again on Jan. 1 and you pay no taxes because at the end of the year you had no profits.

The issue with incorporation is that either the incorporated entity itself is subject to corporate income tax (double taxation) or the profits, whether distributed as dividends or not, pass-through to you as regular income.

I think that Bitcoin is closer related to World of Warcraft gold or Linden Dollars. What are the laws like for people doing business in those digital goods?

I've talked to some accountants and this is what I understand on the matter and what I do personally.

If you just cash out bitcoins to yourself thats capital gains. you pay 10 to 35% depending on your tax bracket unless you hold onto the bitcoins for more then a year, then its long term capital gains which is 5-15%.

If you start a business and pay yourself a salary from bitcoin earnings that normal income tax. Thats the same 10 to 35% as short term capital gains.

What I did is incorporate and I pay myself in dividends. Dividends tax is 0-15%

Im no accountant. this is just what my accountant friends told me.

Been wondering about legal status of bitcoin ownership and it is very, very nebulous. As you'll notice in the disclaimer in my signature I admit to possessing keys but not to bitcoins themselves (this was for the purposes of 'disclosure' to jokingly avoid accusations of conflict of interest).

The coins are held in the database that is distributed in the network, so I, myself, do not actually have possession of the bitcoins, the network does. I hold the keys to access certain coins but can only do so with the collaboration of the network. The closest thing in current law might be a custody arrangement but since the network is not a legal entity, like a bank, then it is not clear who actually has custody of the coins, or if they even exist as assets at all, under current legal definitions. Are the coins really there? The only way of verifying that is to move them into another asset class, up until that point they do not really exist legally speaking, particularly not until the bitcoin network is recognised as a legal entity existing in its own right, like a bank.

So I'm not convinced that legally I actually own anything except the keys. Maybe the keys could be classed as virtual good, but not the bitcoins themselves since they do not really exist as an asset in any legal definition. If I use those keys to make a transfer that results in US, or other state monies or assets that the state recognises, then maybe I'm liable for tax on any profits of bitcoin activity. Until the keys are used for an exchange into 'real' assets (bits in US$ bank account) I'm struggling to see where the liability comes from, legally speaking.

In the US, you would.

You would be entitled to claim a capital loss to offset any capital gains made during the year (so if you made $1,000 profit from a sale of Google stock, you could then make a sale of BTC that loses $1,000 (provided that the BTC sale has the same long-term/short-term holding status as the Google shares) and wipe out the capital gains tax liability from the Google... this is known as Tax-loss harvesting and is quite common).  Beyond that, you can use up to $3,000 of a net capital loss to offset personal income (I forget whether the AMT disallows that deduction...) a year.  If the net capital loss is greater than $3,000, you would use $3,000 to reduce your income tax and then carry the loss forward to offset against any capital gains realized the next year.  If your cumulative capital loss remains after that next year, then you can take another $3,000 to offset your regular income for that year and carry the remainder forward and so on.

Example:

year 1: net capital gain of $10k => you pay capital gains tax on that at whatever the appropriate rate is
year 2: net capital loss of $2k => deduct $2k from your taxable income
year 3: net capital loss of $5k => deduct $3k from your taxable income, carry the other $2k forward
year 4: net realized capital gain of $1k => use the $2k carry-forward to fully offset the $1k gain (so no capital gains tax is owed) and deduct $1k from your taxable income
year 5: net capital loss of $7k => deduct $3k from your taxable income, carry the other $4k forward
year 6: no net realized capital gain or loss => use the $4k carry-forward to deduct $3k, carry the remaining $1k forward

It is true that there is an element of "heads we win, tails you lose" at play here: tax on a net gain is immediately due, while a large capital loss may result in the entirety of the tax deduction not being claimed because you die before using up your $3k a year (to say nothing of opportunity and lost time-value of money considerations!).  This is slightly ameliorated by the fact that the tax rate on regular income is generally markedly higher than that on long-term (held for at least a year) capital gains: at the moment, the long-term capital gains tax rate is capped at 15% (assuming that bitcoin is not classed as a collectible, as gold is...) while if your income is between roughly $35k and $80k (as a single person), the tax deduction effectively operates at a 25% rate... if you're making $200k a year or more (as a single person), then deducting against regular income saves you more than double what it saves you as a gain offset.

IANATA and IANAA, but I would suspect that (assuming bitcoin is not considered a collectible...) the tax-efficient strategy would be to use LIFO accounting (considering each sale to use the cost-basis of the earliest unsold transaction) and try to hold for a year before selling for USD (otherwise it becomes a short-term capital gain and is essentially treated as regular income).

The lower long-term capital-gains tax rate also makes it rather foolhardy, imo, to put a lot of your 401(k) or IRA into investments that realize most of their gain via long-term capital gains (as opposed to short-term trading or dividends/interest).

Not in the US.  Capital gains taxes (the only applicable taxes in this case) are paid only after selling.

If you hold shares in an investment company (e.g. a mutual fund), the fund is buying and selling all the time and thus distributes capital gains through to you (this property is what allows an investment company to not pay taxes itself, as long as the gains are passed through to the owners of the funds), then you do get a capital gains tax liability even though you haven't directly received any gain, though.

Laws on hobby income are weird.  The government tries to make everyone report things as a hobby unless it's in the governments interest to make you classify as a business.  I had hobby income for a few years where I may have been able to count it as business income, but it made no sense.  I would have had few deductions and would have had to pay the extra social security and medicare taxes on it.  Usually, the government is very strict about what counts as a business.  I filed as hobby for a while.  Then they mailed me and said the previous few years should count as business income and I owed a lot of money.  It took a big fight but eventually they let me count it as hobby.

You can profit and still have it counted as a hobby in some cases (I won't advise on which cases those are, though, save that for a lawyer).  Even if it's not a currency, you could deduct losses (if I traded baseball cards at swap meets, I could deduct losses if I had been profitable in the past).

Not getting assraped is a good reason to conform.  When a mugger puts a gun in my face and demands my wallet, I pay him.  It doesn't make him right. 

It seems everything is classified as a hobby with write-offs disallowed until you make the first cent of profit, then it's a taxable enterprise.  The laws are always slanted in favor of the US Treasury.  However, if Bitcoin became classified as a true currency, you could likely write off the first $3000 per year in losses (with carry forwards allowed).  This is my understanding at least.

Suppose the MtGox price had plummeted and your BTC had become worthless. Would you have been entitled to a tax deduction for your losses? If not, it hardly seems fair for you to be taxed on your gains.

Not only is the question interesting, but I think it's important.  There's a good chance some people are holding quite a bit of USD value in bitcoins, and if the project continues to grow in the same way, then there could be many more.  Regardless of what any of us think of the laws, we are subject to them, and there could be very real tax or other implications associated with using, holding and exchanging bitcoin.  I'd like to know what those are as far as I can know.

I think that the topic is not whether or not the laws are good.

The question is "If you want to respect the current law (regardless of its stupidity), what should you do?"

So please, don't fall in the anti-government rhetoric as nearly every other topic here. The question is interesting by itself.

Ohnoes, I must permit the government to steal a percentage of money from me and possibly later to allow me to collect a percentage of the stolen monies at a later date?  What is the reason for this again?

yeah, like nobody is aware of the fucking gargantuan taxes the banksters are shafting us with every year .... !

I am certainly not implying that I want to lie to the feds.  Quite the opposite.  I think it is important for every geek on this site to be aware of tax liabilities when they buy and sell btc.

Bitcoin won't help you escape taxes. You are always free to lie on tax return if that is your inclination.

I'm not aware of any tax you have to pay on holding stock that has increased in value.
You have to pay tax on dividends but bitcoins have none.
Are you referring to mutual funds?
You have to pay taxes on your portion of the buying and selling inside a mutual fund regardless of whether you sold shares of the mutual fund itself. This sounds like what you are describing.

Interesting reading. I'm so glad Bitcoin allows people to escape this system.

Most of my earning have come from mining on two machines way back when the mtgox price was.... .20 cents a btc (early 2010).  I generated quite a few coins.  This to me is a taxable event because I now have something of value that far exceeds the costs of electricity and hardware.  I don't believe one has to "cash out" to be exposed to tax liability.

Buying and selling stocks (out side of ira) require payment of gains at the end of the year regardless of selling (sometimes shares are sold simply to pay tax on gains).

IANAL but I believe you are supposed to report a capital gain on anything you buy then sell at higher value.
If you don't sell them and they aren't paying dividends then I don't know how you could possibly have a tax liability.
Even then it would just be the difference between your cost basis and what your purchase price was.

Mining is an interesting case though. There would be two ways to look at it:
You just received goods for services (barter income) and it is taxable immediately OR you have a gain when you sell with a cost basis of 0$.
Either way I imagine you could write off what it takes to run your mining operation.
Very interesting question.

Dont trust this as fact, but I'd imagine you are subject to the same rules as capital gains.  So if you don't sell, you don't gain yet.  But hopefully someone actually knows.

I think Im going to have my corp accountant write a brief on tax obligations with trading and having btc increase in value.  I may publish the report here on the forum under a cc license.

... or maybe there is an accountant on this site who can speak authoritatively on the subject.

My understanding is that I would need to report the gains at the end of the year.

Thoughts?

Another thing I'm considering is hiring a local attorney who is knowledgeable with FTC laws to write up a brief on the legality of doing btc trading against USD.  I figure being on the correct side of the law when you liquidate could go a long why in protecting your earnings.