41 ms·

IRS Says Bitcoin Is Property

345 points by rbc 13y ago

rainmaking 13y ago
I believe "enforceability" is the key word here.
deleted 13y ago
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- streptomycin 13y ago
  Bitcoin miners would have to report their earnings as taxable income with a value equal to the worth on the day it was mined.
  - sitkack 13y ago
    I am confused about bitcoin taxation and mining, I mined coins back in 2011, when they were $7. They matched my costs of hardware and electricity. Are they both income and capital gains (when I sell over a year later)?
    - deleted 13y ago
      [deleted]
    - maxerickson 13y ago
      I think you would need to refile your 2011 taxes, recognizing the income (and probably deducting some of your mining costs, but it isn't obvious that would be 100%). If you sold them that year, you would also figure the capital gain or loss. In a later year, you would list the capital gain or loss.
    - xur17 13y ago
      Yeah, I'm kind of confused on this too. I mined a few years ago, played around with the coins a bit (lost a few), and have left them in a wallet since. So, technically I pay the taxes on them in 2011 as income tax (when I 'mined' them), at the price I mined them at, and then I will pay the difference between that price, and the price I sold them at as capital gains? Can anyone else in a similar situation chime in here?
- deleted 13y ago
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- deleted 13y ago
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antr 13y ago
I'm not familiar with US tax, but isn't property tax in the US something like 200bp per year? If I understand this correctly this can be a huge blow for Bitcoin users in the US
- mjn 13y ago
  The U.S. has no property taxes in that sense (a tax on all owned property, more commonly called a "wealth tax"). Some states have a tax called a "property tax", but it applies only to land and buildings ("real property"), not to other kinds of property such as stocks, baseball cards, gold, bitcoin, bank accounts, paintings, etc.
  - dionidium 13y ago
    but it applies only to land and buildings ("real property") And, frequently, automobiles, boats, etc
    - genericuser 13y ago
      In many locations the taxes on vehicles come in the form of a separate excise tax on 'value' given to the vehicle based on its original value and age, this tax is administered at the City level where I live in Massachusetts. Are there locations in the US where the general property tax is applied itself to vehicles? Or were you simply stating that things other than land and buildings could be taxed, and not that the property tax applies to them?
      - dionidium 13y ago
        It differs from state to state, basically: * http://money.howstuffworks.com/personal-finance/personal-income-taxes/personal-property-taxes.htm http://money.howstuffworks.com/personal-finance/personal-inc...
  - antr 13y ago
    Understood, thanks
uptown 13y ago
"Under the ruling, purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of income for the coffee shop." So if the coffee shop leaves the "property" as bitcoins instead of converting it over to dollars, and the value of those bitcoins falls before cashing-out, they're stuck paying tax on the $2 worth of income despite potentially no-longer having the funds to cover those taxes.
- JonFish85 13y ago
  Welcome to the tax world! This is true of a lot of things.
- endersshadow 13y ago
  Well, capital gains would be a different set of taxes, but this is essentially how other currencies work, as well. If you earn income, you earn it at the exchange rate at that time--even if the exchange rate takes a dive in the future.
- jstalin 13y ago
  My initial thought is that they'd be able to deduct the loss since the bitcoin is being treated as property and not currency. The trade of property for property is done at market value and any subsequent trade is as well, leading to a loss.
  - uptown 13y ago
    Wouldn't it be treated as depreciation, which typically has limits?
    - jstalin 13y ago
      Unlikely, bitcoin isn't something you'd capitalize (and depreciate) because there's no clear "lifetime" to the asset.
- andylei 13y ago
  but then the coffee shop gets to claim some tax credits for their negative capital gains
thematt 13y ago
Interesting, but unsurprising. The more interesting aspect is that unlike tangible property, bank accounts or stock transactions that can be audited, this seems practically unenforceable on the IRS's part.
- loumf 13y ago
  At large enough amounts, the IRS routinely investigates large accounts no matter how they are held. For example, in cocaine and cash. At some point you spend the money, and the difference in spending and taxes paid gets their attention.
  - shmerl 13y ago
    And if the money is spent in same Bitcoins? It seems the only control they might have is when Bitcoins are exchanged to regular currency.
    - _delirium 13y ago
      Not only when they're exchanged for regular currency, but for anything else conspicuous. The IRS regularly catches people underreporting cash earnings by noticing they're living way above their official means: someone bought two cars and a vacation home despite no significant source of income reported. If you buy the cars and the vacation home with bitcoin, it'll be the same deal. To avoid scrutiny, you'd have to either not spend the bitcoin at all, or only buy inconspicuous things with it, perhaps intangible things like streaming-video subscriptions and videogames.
    - tbrownaw 13y ago
      I thought the way these things normally work is that someone notices that your standard of living doesn't seem to match what they know of your income, and that news makes its way to the IRS (possibly via local law enforcement?).
      - loumf 13y ago
        These days this is quite automatible. Large purchases, like houses and cars, are public.
jcampbell1 13y ago
It seems there are hypothetical scenarios where your taxes could exceed your net worth. If you mine a bitcoin worth $1000, and then it's value falls to $100, you could owe taxes on $1000, and the $900 capital loss would only carry forward to the next year.
- RyJones 13y ago
  This is pretty much what happened to a lot of people in the valley during the dot-com bubble pop - your stock losses could be carried forward until the heat death of the universe, but you paid on 100% of the (illusory) gains.
  - ChuckMcM 13y ago
    I was going to say this exact same thing. I was writing off 'losses' from stock losing value from 2001 to 2012 at $3,000 a year. It would have been longer except that you can, in some cases, offset gains made later against those losses. And yes, all under the auspices of 'alternative minimum tax' for which I have a special place of loathing in my heart for whomever thought that was a good idea.
    - loumf 13y ago
      Do you know (remember) the mechanics of how the AMT affected this? Were you given stock that you didn't have a chance to sell? My understanding that only the initial grant of stock and the subsequent selling are taxable -- and didn't realize the AMT affected this.
      - ChuckMcM 13y ago
        Note, the tax code changes every year and I'm not an accountant, just a victim :-) Whenever I have exercised an option, my taxes have included an AMT calculation based on adding in the difference in value between exercise price, and market price, of those options as additional ordinary income. When the AMT tax calculation yields a 'tax owed' number that is larger than the non-AMT version (which it always did when exercising shares to make down payments) the IRS asked for the bigger number. Meaning that even if I had not sold the shares I exercised, the IRS wanted me to pretend that I had and pay tax on that money that I was pretending to have received. In exchange for doing that, the tax basis becomes the market price at the time of exercise. If you don't actually sell the stock (because, for example, you are waiting for escrow to close), and the stock value goes down significantly, you can reach a point that the value of the stock drops below the tax liability you incurred by exercising the stock option in the first place. In some cases the stock can become worthless. (my best score has been $120/share stock going down to $0.52 share) If you realize this is going to happen before the tax year is over you can dump the stock take the loss and it all works out in the wash (loss cancels gain). If you cross over a tax year boundary then you owe the tax anyway (even though you don't have a way to pay it) and when you sell the stock in the following tax year you get a 'loss' but you don't have any gains to offset that against and you can't just take it out of the taxes owed. You can however write it off, $3,000 per year against your ordinary income.
rdmcfee 13y ago
On one hand this makes sense. The IRS is trying to avoid early adopters from cashing out millions by purchasing goods to avoid paying capital gains tax. On the other hand, this is debilitating for people who want to use BTC for day to day transactions. Imagine the paperwork involved. <- opportunity for a wallet app which tracks gains/losses
- dllthomas 13y ago
  You say it's debilitating, but you describe the precise solution. This is easy to code around if you don't care about preserving BTC anonymity.
  - dragontamer 13y ago
    BTC Anonymity requires the use of mixers, and using mixers is against the law (its money laundering).
    - dllthomas 13y ago
      "BTC Anonymity requires the use of mixers" There are different levels of anonymity. "using mixers is against the law (its money laundering)" I think that's likely the case, and I think if it's not yet the case it will be soon, but do you know if this has actually been prosecuted (or otherwise made legally clear) anywhere yet?
      - dragontamer 13y ago
        """ There are different levels of anonymity. """ You are either secure, or not secure. There is no in between. BTC is a permanent public ledger that can be analyzed for the rest of time. Without mixers (or similar techniques), it becomes possible to figure out lots of facts. http://www.coindesk.com/194993-btc-transaction-147m-mystery-and-speculation/ http://www.coindesk.com/194993-btc-transaction-147m-mystery-... Similarly, your transactions can be tracked and analyzed because its all public information. -------------------- And yes, people have been prosecuted for money laundering through mixers. (ie: Silk Road seizure + prosecution). So don't play the ignorance game, learn about the current state of affairs and understand the risks you're taking.
pat2man 13y ago
I imagine a managed wallet like Coinbase would really help here. They could easily create a report on exactly how much you owe in capital gains. Managing this yourself could get a bit messy.
- loumf 13y ago
  The main thing that's a pain (extrapolating from stock) is if you buy and sell a lot. The tax is on the gain, but which one did you sell -- you need to keep track of each price you bought (and how many) and offset the amounts against sells. I think you are allowed to average, but this might not be beneficial with big swings.
- sillysaurus3 13y ago
  Please don't store most of your bitcoin in Coinbase. If Coinbase ever goes under, you'll lose all your bitcoin. It sucks when someone else loses your bitcoin for you.
  - abhigupta 13y ago
    It is no different than having your money in multiple banks or brokers.
    - sillysaurus3 13y ago
      It's insanely different from having your money in banks. A bank is backed by the government. If a bank goes under, you still get your money. If Coinbase goes under, you get nothing or very little. Funds from Coinbase should be evacuated to your own secure cold storage wallet immediately after you purchase them. You should never hold a balance higher than 0BTC for any length of time on Coinbase. Follow this advice and you'll have your money forever. Don't follow it and you'll lose your money the moment Coinbase suffers any serious theft, a technical disaster, a rogue employee, or the founder steals coins. (I speak from experience, having lost a massive amount of money when Mt. Gox went under for one of the above reasons, which I probably won't get back.)
    - Smudge 13y ago
sergiotapia 13y ago
And how exactly can they know your bitcoin stash amount?
- hitchhiker999 13y ago
  If a user has a reasonable knowledge of bitcoin, they can't. They can monitor it only when it hits the existing financial structure. If you don't cross through that, they (in effect / in most cases / under normal circumstances) can't really see it.
  - PeterisP 13y ago
    They can monitor it when it hits the real world, i.e., as soon as you want any actual goods or services instead of just a virtual coin. Noone in IRS cares if you hide $100 or $1000; but for large amounts the spending is traceable.
- cbhl 13y ago
  Well, since the ledger is public, if you manage your coins yourself, all they need to know are the address(es) that are yours. They can look up what's in them with a copy of the ledger. If your bitcoins are in an aggregated account like Coinbase (or the now-dead Mt. Gox), they'd probably put in bank-like reporting requirements that make the bank tell the IRS how much money you have if you have enough of it.
  - ufmace 13y ago
    The trick is that knowing what addresses are yours is not necessarily easy.
    - PeterisP 13y ago
      Umm, just as with any other expensive property - they ask you to declare them; and if you conveniently forget to declare it, but at some time later (say, after 5 years) they somehow find that out, then you go to jail. Are you sure that you can hide that stash (and all purchases/deals made from it) permanently?
rch 13y ago
Compared to getting the general public to accept virtual currencies for everyday transactions, shouldn't it be relatively easy to convince those same people to put pressure on the IRS and congress? In fact, this is a particularly good year to begin such an effort, since the Senate is in play in the midterms. If predictions start to indicate an unusually high turnout of virtual currency supporters, it would throw a big wrench into almost every political playbook (which are presently primed for older, conservative demographics).
- Amezarak 13y ago
  Unless there is some reason to believe virtual currency supporters make exceptionally large campaign donations, I'm not sure why any Congressman would be swayed by what can't possibly constitute more than a tenth of a percent of the voting population. Bitcoin supporters would be better served talking directly to their current representatives outside of an election context and even to the IRS.
  - rch 13y ago
    An organized, vocal minority can still be persuasive without being big donors themselves. But talking directly to current representatives is exactly what I was suggesting.
kevinpet 13y ago
It still doesn't clearly address the question of how those who mine bitcoin should be taxed. I guess your cost basis is a prorated portion of what you've spent on bitcoin mining. Very hard to do the accounting.
- mbreese 13y ago
  If you're mining in a pool, you should have a record of when you got each fractional allocation of Bitcoins. You could then look up the Bitcoin/USD rate at that time from historical data at one of the exchanges. This is going to be one very large spreadsheet. One benefit is that you can probably batch rounds together and only count the bitcoins as "realized" when they are sent from the pool to you (at payout). This way you won't have to figure out the rates for each shift.
  - Consultant32452 13y ago
    Theoretically you could probably choose any arbitrary price on the day you "receive" the bitcoins.. which given the nature of bitcoin price fluctuations could be significant.
    - mpyne 13y ago
      Yes, but as long as the way you pick that price is reasonable at estimating fair market value and consistently applied that shouldn't be a big issue.
- maxerickson 13y ago
  The coins received from mining are treated as income by calculating the dollar value at the time they were received by the miner. If they are later sold, the change in value is treated as a capital gain (or loss). The mining expenses would probably be somewhat deductible (but this isn't the same thing as a cost basis). The thing that is probably going to catch people out is they are going to not pay self employment taxes on the mining income (it's going to be hard to defend as a hobby).
timrosenblatt 13y ago
Does this mean that Bitcoin are more legit now and will be picked up by more institutions, or since the IRS doesn't consider Bitcoin a currency, will that stop companies from using it (for regulatory reasons?)
- joe_inferno 13y ago
  Yes.
Kapura 13y ago
>Bitcoin miners would have to report their earnings as taxable income with a value equal to the worth on the day it was mined. Maybe the rules are more thorough in reality than in this article, but how would the above statement apply to people who mine in a pool? Would only the person who hits the hash have to report the income? Would all of the miners? Additionally, how does the IRS plan on enforcing any of this? It seems like an anonymous currency would be ripe with disregard for regulators.
- jstalin 13y ago
  Pool mining would be no different. Basically the rule is that you "recognize" the income when you receive the bitcoins, be it through pool mining or individually -- it makes no difference.
- the_mitsuhiko 13y ago
  > Additionally, how does the IRS plan on enforcing any of this? It seems like an anonymous currency would be ripe with disregard for regulators. The same way the IRS enforces all other rules. If you break them and get caught you're in deep troubles.
- sliverstorm 13y ago
  Sounds like an absolute tax nightmare. In a pool you are awarded some small amount of coins every couple hours. Mine for a month, and you'll have hundreds or thousands of "bitcoin income" events, each with its own market price.
  - PeterisP 13y ago
    What's the nightmare there? You need a single simple report (excel sheet?) from the mining pool and just total them up. Hundreds or thousands of events is nothing special - if your income would come from selling stuff in a tiny shop, you'd likely have that many receipts to report.
    - sliverstorm 13y ago
      Well, sure, it would be easy if the pool provided you a 1099. But they don't.
dscrd 13y ago
Mm. Bitcoin owners say that IRS is an illusion.
e15ctr0n 13y ago
It's worth going back to read what Reuters finance journalist Felix Salmon wrote about Bitcoin almost exactly a year ago. The Bitcoin Bubble and the Future of Currency https://medium.com/money-banking/2b5ef79482cb https://medium.com/money-banking/2b5ef79482cb Why bitcoin’s rise is nothing to celebrate http://blogs.reuters.com/felix-salmon/2013/04/03/why-bitcoins-rise-is-nothing-to-celebrate/ http://blogs.reuters.com/felix-salmon/2013/04/03/why-bitcoin...
Xcelerate 13y ago
As a grad student who knows little about taxes (but quickly needs to learn more), what does this mean with regard to the 2 BTC I lost on Mt. Gox?
- chime 13y ago
  How much did you buy them for? That is your reportable loss.
  - Xcelerate 13y ago
    Well crap. I bought them for about $50 in Feb 2013. EDIT: Now I don't know what to do. This is kind of confusing. I bought 1.82 BTC in Feb 2013, traded, played around with them, and lost some. Then I sold what I had left to Gox USD about 5 months ago ($500) and repurchased 2 BTC during the "withdraws are disabled" period a few weeks ago. I'm going have to read more about this I think.
    - dragontamer 13y ago
      I'm not a lawyer or a tax advisor... but I'll tell you what I think so that you can kick-off your research. You spent $50 and then sold them for $500. That is a $450 short-term capital gains tax. If you held onto them for more than a year, then it'd be a long-term capital gains tax. (But since you were actively trading, its definitely going to be taxxed at the higher short-term rate) You then re-bought the 2BTC and totally lost them. That would be a capital loss (which if reported, will lower the amount that you are taxed)
    - genwin 13y ago
      Don't take my advice: Forget about it. Don't spend many hours trying to report a relatively small loss the IRS presumably doesn't know about, especially of a new type of property the IRS might be very interested to know (if only via an audit) how much more you have possession of.
- loumf 13y ago
  That's a good question. You never realized the gain. What tax would you owe if you bought a diamond for $1, it went up to $10, and then got stolen. My guess would be nothing -- but I am not an accountant.
wizzard 13y ago
What does this mean for Mt. Gox users? I know it would be for next year's return and we're not even sure how much has been lost yet since they are apparently still "finding" wallets.
- jstalin 13y ago
  Like any other property theft, you can (sometimes) deduct the value of the theft from your income. http://www.irs.gov/publications/p547/ar02.html http://www.irs.gov/publications/p547/ar02.html
jstalin 13y ago
The actual notice from the IRS: http://i.cdn.turner.com/money/2014/images/03/25/IRS_Notice_2014_21.pdf?iid=EL http://i.cdn.turner.com/money/2014/images/03/25/IRS_Notice_2... [EDIT] - added actual notice
- andrewla 13y ago
  Here's the version hosted by the IRS: http://www.irs.gov/pub/irs-drop/n-14-21.pdf http://www.irs.gov/pub/irs-drop/n-14-21.pdf Linked from here: http://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidance http://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidanc... (@jstalin -- feel free to edit your post and I'll delete this one)
unclebucknasty 13y ago
Am I missing something or would this be nearly impossible to track? You buy some bitcoin here and there and occasionally transfer some to a wallet from which you pay for items. The price of bitcoin is rising and falling constantly, such that when you buy that cup of coffee, you could either be realizing a capital gain or loss of X amount. How on earth would you track this without losing your mind? And, how would the IRS enforce this?
jcyr 13y ago
So we should be tracking our bitcoin in our wallets by age, such that when spending we incur long term capital gain vs short term (if possible)? Or perhaps use the most recent bitcoin purchased if the value is relatively the same as purchase date, thus seeing no gain (vs say 2 yr old coins which have greatly appreciated).
- lutusp 13y ago
  > So we should be tracking our bitcoin in our wallets by age, such that when spending we incur long term capital gain vs short term (if possible)? That would have been daunting in the paper-records era, but with Bitcoin, discovering the tax implications may be a matter of running a shell script against a database of transactions. In modern investment tax accounting, most issues revolve around comparing the present value of an asset against something called its "cost basis", meaning the price paid for the asset when it was purchased. This should be an easy issue to sort out for a virtual currency if proper records are kept.
quakkels 13y ago
I can't tell if this is good or bad. But, does it strike anyone else as odd that the IRS ignores that bitcoin _is_ actually currency? Can they even declare it to be property when the reality is that it is currency?
- lutusp 13y ago
  > Can they even declare it to be property when the reality is that it is currency? It seems you're overlooking the possibility that it may be both.
- dragonwriter 13y ago
  > But, does it strike anyone else as odd that the IRS ignores that bitcoin _is_ actually currency? Can they even declare it to be property when the reality is that it is currency? "Property" is a statement about a legal relationship between a person and some (tangible or intangible) thing. "Currency" is a statement about an attribute of a thing idnependent of its legal relationship to any person. Whether a thing is "currency" and whether it is someone's "property" are orthogonal concerns. It can be either, both, or neither. The fact that it is one does not prevent it from being the other.
- saraid216 13y ago
  What would you say the difference between property and currency is?
- deleted 13y ago
  [deleted]
- nullz 13y ago
  define 'reality'
- bertil 13y ago
  As I understand it, the main difference is that, if it were currency, you’d need to go though a lot of regulation to process it, keep it and change it with dollars. I doubt the IRS can influence SEC and the Financial commission into the finer points of Legal tender. What they say is: no matter that, these things are like stock, and we feel the right to tax your profits on trading them. Sounds reasonable to me. Put otherwise: it sounds like when a lawyer (or The Dude) says that you are “an asshole”. Most lawyers don’t really have the moral standing to accuse anyone of that, but what they are saying is: my qualifications are telling you what is legal and what isn’t, and this unsavory action isn’t illegal. IRS is saying: BitCoins are not just to pay for your groceries, they are a way to store and accrue value; they have no standing on how convenient they are or should be to buy groceries.
Xcelerate 13y ago
Hopefully now that there is some regulation and rules in place, Apple will allow Bitcoin apps. We'll definitely need some since now we have to keep track of a bunch of tiny capital gains and losses.
fatbat 13y ago
Does this mean MtGox users can claim capital loss when filing taxes now? How will users be able to prove that?
- maxerickson 13y ago
  Presumably the process of figuring out the bankruptcy will involve either giving people some of their value back or letting them know they aren't getting anything.
IgorPartola 13y ago
This is exactly why a sales tax would make things so much easier. Who care about historic price points of when you bought and sold BTC, let alone the historic electricity costs and pool fees when you mined it. You buy a milk shake, you pay taxes. Want food, etc. to be taxed differently? Still easier than figuring out if you are operating a railroad/fishing farm in Alaska while running a BTC mining rig to heat your house using sustainable energy from your newly installed solar panels.
- BrandonM 13y ago
  Sales taxes are regressive, so much so that combined US state taxes are also regressive, being largely funded by sales tax. Refer to the big square in the middle of https://xkcd.com/980/ https://xkcd.com/980/
  - humanrebar 13y ago
    Simple taxes is a justice issue. A simple tax code will always be more fair than an arcane one. If we're worried about the cost of living of people with incomes below a certain level, the best solution to that problem is a solution to that problem, such as an earned income tax credit, a guaranteed income, food stamps, health insurance supplements, and the like.
    - sp332 13y ago
      The trouble with a refund is maybe the person can't afford to pay (price of goods + taxes) in the first place. And it seems strange to collect sales tax, then redistribute the money as food stamps, to reduce the burden from the sales tax.
      - humanrebar 13y ago
        You could dispense an EIC on a paycheck-by-paycheck basis.
    - tzs 13y ago
      Almost none of the complexity of the tax code has anything at all to do with it being progressive. The progressiveness comes from the rate structure, which takes under a page to specify. Almost all of the complexity comes from dealing with what to tax, not how much to tax it.
mantrax3 13y ago
Keep coins in a secret wallet. When you need to change for USD, transfer only that amount to your "public" wallet, and pay taxes just on that.
ThomPete 13y ago
Interestingly Denmarks IRS just ruled that it's not taxable. (in Danish) http://epn.dk/samfund/politik/ECE6587289/afgoerelse-gevinster-fra-bitcoins-er-skattefrie/ http://epn.dk/samfund/politik/ECE6587289/afgoerelse-gevinste...
- knome 13y ago
  All this has given me a thought. If in the video game based economy for TF2 you receive a hat that can be traded on the marketplace or traded to others, do you have to consider that a taxable event? If you have something rare and it's potential value goes up, is it a capital gain? Is the depreciation similarly a loss?
  - politician 13y ago
    Was Blizzard's removal of RMT from Diablo 3 more or less related to IRS issues? When ships in EVE Online are blown up, can we claim a deduction?
- logfromblammo 13y ago
  And so now a business structure incorporating both Danish and US companies is probably possible, such that Bitcoin can be used to avoid taxes on dollar and euro income.
scotty79 13y ago
> “The danger is the creation of an electronic black market, similar to the cash economy,” Joshua Blank, a tax law professor at New York University, said in a December interview. “That’s what the IRS wants to avoid.” I think demanding over 40% tax on a trivially worldwide transferable, hard to track, easy to secretly manufacture commodity is exactly the best way to create black market.
- outside1234 13y ago
  If its treated as property then the maximum is 20% of capital gains. Do you not think you should pay taxes on gains?
  - makr17 13y ago
    > If its treated as property then the maximum is 20% of capital gains. if it is _long_ _term_ capital gains. short term gains are taxed at the same rate as regular income.
    - donpdonp 13y ago
      Long term gains apply to assets held over one year. The rate on such gains for an income under $36000 is ... wait for it ... 0%!
      - deleted 13y ago
        [deleted]
  - molsongolden 13y ago
    If you haven't held the asset for over a year then it will be taxed at ordinary rates not capital gains.
  - dclusin 13y ago
    The lower 20% (Didn't it recently go up to 29%?) rate is only applicable if you have held the asset for 2 years. If you buy and sell short term, as I have, then short-term capital gains applies.
Kopion 13y ago
I'm curious, what does this mean for someone interested in operating a Bitcoin ATM? Is a money transmitter license still a requirement?
- jboggan 13y ago
  Really good question. I would guess that the states issuing MSB licenses are going to keep doing whatever they've been doing. This is taxation guidance, not necessarily a definitive ruling that Bitcoin shall be treated as property by every entity for all legal purposes.
patio11 13y ago
Somebody in the Bitcoin ecosystem would get a lot of attention if they published an authoritative number for the average Bitcoin price in 2013, which would likely suffice for most taxpayers' needs for a reasonable and consistent valuation. (Ask a tax professional if you disbelieve that informal recommendation.) This is one of the many equally valid options for e.g. calculating the yen/USD conversion if you happen to have many yen transactions which are approximately equally distributed throughout the year. (The Treasury Department has a handy web page listing yearly averages for reference, but you're allowed to use any number which is reasonable and consistent. One of the best reasons to keep good books is that you can try several reasonable methods and then consistently adopt the one which is most favorable to your interests. Welcome to taxes, if that being OK is counterintuitive.)
- candybar 13y ago
  Isn't the whole point of saying bitcoin is not currency, but property, that you're not allowed to do this kind of accounting? I'm pretty sure if I buy and sell the same stock throughout the year, I can't simply account for it using the stock's average for the year.
  - VLM 13y ago
    If you run a numerical simulation of white noise distribution of buy and sell, you'll find no profit to tax and your buy and sell prices will average close to that number.
  - patio11 13y ago
    Special rules apply to stocks, principally because the IRS thinks you should have really good records for your cost basis. If you had acquired them through a dividend reinvestment plan (DRIP) average market price over time is exactly what you'd use.
    - hundt 13y ago
      "If you had acquired them through a dividend reinvestment plan (DRIP) average market price over time is exactly what you'd use." I think that is allowed for mutual funds, but not stocks. http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Capital-Gains,-Losses,-Sale-of-Home/Stocks-(Options,-Splits,-Traders)/Stocks-(Options,-Splits,-Traders)-3 http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-In...
deleted 13y ago
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vinchuco 13y ago
would this ruling encourage more Bitcoin hoarding? >Bitcoins held for more than a year and then sold would pay the lower tax rates applicable to capital gains — a maximum of 23.8 percent compared with the 43.4 percent top rate on property sold within a year of purchase.
brudgers 13y ago
Treating Bitcoin as property might make adoption by business problematic in the US because of UCC section 9. http://www.nakedcapitalism.com/2014/03/ucc-article-9-going-kill-us-bitcoin-us-businesses.html http://www.nakedcapitalism.com/2014/03/ucc-article-9-going-k...
Zarathust 13y ago
I don't see how this law could be enforceable. Hiding bitcoins from the IRS seems to be trivial and lying about the real acquisition value as well. This is very different from stocks where all trades are overseen by the SEC. You can't just go to a neighbor's house and pay for stock in cash without telling anybody else.
- ry0ohki 13y ago
  The same way cash transactions are trackable, which is to say they are not. In either event you can choose to evade the taxes but it's probably not a wise bet.
  - thatthatis 13y ago
    They aren't trackable, but when you pay cash for a $90,000 car and a $350,000 boat the fact that you've clearly under reported something is observable and to my knowledge sufficient information to prosecute for tax evasion.
    - ry0ohki 13y ago
      How would that be any different then if you paid Bitcoins for a car or a boat? Once you convert it into something tangible it's easier for the IRS to figure out.
- deleted 13y ago
  [deleted]
- sosborn 13y ago
  > all trades are overseen by the SEC Longterm goal?
- anigbrowl 13y ago
  Well, the blockchain records all transactions, and when they took place: http://blockr.io/ http://blockr.io/ So if the IRS is auditing you, then it would be easy for them to cross-reference to that.
quotha 13y ago
Ummm Bitcoin is not property o.O
zacinbusiness 13y ago
How does this work for a coffee shop that does not exchange bitcoin for dollars? Say they sell a medium coffee for $4.44 (that's the price I pay for my coffee at my normal "spot.") Or you can pay, say, .002 BTC (I'm guessing here on the amount BTC). But let's say if you send them bitcoin that they just keep it or spend it somewhere else that also accepts bitcoin (and preferably that also doesn't cash them out).
- derekp7 13y ago
  If bitcoin is property, then this should be handled the same way barter is handled. Taxes would be paid on the fair cash value of the property. This is also what would keep USD in use -- it is the only currency the government accepts to pay taxes.
  - zacinbusiness 13y ago
    Ah interesting. Would price volatility make this practice too difficult? Or would the market eventually reach a basic equilibrium price?
    - derekp7 13y ago
      Actually, I think I stated that kind of backwards. If I sell you a cow for 2 BTC, then I owe taxes based on the cash value of the cow. Same as if I sold a cow for 10 pigs. But, you can't pay taxes in BTC or pigs, so that is one thing that will always keep USD in use.
mindcrime 13y ago
“It’s challenging if you have to think about capital gains before you buy a cup of coffee,” he said. This is exactly why we need to quit caring what the IRS, Fed, Treasury, Inland Revenue, etc. think of Bitcoin, and focus on it's use (along with Tor, tumblers, and other technologies) as an untraceable, anonymous crypto-currency that lets us avoid dealings with the IRS and agencies of their ilk. Will this work against "mainstream" adoption of Bitcoin? Maybe. Who cares? Personally, I'm not interested in Bitcoin as yet another way to incur additional entanglements with corrupt, evil and bureaucratic government agencies. Government is damage, and we, the hackers, should be working on ways to route around that damage.
- npizzolato 13y ago
  Let me know how that works out for you when the IRS wants to know how you bought that house, car, and boat with all the money you never reported. When the IRS shows up at your door and your answer is "hahaha sorry, it's all untraceable and anonymous, you can't know how much i own!", I'm sure they'll throw their hands up and walk away in defeat.
  - mindcrime 13y ago
    I'm sure they'll throw their hands up and walk away in defeat. That should certainly be our goal. We're hackers, we're better than this. Again, we should be looking for ways to route around the damage, rather than embracing it.
anonbanker 13y ago
This is fantastic news. I'll be preparing my 1040v's and T5008's accordingly. Thanks for the asset determination, IRS! Does this decision open the doors to other currencies (linden dollars, Nintendo store points, air miles cards) being similarly registered as assets?
mindvirus 13y ago
Does this make it illegal for someone on an H1B to mine bitcoins?
JumpCrisscross 13y ago
If I had more time on my hands: (1) Launch a Bitcoin capital gains/losses tax approximation application (the "App") in beta. User keys in their Bitcoin addresses. App searches the block chain for the user's entry and exit times. App searches exchanges for the most favourable pricing source. App then returns an approximation of taxes owed/to be credited (e.g. in case of coins lost at Mt. Gox). App has a prominent disclaimer across the top warning against using it as tax advice. (2) Bring on board a senior CPA with policy-making experience. Clean up the tax logic of the App under their guidance. Call buddies in the IRS and New York State Department of Taxation and Finance. Ask them to look over the tax logic of the App in exchange for dinner, drinks and equity. Move the disclaimer from the top of the app to the bottom. (3) Call TurboTax and small accounting firms with any public posts about Bitcoin. Meet to discuss a partnership. Parlay into an acquisition.
- gamblor956 13y ago
  App searches exchanges for the most favourable pricing source. The taxpayer has to be consistent with how they determine the price of bitcoins, generally meaning that they have to use the same method unless they have a good reason for switching. Deliberately choosing the most favorable pricing source is fine the first year--but they'd have to stick with the same source in subsequent years. Also, the app would be enabling tax fraud. A "prominent disclaimer" isn't going to be much protection. If anything, it's likely to be used against the appmaker to demonstrate willful blindness.
  - JumpCrisscross 13y ago
    A taxpayer has to be internally consistent in picking their pricing source. It does not follow that the pricing source must be consistent between tax payers. Different situations could merit different pricing sources. It is not wrong to advise different people in different situations on how their differing needs may merit different pricing sources.
    - deleted 13y ago
      [deleted]
Eleutheria 13y ago
Bitcoin says they don't care what the IRS says. Take that.
csmeder 13y ago
What does this mean if a person bought a Bitcoin for $400 last year and now it is worth $583.03. What is the proper way to record this on a tax form? Will they have to pay tax now or when they sell the coin?
- csmeder 13y ago
  It sounds like no taxes would be collected at this point according to this: "Do I need to file or pay taxes if I own Bitcoins? Not if you bought Bitcoins or any crypto-currencies with your own money. However, if you traded, sold, or used any to purchase something, then you might. If you were given Bitcoins as payment, as a salary, or as a gift/donation, this is income and should be reported as any other income you earn. If you sold any, spent any or even traded one coin for another, then this is a tax event. This probably means you either gained or lost some money on the of the coins you just disposed. Gain or loss, you are supposed to include the sale on your tax forms and include the profit or loss you made. This is taxable as capital gains." - https://bitcointaxes.info/faq https://bitcointaxes.info/faq But would it need to be marked on the tax form as owned property? At what value?
  - sokoloff 13y ago
    You don't itemize your property on any tax form. If I bought AAPL stock some time in the past, but haven't (yet) sold it, I don't report that position to the IRS.
nanidin 13y ago
Still not clear on what the situation is on stocks that are denominated in bitcoins, and that pay out dividends in bitcoins, such as ASICMINER. Is it possible for the dividends to be treated as qualified dividends?
Snail_Commando 13y ago
Hypothetically, if a person still had Bitcoin drawn from a btc faucet (by that person), would that count as a gift, treasure trove [+], or something else? [+] https://en.wikipedia.org/wiki/Cesarini_v._United_States https://en.wikipedia.org/wiki/Cesarini_v._United_States
politician 13y ago
I wonder what other "proof of work" algorithms also now generate taxable events. Or whether something mundane like using iterated bcrypt2 turns the resulting hashes into property which I have to report to the IRS?

345 points by rbc 13y ago

rainmaking 13y ago

I believe "enforceability" is the key word here.

deleted 13y ago

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streptomycin 13y ago
Bitcoin miners would have to report their earnings as taxable income with a value equal to the worth on the day it was mined.
- sitkack 13y ago
  I am confused about bitcoin taxation and mining, I mined coins back in 2011, when they were $7. They matched my costs of hardware and electricity. Are they both income and capital gains (when I sell over a year later)?
  - deleted 13y ago
    [deleted]
  - maxerickson 13y ago
    I think you would need to refile your 2011 taxes, recognizing the income (and probably deducting some of your mining costs, but it isn't obvious that would be 100%). If you sold them that year, you would also figure the capital gain or loss. In a later year, you would list the capital gain or loss.
  - xur17 13y ago
    Yeah, I'm kind of confused on this too. I mined a few years ago, played around with the coins a bit (lost a few), and have left them in a wallet since. So, technically I pay the taxes on them in 2011 as income tax (when I 'mined' them), at the price I mined them at, and then I will pay the difference between that price, and the price I sold them at as capital gains? Can anyone else in a similar situation chime in here?
deleted 13y ago
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antr 13y ago

I'm not familiar with US tax, but isn't property tax in the US something like 200bp per year? If I understand this correctly this can be a huge blow for Bitcoin users in the US

mjn 13y ago
The U.S. has no property taxes in that sense (a tax on all owned property, more commonly called a "wealth tax"). Some states have a tax called a "property tax", but it applies only to land and buildings ("real property"), not to other kinds of property such as stocks, baseball cards, gold, bitcoin, bank accounts, paintings, etc.
- dionidium 13y ago
  but it applies only to land and buildings ("real property") And, frequently, automobiles, boats, etc
  - genericuser 13y ago
    In many locations the taxes on vehicles come in the form of a separate excise tax on 'value' given to the vehicle based on its original value and age, this tax is administered at the City level where I live in Massachusetts. Are there locations in the US where the general property tax is applied itself to vehicles? Or were you simply stating that things other than land and buildings could be taxed, and not that the property tax applies to them?
    - dionidium 13y ago
      It differs from state to state, basically: * http://money.howstuffworks.com/personal-finance/personal-income-taxes/personal-property-taxes.htm http://money.howstuffworks.com/personal-finance/personal-inc...
- antr 13y ago
  Understood, thanks

uptown 13y ago

"Under the ruling, purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of income for the coffee shop." So if the coffee shop leaves the "property" as bitcoins instead of converting it over to dollars, and the value of those bitcoins falls before cashing-out, they're stuck paying tax on the $2 worth of income despite potentially no-longer having the funds to cover those taxes.

JonFish85 13y ago
Welcome to the tax world! This is true of a lot of things.
endersshadow 13y ago
Well, capital gains would be a different set of taxes, but this is essentially how other currencies work, as well. If you earn income, you earn it at the exchange rate at that time--even if the exchange rate takes a dive in the future.
jstalin 13y ago
My initial thought is that they'd be able to deduct the loss since the bitcoin is being treated as property and not currency. The trade of property for property is done at market value and any subsequent trade is as well, leading to a loss.
- uptown 13y ago
  Wouldn't it be treated as depreciation, which typically has limits?
  - jstalin 13y ago
    Unlikely, bitcoin isn't something you'd capitalize (and depreciate) because there's no clear "lifetime" to the asset.
andylei 13y ago
but then the coffee shop gets to claim some tax credits for their negative capital gains

thematt 13y ago

Interesting, but unsurprising. The more interesting aspect is that unlike tangible property, bank accounts or stock transactions that can be audited, this seems practically unenforceable on the IRS's part.

loumf 13y ago
At large enough amounts, the IRS routinely investigates large accounts no matter how they are held. For example, in cocaine and cash. At some point you spend the money, and the difference in spending and taxes paid gets their attention.
- shmerl 13y ago
  And if the money is spent in same Bitcoins? It seems the only control they might have is when Bitcoins are exchanged to regular currency.
  - _delirium 13y ago
    Not only when they're exchanged for regular currency, but for anything else conspicuous. The IRS regularly catches people underreporting cash earnings by noticing they're living way above their official means: someone bought two cars and a vacation home despite no significant source of income reported. If you buy the cars and the vacation home with bitcoin, it'll be the same deal. To avoid scrutiny, you'd have to either not spend the bitcoin at all, or only buy inconspicuous things with it, perhaps intangible things like streaming-video subscriptions and videogames.
  - tbrownaw 13y ago
    I thought the way these things normally work is that someone notices that your standard of living doesn't seem to match what they know of your income, and that news makes its way to the IRS (possibly via local law enforcement?).
    - loumf 13y ago
      These days this is quite automatible. Large purchases, like houses and cars, are public.

jcampbell1 13y ago

It seems there are hypothetical scenarios where your taxes could exceed your net worth. If you mine a bitcoin worth $1000, and then it's value falls to $100, you could owe taxes on $1000, and the $900 capital loss would only carry forward to the next year.

RyJones 13y ago
This is pretty much what happened to a lot of people in the valley during the dot-com bubble pop - your stock losses could be carried forward until the heat death of the universe, but you paid on 100% of the (illusory) gains.
- ChuckMcM 13y ago
  I was going to say this exact same thing. I was writing off 'losses' from stock losing value from 2001 to 2012 at $3,000 a year. It would have been longer except that you can, in some cases, offset gains made later against those losses. And yes, all under the auspices of 'alternative minimum tax' for which I have a special place of loathing in my heart for whomever thought that was a good idea.
  - loumf 13y ago
    Do you know (remember) the mechanics of how the AMT affected this? Were you given stock that you didn't have a chance to sell? My understanding that only the initial grant of stock and the subsequent selling are taxable -- and didn't realize the AMT affected this.
    - ChuckMcM 13y ago
      Note, the tax code changes every year and I'm not an accountant, just a victim :-) Whenever I have exercised an option, my taxes have included an AMT calculation based on adding in the difference in value between exercise price, and market price, of those options as additional ordinary income. When the AMT tax calculation yields a 'tax owed' number that is larger than the non-AMT version (which it always did when exercising shares to make down payments) the IRS asked for the bigger number. Meaning that even if I had not sold the shares I exercised, the IRS wanted me to pretend that I had and pay tax on that money that I was pretending to have received. In exchange for doing that, the tax basis becomes the market price at the time of exercise. If you don't actually sell the stock (because, for example, you are waiting for escrow to close), and the stock value goes down significantly, you can reach a point that the value of the stock drops below the tax liability you incurred by exercising the stock option in the first place. In some cases the stock can become worthless. (my best score has been $120/share stock going down to $0.52 share) If you realize this is going to happen before the tax year is over you can dump the stock take the loss and it all works out in the wash (loss cancels gain). If you cross over a tax year boundary then you owe the tax anyway (even though you don't have a way to pay it) and when you sell the stock in the following tax year you get a 'loss' but you don't have any gains to offset that against and you can't just take it out of the taxes owed. You can however write it off, $3,000 per year against your ordinary income.

rdmcfee 13y ago

On one hand this makes sense. The IRS is trying to avoid early adopters from cashing out millions by purchasing goods to avoid paying capital gains tax. On the other hand, this is debilitating for people who want to use BTC for day to day transactions. Imagine the paperwork involved. <- opportunity for a wallet app which tracks gains/losses

dllthomas 13y ago
You say it's debilitating, but you describe the precise solution. This is easy to code around if you don't care about preserving BTC anonymity.
- dragontamer 13y ago
  BTC Anonymity requires the use of mixers, and using mixers is against the law (its money laundering).
  - dllthomas 13y ago
    "BTC Anonymity requires the use of mixers" There are different levels of anonymity. "using mixers is against the law (its money laundering)" I think that's likely the case, and I think if it's not yet the case it will be soon, but do you know if this has actually been prosecuted (or otherwise made legally clear) anywhere yet?
    - dragontamer 13y ago
      """ There are different levels of anonymity. """ You are either secure, or not secure. There is no in between. BTC is a permanent public ledger that can be analyzed for the rest of time. Without mixers (or similar techniques), it becomes possible to figure out lots of facts. http://www.coindesk.com/194993-btc-transaction-147m-mystery-and-speculation/ http://www.coindesk.com/194993-btc-transaction-147m-mystery-... Similarly, your transactions can be tracked and analyzed because its all public information. -------------------- And yes, people have been prosecuted for money laundering through mixers. (ie: Silk Road seizure + prosecution). So don't play the ignorance game, learn about the current state of affairs and understand the risks you're taking.

pat2man 13y ago

I imagine a managed wallet like Coinbase would really help here. They could easily create a report on exactly how much you owe in capital gains. Managing this yourself could get a bit messy.

loumf 13y ago
The main thing that's a pain (extrapolating from stock) is if you buy and sell a lot. The tax is on the gain, but which one did you sell -- you need to keep track of each price you bought (and how many) and offset the amounts against sells. I think you are allowed to average, but this might not be beneficial with big swings.
sillysaurus3 13y ago
Please don't store most of your bitcoin in Coinbase. If Coinbase ever goes under, you'll lose all your bitcoin. It sucks when someone else loses your bitcoin for you.
- abhigupta 13y ago
  It is no different than having your money in multiple banks or brokers.
  - sillysaurus3 13y ago
    It's insanely different from having your money in banks. A bank is backed by the government. If a bank goes under, you still get your money. If Coinbase goes under, you get nothing or very little. Funds from Coinbase should be evacuated to your own secure cold storage wallet immediately after you purchase them. You should never hold a balance higher than 0BTC for any length of time on Coinbase. Follow this advice and you'll have your money forever. Don't follow it and you'll lose your money the moment Coinbase suffers any serious theft, a technical disaster, a rogue employee, or the founder steals coins. (I speak from experience, having lost a massive amount of money when Mt. Gox went under for one of the above reasons, which I probably won't get back.)
  - Smudge 13y ago

sergiotapia 13y ago

And how exactly can they know your bitcoin stash amount?

hitchhiker999 13y ago
If a user has a reasonable knowledge of bitcoin, they can't. They can monitor it only when it hits the existing financial structure. If you don't cross through that, they (in effect / in most cases / under normal circumstances) can't really see it.
- PeterisP 13y ago
  They can monitor it when it hits the real world, i.e., as soon as you want any actual goods or services instead of just a virtual coin. Noone in IRS cares if you hide $100 or $1000; but for large amounts the spending is traceable.
cbhl 13y ago
Well, since the ledger is public, if you manage your coins yourself, all they need to know are the address(es) that are yours. They can look up what's in them with a copy of the ledger. If your bitcoins are in an aggregated account like Coinbase (or the now-dead Mt. Gox), they'd probably put in bank-like reporting requirements that make the bank tell the IRS how much money you have if you have enough of it.
- ufmace 13y ago
  The trick is that knowing what addresses are yours is not necessarily easy.
  - PeterisP 13y ago
    Umm, just as with any other expensive property - they ask you to declare them; and if you conveniently forget to declare it, but at some time later (say, after 5 years) they somehow find that out, then you go to jail. Are you sure that you can hide that stash (and all purchases/deals made from it) permanently?

rch 13y ago

Compared to getting the general public to accept virtual currencies for everyday transactions, shouldn't it be relatively easy to convince those same people to put pressure on the IRS and congress? In fact, this is a particularly good year to begin such an effort, since the Senate is in play in the midterms. If predictions start to indicate an unusually high turnout of virtual currency supporters, it would throw a big wrench into almost every political playbook (which are presently primed for older, conservative demographics).

Amezarak 13y ago
Unless there is some reason to believe virtual currency supporters make exceptionally large campaign donations, I'm not sure why any Congressman would be swayed by what can't possibly constitute more than a tenth of a percent of the voting population. Bitcoin supporters would be better served talking directly to their current representatives outside of an election context and even to the IRS.
- rch 13y ago
  An organized, vocal minority can still be persuasive without being big donors themselves. But talking directly to current representatives is exactly what I was suggesting.

kevinpet 13y ago

It still doesn't clearly address the question of how those who mine bitcoin should be taxed. I guess your cost basis is a prorated portion of what you've spent on bitcoin mining. Very hard to do the accounting.

mbreese 13y ago
If you're mining in a pool, you should have a record of when you got each fractional allocation of Bitcoins. You could then look up the Bitcoin/USD rate at that time from historical data at one of the exchanges. This is going to be one very large spreadsheet. One benefit is that you can probably batch rounds together and only count the bitcoins as "realized" when they are sent from the pool to you (at payout). This way you won't have to figure out the rates for each shift.
- Consultant32452 13y ago
  Theoretically you could probably choose any arbitrary price on the day you "receive" the bitcoins.. which given the nature of bitcoin price fluctuations could be significant.
  - mpyne 13y ago
    Yes, but as long as the way you pick that price is reasonable at estimating fair market value and consistently applied that shouldn't be a big issue.
maxerickson 13y ago
The coins received from mining are treated as income by calculating the dollar value at the time they were received by the miner. If they are later sold, the change in value is treated as a capital gain (or loss). The mining expenses would probably be somewhat deductible (but this isn't the same thing as a cost basis). The thing that is probably going to catch people out is they are going to not pay self employment taxes on the mining income (it's going to be hard to defend as a hobby).

timrosenblatt 13y ago

Does this mean that Bitcoin are more legit now and will be picked up by more institutions, or since the IRS doesn't consider Bitcoin a currency, will that stop companies from using it (for regulatory reasons?)

joe_inferno 13y ago
Yes.

Kapura 13y ago

>Bitcoin miners would have to report their earnings as taxable income with a value equal to the worth on the day it was mined. Maybe the rules are more thorough in reality than in this article, but how would the above statement apply to people who mine in a pool? Would only the person who hits the hash have to report the income? Would all of the miners? Additionally, how does the IRS plan on enforcing any of this? It seems like an anonymous currency would be ripe with disregard for regulators.

jstalin 13y ago
Pool mining would be no different. Basically the rule is that you "recognize" the income when you receive the bitcoins, be it through pool mining or individually -- it makes no difference.
the_mitsuhiko 13y ago
> Additionally, how does the IRS plan on enforcing any of this? It seems like an anonymous currency would be ripe with disregard for regulators. The same way the IRS enforces all other rules. If you break them and get caught you're in deep troubles.
sliverstorm 13y ago
Sounds like an absolute tax nightmare. In a pool you are awarded some small amount of coins every couple hours. Mine for a month, and you'll have hundreds or thousands of "bitcoin income" events, each with its own market price.
- PeterisP 13y ago
  What's the nightmare there? You need a single simple report (excel sheet?) from the mining pool and just total them up. Hundreds or thousands of events is nothing special - if your income would come from selling stuff in a tiny shop, you'd likely have that many receipts to report.
  - sliverstorm 13y ago
    Well, sure, it would be easy if the pool provided you a 1099. But they don't.

dscrd 13y ago

Mm. Bitcoin owners say that IRS is an illusion.

e15ctr0n 13y ago

It's worth going back to read what Reuters finance journalist Felix Salmon wrote about Bitcoin almost exactly a year ago. The Bitcoin Bubble and the Future of Currency https://medium.com/money-banking/2b5ef79482cb https://medium.com/money-banking/2b5ef79482cb Why bitcoin’s rise is nothing to celebrate http://blogs.reuters.com/felix-salmon/2013/04/03/why-bitcoins-rise-is-nothing-to-celebrate/ http://blogs.reuters.com/felix-salmon/2013/04/03/why-bitcoin...

Xcelerate 13y ago

As a grad student who knows little about taxes (but quickly needs to learn more), what does this mean with regard to the 2 BTC I lost on Mt. Gox?

chime 13y ago
How much did you buy them for? That is your reportable loss.
- Xcelerate 13y ago
  Well crap. I bought them for about $50 in Feb 2013. EDIT: Now I don't know what to do. This is kind of confusing. I bought 1.82 BTC in Feb 2013, traded, played around with them, and lost some. Then I sold what I had left to Gox USD about 5 months ago ($500) and repurchased 2 BTC during the "withdraws are disabled" period a few weeks ago. I'm going have to read more about this I think.
  - dragontamer 13y ago
    I'm not a lawyer or a tax advisor... but I'll tell you what I think so that you can kick-off your research. You spent $50 and then sold them for $500. That is a $450 short-term capital gains tax. If you held onto them for more than a year, then it'd be a long-term capital gains tax. (But since you were actively trading, its definitely going to be taxxed at the higher short-term rate) You then re-bought the 2BTC and totally lost them. That would be a capital loss (which if reported, will lower the amount that you are taxed)
  - genwin 13y ago
    Don't take my advice: Forget about it. Don't spend many hours trying to report a relatively small loss the IRS presumably doesn't know about, especially of a new type of property the IRS might be very interested to know (if only via an audit) how much more you have possession of.
loumf 13y ago
That's a good question. You never realized the gain. What tax would you owe if you bought a diamond for $1, it went up to $10, and then got stolen. My guess would be nothing -- but I am not an accountant.

wizzard 13y ago

What does this mean for Mt. Gox users? I know it would be for next year's return and we're not even sure how much has been lost yet since they are apparently still "finding" wallets.

jstalin 13y ago
Like any other property theft, you can (sometimes) deduct the value of the theft from your income. http://www.irs.gov/publications/p547/ar02.html http://www.irs.gov/publications/p547/ar02.html

jstalin 13y ago

The actual notice from the IRS: http://i.cdn.turner.com/money/2014/images/03/25/IRS_Notice_2014_21.pdf?iid=EL http://i.cdn.turner.com/money/2014/images/03/25/IRS_Notice_2... [EDIT] - added actual notice

andrewla 13y ago
Here's the version hosted by the IRS: http://www.irs.gov/pub/irs-drop/n-14-21.pdf http://www.irs.gov/pub/irs-drop/n-14-21.pdf Linked from here: http://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidance http://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidanc... (@jstalin -- feel free to edit your post and I'll delete this one)

unclebucknasty 13y ago

Am I missing something or would this be nearly impossible to track? You buy some bitcoin here and there and occasionally transfer some to a wallet from which you pay for items. The price of bitcoin is rising and falling constantly, such that when you buy that cup of coffee, you could either be realizing a capital gain or loss of X amount. How on earth would you track this without losing your mind? And, how would the IRS enforce this?

jcyr 13y ago

So we should be tracking our bitcoin in our wallets by age, such that when spending we incur long term capital gain vs short term (if possible)? Or perhaps use the most recent bitcoin purchased if the value is relatively the same as purchase date, thus seeing no gain (vs say 2 yr old coins which have greatly appreciated).

lutusp 13y ago
> So we should be tracking our bitcoin in our wallets by age, such that when spending we incur long term capital gain vs short term (if possible)? That would have been daunting in the paper-records era, but with Bitcoin, discovering the tax implications may be a matter of running a shell script against a database of transactions. In modern investment tax accounting, most issues revolve around comparing the present value of an asset against something called its "cost basis", meaning the price paid for the asset when it was purchased. This should be an easy issue to sort out for a virtual currency if proper records are kept.

quakkels 13y ago

I can't tell if this is good or bad. But, does it strike anyone else as odd that the IRS ignores that bitcoin _is_ actually currency? Can they even declare it to be property when the reality is that it is currency?

lutusp 13y ago
> Can they even declare it to be property when the reality is that it is currency? It seems you're overlooking the possibility that it may be both.
dragonwriter 13y ago
> But, does it strike anyone else as odd that the IRS ignores that bitcoin _is_ actually currency? Can they even declare it to be property when the reality is that it is currency? "Property" is a statement about a legal relationship between a person and some (tangible or intangible) thing. "Currency" is a statement about an attribute of a thing idnependent of its legal relationship to any person. Whether a thing is "currency" and whether it is someone's "property" are orthogonal concerns. It can be either, both, or neither. The fact that it is one does not prevent it from being the other.
saraid216 13y ago
What would you say the difference between property and currency is?
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nullz 13y ago
define 'reality'
bertil 13y ago
As I understand it, the main difference is that, if it were currency, you’d need to go though a lot of regulation to process it, keep it and change it with dollars. I doubt the IRS can influence SEC and the Financial commission into the finer points of Legal tender. What they say is: no matter that, these things are like stock, and we feel the right to tax your profits on trading them. Sounds reasonable to me. Put otherwise: it sounds like when a lawyer (or The Dude) says that you are “an asshole”. Most lawyers don’t really have the moral standing to accuse anyone of that, but what they are saying is: my qualifications are telling you what is legal and what isn’t, and this unsavory action isn’t illegal. IRS is saying: BitCoins are not just to pay for your groceries, they are a way to store and accrue value; they have no standing on how convenient they are or should be to buy groceries.

Xcelerate 13y ago

Hopefully now that there is some regulation and rules in place, Apple will allow Bitcoin apps. We'll definitely need some since now we have to keep track of a bunch of tiny capital gains and losses.

fatbat 13y ago

Does this mean MtGox users can claim capital loss when filing taxes now? How will users be able to prove that?

maxerickson 13y ago
Presumably the process of figuring out the bankruptcy will involve either giving people some of their value back or letting them know they aren't getting anything.

IgorPartola 13y ago

This is exactly why a sales tax would make things so much easier. Who care about historic price points of when you bought and sold BTC, let alone the historic electricity costs and pool fees when you mined it. You buy a milk shake, you pay taxes. Want food, etc. to be taxed differently? Still easier than figuring out if you are operating a railroad/fishing farm in Alaska while running a BTC mining rig to heat your house using sustainable energy from your newly installed solar panels.

BrandonM 13y ago
Sales taxes are regressive, so much so that combined US state taxes are also regressive, being largely funded by sales tax. Refer to the big square in the middle of https://xkcd.com/980/ https://xkcd.com/980/
- humanrebar 13y ago
  Simple taxes is a justice issue. A simple tax code will always be more fair than an arcane one. If we're worried about the cost of living of people with incomes below a certain level, the best solution to that problem is a solution to that problem, such as an earned income tax credit, a guaranteed income, food stamps, health insurance supplements, and the like.
  - sp332 13y ago
    The trouble with a refund is maybe the person can't afford to pay (price of goods + taxes) in the first place. And it seems strange to collect sales tax, then redistribute the money as food stamps, to reduce the burden from the sales tax.
    - humanrebar 13y ago
      You could dispense an EIC on a paycheck-by-paycheck basis.
  - tzs 13y ago
    Almost none of the complexity of the tax code has anything at all to do with it being progressive. The progressiveness comes from the rate structure, which takes under a page to specify. Almost all of the complexity comes from dealing with what to tax, not how much to tax it.

mantrax3 13y ago

Keep coins in a secret wallet. When you need to change for USD, transfer only that amount to your "public" wallet, and pay taxes just on that.

ThomPete 13y ago

Interestingly Denmarks IRS just ruled that it's not taxable. (in Danish) http://epn.dk/samfund/politik/ECE6587289/afgoerelse-gevinster-fra-bitcoins-er-skattefrie/ http://epn.dk/samfund/politik/ECE6587289/afgoerelse-gevinste...

knome 13y ago
All this has given me a thought. If in the video game based economy for TF2 you receive a hat that can be traded on the marketplace or traded to others, do you have to consider that a taxable event? If you have something rare and it's potential value goes up, is it a capital gain? Is the depreciation similarly a loss?
- politician 13y ago
  Was Blizzard's removal of RMT from Diablo 3 more or less related to IRS issues? When ships in EVE Online are blown up, can we claim a deduction?
logfromblammo 13y ago
And so now a business structure incorporating both Danish and US companies is probably possible, such that Bitcoin can be used to avoid taxes on dollar and euro income.

scotty79 13y ago

> “The danger is the creation of an electronic black market, similar to the cash economy,” Joshua Blank, a tax law professor at New York University, said in a December interview. “That’s what the IRS wants to avoid.” I think demanding over 40% tax on a trivially worldwide transferable, hard to track, easy to secretly manufacture commodity is exactly the best way to create black market.

outside1234 13y ago
If its treated as property then the maximum is 20% of capital gains. Do you not think you should pay taxes on gains?
- makr17 13y ago
  > If its treated as property then the maximum is 20% of capital gains. if it is _long_ _term_ capital gains. short term gains are taxed at the same rate as regular income.
  - donpdonp 13y ago
    Long term gains apply to assets held over one year. The rate on such gains for an income under $36000 is ... wait for it ... 0%!
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- molsongolden 13y ago
  If you haven't held the asset for over a year then it will be taxed at ordinary rates not capital gains.
- dclusin 13y ago
  The lower 20% (Didn't it recently go up to 29%?) rate is only applicable if you have held the asset for 2 years. If you buy and sell short term, as I have, then short-term capital gains applies.

Kopion 13y ago

I'm curious, what does this mean for someone interested in operating a Bitcoin ATM? Is a money transmitter license still a requirement?

jboggan 13y ago
Really good question. I would guess that the states issuing MSB licenses are going to keep doing whatever they've been doing. This is taxation guidance, not necessarily a definitive ruling that Bitcoin shall be treated as property by every entity for all legal purposes.

patio11 13y ago

Somebody in the Bitcoin ecosystem would get a lot of attention if they published an authoritative number for the average Bitcoin price in 2013, which would likely suffice for most taxpayers' needs for a reasonable and consistent valuation. (Ask a tax professional if you disbelieve that informal recommendation.) This is one of the many equally valid options for e.g. calculating the yen/USD conversion if you happen to have many yen transactions which are approximately equally distributed throughout the year. (The Treasury Department has a handy web page listing yearly averages for reference, but you're allowed to use any number which is reasonable and consistent. One of the best reasons to keep good books is that you can try several reasonable methods and then consistently adopt the one which is most favorable to your interests. Welcome to taxes, if that being OK is counterintuitive.)

candybar 13y ago
Isn't the whole point of saying bitcoin is not currency, but property, that you're not allowed to do this kind of accounting? I'm pretty sure if I buy and sell the same stock throughout the year, I can't simply account for it using the stock's average for the year.
- VLM 13y ago
  If you run a numerical simulation of white noise distribution of buy and sell, you'll find no profit to tax and your buy and sell prices will average close to that number.
- patio11 13y ago
  Special rules apply to stocks, principally because the IRS thinks you should have really good records for your cost basis. If you had acquired them through a dividend reinvestment plan (DRIP) average market price over time is exactly what you'd use.
  - hundt 13y ago
    "If you had acquired them through a dividend reinvestment plan (DRIP) average market price over time is exactly what you'd use." I think that is allowed for mutual funds, but not stocks. http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Capital-Gains,-Losses,-Sale-of-Home/Stocks-(Options,-Splits,-Traders)/Stocks-(Options,-Splits,-Traders)-3 http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-In...

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vinchuco 13y ago

would this ruling encourage more Bitcoin hoarding? >Bitcoins held for more than a year and then sold would pay the lower tax rates applicable to capital gains — a maximum of 23.8 percent compared with the 43.4 percent top rate on property sold within a year of purchase.

brudgers 13y ago

Treating Bitcoin as property might make adoption by business problematic in the US because of UCC section 9. http://www.nakedcapitalism.com/2014/03/ucc-article-9-going-kill-us-bitcoin-us-businesses.html http://www.nakedcapitalism.com/2014/03/ucc-article-9-going-k...

Zarathust 13y ago

I don't see how this law could be enforceable. Hiding bitcoins from the IRS seems to be trivial and lying about the real acquisition value as well. This is very different from stocks where all trades are overseen by the SEC. You can't just go to a neighbor's house and pay for stock in cash without telling anybody else.

ry0ohki 13y ago
The same way cash transactions are trackable, which is to say they are not. In either event you can choose to evade the taxes but it's probably not a wise bet.
- thatthatis 13y ago
  They aren't trackable, but when you pay cash for a $90,000 car and a $350,000 boat the fact that you've clearly under reported something is observable and to my knowledge sufficient information to prosecute for tax evasion.
  - ry0ohki 13y ago
    How would that be any different then if you paid Bitcoins for a car or a boat? Once you convert it into something tangible it's easier for the IRS to figure out.
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sosborn 13y ago
> all trades are overseen by the SEC Longterm goal?
anigbrowl 13y ago
Well, the blockchain records all transactions, and when they took place: http://blockr.io/ http://blockr.io/ So if the IRS is auditing you, then it would be easy for them to cross-reference to that.

quotha 13y ago

Ummm Bitcoin is not property o.O

zacinbusiness 13y ago

How does this work for a coffee shop that does not exchange bitcoin for dollars? Say they sell a medium coffee for $4.44 (that's the price I pay for my coffee at my normal "spot.") Or you can pay, say, .002 BTC (I'm guessing here on the amount BTC). But let's say if you send them bitcoin that they just keep it or spend it somewhere else that also accepts bitcoin (and preferably that also doesn't cash them out).

derekp7 13y ago
If bitcoin is property, then this should be handled the same way barter is handled. Taxes would be paid on the fair cash value of the property. This is also what would keep USD in use -- it is the only currency the government accepts to pay taxes.
- zacinbusiness 13y ago
  Ah interesting. Would price volatility make this practice too difficult? Or would the market eventually reach a basic equilibrium price?
  - derekp7 13y ago
    Actually, I think I stated that kind of backwards. If I sell you a cow for 2 BTC, then I owe taxes based on the cash value of the cow. Same as if I sold a cow for 10 pigs. But, you can't pay taxes in BTC or pigs, so that is one thing that will always keep USD in use.

mindcrime 13y ago

“It’s challenging if you have to think about capital gains before you buy a cup of coffee,” he said. This is exactly why we need to quit caring what the IRS, Fed, Treasury, Inland Revenue, etc. think of Bitcoin, and focus on it's use (along with Tor, tumblers, and other technologies) as an untraceable, anonymous crypto-currency that lets us avoid dealings with the IRS and agencies of their ilk. Will this work against "mainstream" adoption of Bitcoin? Maybe. Who cares? Personally, I'm not interested in Bitcoin as yet another way to incur additional entanglements with corrupt, evil and bureaucratic government agencies. Government is damage, and we, the hackers, should be working on ways to route around that damage.

npizzolato 13y ago
Let me know how that works out for you when the IRS wants to know how you bought that house, car, and boat with all the money you never reported. When the IRS shows up at your door and your answer is "hahaha sorry, it's all untraceable and anonymous, you can't know how much i own!", I'm sure they'll throw their hands up and walk away in defeat.
- mindcrime 13y ago
  I'm sure they'll throw their hands up and walk away in defeat. That should certainly be our goal. We're hackers, we're better than this. Again, we should be looking for ways to route around the damage, rather than embracing it.

anonbanker 13y ago

This is fantastic news. I'll be preparing my 1040v's and T5008's accordingly. Thanks for the asset determination, IRS! Does this decision open the doors to other currencies (linden dollars, Nintendo store points, air miles cards) being similarly registered as assets?

mindvirus 13y ago

Does this make it illegal for someone on an H1B to mine bitcoins?

JumpCrisscross 13y ago

If I had more time on my hands: (1) Launch a Bitcoin capital gains/losses tax approximation application (the "App") in beta. User keys in their Bitcoin addresses. App searches the block chain for the user's entry and exit times. App searches exchanges for the most favourable pricing source. App then returns an approximation of taxes owed/to be credited (e.g. in case of coins lost at Mt. Gox). App has a prominent disclaimer across the top warning against using it as tax advice. (2) Bring on board a senior CPA with policy-making experience. Clean up the tax logic of the App under their guidance. Call buddies in the IRS and New York State Department of Taxation and Finance. Ask them to look over the tax logic of the App in exchange for dinner, drinks and equity. Move the disclaimer from the top of the app to the bottom. (3) Call TurboTax and small accounting firms with any public posts about Bitcoin. Meet to discuss a partnership. Parlay into an acquisition.

gamblor956 13y ago
App searches exchanges for the most favourable pricing source. The taxpayer has to be consistent with how they determine the price of bitcoins, generally meaning that they have to use the same method unless they have a good reason for switching. Deliberately choosing the most favorable pricing source is fine the first year--but they'd have to stick with the same source in subsequent years. Also, the app would be enabling tax fraud. A "prominent disclaimer" isn't going to be much protection. If anything, it's likely to be used against the appmaker to demonstrate willful blindness.
- JumpCrisscross 13y ago
  A taxpayer has to be internally consistent in picking their pricing source. It does not follow that the pricing source must be consistent between tax payers. Different situations could merit different pricing sources. It is not wrong to advise different people in different situations on how their differing needs may merit different pricing sources.
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Eleutheria 13y ago

Bitcoin says they don't care what the IRS says. Take that.

csmeder 13y ago

What does this mean if a person bought a Bitcoin for $400 last year and now it is worth $583.03. What is the proper way to record this on a tax form? Will they have to pay tax now or when they sell the coin?

csmeder 13y ago
It sounds like no taxes would be collected at this point according to this: "Do I need to file or pay taxes if I own Bitcoins? Not if you bought Bitcoins or any crypto-currencies with your own money. However, if you traded, sold, or used any to purchase something, then you might. If you were given Bitcoins as payment, as a salary, or as a gift/donation, this is income and should be reported as any other income you earn. If you sold any, spent any or even traded one coin for another, then this is a tax event. This probably means you either gained or lost some money on the of the coins you just disposed. Gain or loss, you are supposed to include the sale on your tax forms and include the profit or loss you made. This is taxable as capital gains." - https://bitcointaxes.info/faq https://bitcointaxes.info/faq But would it need to be marked on the tax form as owned property? At what value?
- sokoloff 13y ago
  You don't itemize your property on any tax form. If I bought AAPL stock some time in the past, but haven't (yet) sold it, I don't report that position to the IRS.

nanidin 13y ago

Still not clear on what the situation is on stocks that are denominated in bitcoins, and that pay out dividends in bitcoins, such as ASICMINER. Is it possible for the dividends to be treated as qualified dividends?

Snail_Commando 13y ago

Hypothetically, if a person still had Bitcoin drawn from a btc faucet (by that person), would that count as a gift, treasure trove [+], or something else? [+] https://en.wikipedia.org/wiki/Cesarini_v._United_States https://en.wikipedia.org/wiki/Cesarini_v._United_States

politician 13y ago

I wonder what other "proof of work" algorithms also now generate taxable events. Or whether something mundane like using iterated bcrypt2 turns the resulting hashes into property which I have to report to the IRS?