Primer on Bitcoin Taxation(bitcointax.info)
bitcointax.info
Primer on Bitcoin Taxation
http://www.bitcointax.info/
10 comments
>>I just wrote an article about US tax implications regarding Bitcoin holdings (not transactions! transactions are easy, and well-covered on the Bitcoin wiki).
The stated author of the article, Tyler S. Robbins, reached out to me to state that you (@gamblor956) are not the author of the article linked by the submitter. Evidently he's been downvoted trying to point this out.
Perhaps the unintentional implication inferred by most on this thread is that that you personally wrote the linked article, when in fact you may be referring to a different article you wrote about US tax implications that has yet to be published (as you stated above).
Hope this clears things up for anybody else that may have unintentionally made the same inference. I'm meeting Mr. Robbins on Monday to discuss some of the issues he raised in his article.
EDIT: I see that he's put a warning at the top of article to clear up any misunderstandings.
The stated author of the article, Tyler S. Robbins, reached out to me to state that you (@gamblor956) are not the author of the article linked by the submitter. Evidently he's been downvoted trying to point this out.
Perhaps the unintentional implication inferred by most on this thread is that that you personally wrote the linked article, when in fact you may be referring to a different article you wrote about US tax implications that has yet to be published (as you stated above).
Hope this clears things up for anybody else that may have unintentionally made the same inference. I'm meeting Mr. Robbins on Monday to discuss some of the issues he raised in his article.
EDIT: I see that he's put a warning at the top of article to clear up any misunderstandings.
Ah yes when I posted my comment it was originally obvious that I wasn't referring to the same post as the linked article. My article is for a print tax publication targeted at tax advisors, and comes out next spring; Mr. Robbins' article is clearly not intended for print and is aimed more toward laymen.
Also, Mr. Robbins has updated the article since I posted my comment, so generally all of the questions I have received would now be answered by his article.
Also, Mr. Robbins has updated the article since I posted my comment, so generally all of the questions I have received would now be answered by his article.
>Evidently he's been downvoted trying to point this out.
That shouldn't really come as a surprise, given the way he went about it. Making an entire post using caps lock is usually frowned upon, to say the least, and, as has been pointed out, no such claims were ever made in the first place, it's perfectly clear that grandparent is referring to a completely separate article that's yet to even be published.
That shouldn't really come as a surprise, given the way he went about it. Making an entire post using caps lock is usually frowned upon, to say the least, and, as has been pointed out, no such claims were ever made in the first place, it's perfectly clear that grandparent is referring to a completely separate article that's yet to even be published.
>Evidently he's been downvoted trying to point this out.
As he should have been, replying in all caps while being unable to comprehend what gamblor956 wrote. gamblor956 did not imply that he was the author of the article, rather the author of AN article on a related topic. Coming to hasty conclusions and calling out a friendly poster hardly speaks highly of the OP.
He should read more carefully in the future and not overreacted, I would be hesitant to trust such a personality, an attorney should know better.
As he should have been, replying in all caps while being unable to comprehend what gamblor956 wrote. gamblor956 did not imply that he was the author of the article, rather the author of AN article on a related topic. Coming to hasty conclusions and calling out a friendly poster hardly speaks highly of the OP.
He should read more carefully in the future and not overreacted, I would be hesitant to trust such a personality, an attorney should know better.
If I transferred money to MtGox, bought bitcoins, and then withdrew those bitcoins from MtGox, does that trigger a foreign account reporting requirement even though the money was overseas for a small amount of time (e.g. 1 month)?
If I hold bitcoins at Coinbase, or in my own personal bitcoin wallet, does that trigger a foreign account reporting requirement? Coinbase is a U.S. company, but could the law be read to consider any bitcoin holdings as foreign and therefore require reporting?
If I hold bitcoins at Coinbase, or in my own personal bitcoin wallet, does that trigger a foreign account reporting requirement? Coinbase is a U.S. company, but could the law be read to consider any bitcoin holdings as foreign and therefore require reporting?
That depends on the value of the Bitcoins held in the MtGox account. If it was worth more than $10,000, which is very possible considering the meteoric rise of Bitcoins this year, you could have an FBAR reporting requirement.
A FBAR reporting requirement means that next year you would need to file a Form TD-F 90.22-1, electronically, by June 30th. The form itself is for the most part simple and self-explanatory.
As for the Coinbase coins, for the most part, "foreign" in "foreign currency" means issued by a foreign government. The government generally refers to Bitcoin and other digital currencies as "virtual" currencies.
EDIT: Followup. FATCA, the other foreign reporting requirement, only kicks in if the value of total foreign financial assets exceeds $50,000 at the end of the taxable year. If total foreign financial assets aren't worth $50,000 at the end of the year, FATCA shouldn't apply.
A FBAR reporting requirement means that next year you would need to file a Form TD-F 90.22-1, electronically, by June 30th. The form itself is for the most part simple and self-explanatory.
As for the Coinbase coins, for the most part, "foreign" in "foreign currency" means issued by a foreign government. The government generally refers to Bitcoin and other digital currencies as "virtual" currencies.
EDIT: Followup. FATCA, the other foreign reporting requirement, only kicks in if the value of total foreign financial assets exceeds $50,000 at the end of the taxable year. If total foreign financial assets aren't worth $50,000 at the end of the year, FATCA shouldn't apply.
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The real question around US compliance is how to position Bitcoin holdings in the most favourable light and prove it so that if the IRS initiates an audit then you can provide enough of a trail (e.g. blockchain) to show that you've held onto them for long enough to qualify for certain tax rates and satisfy conditions for capital treatment.
When you refer to "wallets" in your comment above, it seems you're only referring to ones that are on Bitcoin exchanges. I think many people would like to know where personal wallets fall, mainly wallets that are on personal computers running bitcoin-qt/Armory/Multibit.
When you refer to "wallets" in your comment above, it seems you're only referring to ones that are on Bitcoin exchanges. I think many people would like to know where personal wallets fall, mainly wallets that are on personal computers running bitcoin-qt/Armory/Multibit.
The real question around US compliance is how to position Bitcoin holdings in the most favourable light and prove it so that if the IRS initiates an audit then you can provide enough of a trail (e.g. blockchain) to show that you've held onto them for long enough to qualify for certain tax rates and satisfy conditions for capital treatment.
Proving length of ownership is necessary for all capital goods for which the taxpayer hopes to qualify for capital gains rates in the face of an audit. However, audits are retrospective--you don't need IRS permission to claim capital gains rates on your return. You simply need to have supporting documentation to defeat an audit if the IRS audits your return and challenges to applicability of the capital gains rates.
I refer only to wallets held on exchanges above because wallets held privately or in the US generally don't incur compliance obligations under the FBAR (foreign bank accounts) or FATCA (foreign financial assets) information reporting regimes. Specifically, the issue is that the FBAR and FATCA reporting regimes apply to accounts held in foreign financial institutions. Any business that holds financial assets for others is considered a financial institution, so any exchange offering bitcoin wallet services should be a financial institution under these laws. Because all of the major bitcoin exchanges are foreign, FBAR and FATCA reporting becomes an issue for U.S. taxpayers. The threshold for having a FBAR reporting obligation is $10,000, and for FATCA is $50,000. In both cases, the value of foreign accounts or assets is translated to USD.
Note also that financial institutions are actually defined somewhat differently for FBAR vs FATCA contexts. Bitcoin payment processors appear to be financial institutions in the FBAR context, but not in the FATCA context. However, all of the major payment processors are US-based, so FBAR and FATCA don't apply. Generally, U.S. tax law doesn't require you to disclose your domestic assets (the income is what matters.)
Proving length of ownership is necessary for all capital goods for which the taxpayer hopes to qualify for capital gains rates in the face of an audit. However, audits are retrospective--you don't need IRS permission to claim capital gains rates on your return. You simply need to have supporting documentation to defeat an audit if the IRS audits your return and challenges to applicability of the capital gains rates.
I refer only to wallets held on exchanges above because wallets held privately or in the US generally don't incur compliance obligations under the FBAR (foreign bank accounts) or FATCA (foreign financial assets) information reporting regimes. Specifically, the issue is that the FBAR and FATCA reporting regimes apply to accounts held in foreign financial institutions. Any business that holds financial assets for others is considered a financial institution, so any exchange offering bitcoin wallet services should be a financial institution under these laws. Because all of the major bitcoin exchanges are foreign, FBAR and FATCA reporting becomes an issue for U.S. taxpayers. The threshold for having a FBAR reporting obligation is $10,000, and for FATCA is $50,000. In both cases, the value of foreign accounts or assets is translated to USD.
Note also that financial institutions are actually defined somewhat differently for FBAR vs FATCA contexts. Bitcoin payment processors appear to be financial institutions in the FBAR context, but not in the FATCA context. However, all of the major payment processors are US-based, so FBAR and FATCA don't apply. Generally, U.S. tax law doesn't require you to disclose your domestic assets (the income is what matters.)
>>You simply need to have supporting documentation to defeat an audit if the IRS audits your return and challenges to applicability of the capital gains rates.
This is the crux of the matter: what supporting documentation will be sufficient for the IRS? As Silk Road and other black market operations show, it is not easy to trace transactions and ascertain ownership.
The flip side is that hopefully one can try to use the blockchain to "prove" to the IRS that even though coins may have been transferred to different addresses (example: cold storage address cycling), all such addresses in the chain were owned by the same owner which would substantiate and satisfy the IRS.
Fun times.
This is the crux of the matter: what supporting documentation will be sufficient for the IRS? As Silk Road and other black market operations show, it is not easy to trace transactions and ascertain ownership.
The flip side is that hopefully one can try to use the blockchain to "prove" to the IRS that even though coins may have been transferred to different addresses (example: cold storage address cycling), all such addresses in the chain were owned by the same owner which would substantiate and satisfy the IRS.
Fun times.
The easiest way to have proof would simply be not to transfer the coins to other addresses; if they remain in a single address then it's fairly obvious what the holding period should be. If you cycle the coins, you'd probably have to prove that you were the owner of all the addresses involved.
The standard that applies to Silk Road is not the standard that applies to tax supporting documentation. The Silk Road is a criminal prosecution and thus is held to the highest standard in the land. For the most part, tax documentation merely needs to be reasonable.
The standard that applies to Silk Road is not the standard that applies to tax supporting documentation. The Silk Road is a criminal prosecution and thus is held to the highest standard in the land. For the most part, tax documentation merely needs to be reasonable.
Hey guys. I'm a simple man with a knack for trading. I have a situation here that's probably similar to some of you and I'm hoping any of you can shed some light. Got into bitcoin trading last 3 weeks ago on localbitcoins and I've made some gains due to recent spike in btc price. I've probably made purchases around $1,400 at most. Some of my deals were done with buyers who are also outside the country and converted to USD. Would that constitute my activities as illegal? I just recently read about the FINCEN regulation and I've now decided to stop trading bitcoins. Am I still obligated to register at FINCEN as an MSB even if I'm planning to discontinue after 3-4 weeks of trading? Would I be fine if I just honestly report my gains in my income tax? Or should I fear anyone coming knocking at my door? Please advise. Thanks so much and I would really appreciate it if you can shed some information.
1) If I held xxx bitcoins in a foreign exchange, having bouhgt y% of those xxx coins there; and transfered z% of the coins there; then later turned into cash w% of those coins and withdrew it to my USA bank account; then transfered the remaining xxx-w% coins to my local wallet; what do i do about taxes.
2 ) additionally, of those xxx-w%; i lost a password protecting all of the coins and paid 10% of xxx-w% (measured in bitcoins) for someone to crack the wallet passphrase, then what do i do about taxes?
3) then, my computer got hacked and someone stole the remaining bitcoins leaving me with 0 on my local machine and n (where n is << xxx-w%) in a different, us based wallet, then what do i do about taxes?
to be clear, i have 3 questions
what happens if 1) happens. what happens if 1) THEN 2) happens. what happens if 1) THEN 2) THEN 3) happens?
edit: the z% of coins transferred into the foreign exchange came from services rendered at a fair market value of `d`
2 ) additionally, of those xxx-w%; i lost a password protecting all of the coins and paid 10% of xxx-w% (measured in bitcoins) for someone to crack the wallet passphrase, then what do i do about taxes?
3) then, my computer got hacked and someone stole the remaining bitcoins leaving me with 0 on my local machine and n (where n is << xxx-w%) in a different, us based wallet, then what do i do about taxes?
to be clear, i have 3 questions
what happens if 1) happens. what happens if 1) THEN 2) happens. what happens if 1) THEN 2) THEN 3) happens?
edit: the z% of coins transferred into the foreign exchange came from services rendered at a fair market value of `d`
I am not a tax expert, so take this with a grain of salt, but I believe these are accurate answers.
1. Once you mix your coins the value of a coin from your perspective becomes the average cost of a coin. So if you paid $1 for a coin and $100 for another coin, put both into something that made the distinction impossible, and then sold a coin for $150, you would have to pay taxes on $150 - ($100 + $1)/2 or $99.5 of income.
Note that turning into non-Bitcoin is the event, type of Bitcoin does not matter, but anything but a Bitcoin does.
2. Technically you would have an income on your gains of xxx-w%. I don't know offhand if you could write off the expense, but I doubt it.
3. You are talking about bitcoins being bitcoins, so no taxable event. Whether it counts as an expense for writing off purposes is another point I don't know. This would likely be a loss so could be deducted.
Your edit: Assuming you account for the value of the bitcoins gained at the time you gained them as income (which you should have) then you can consider that as the cost of the bitcoins. If you never counted the value of the bitcoins when you gained them then your cost basis is $0, so the entire value of the cash out is income. There may also be penalties involved in that but they likely won't care for small amounts of original value.
1. Once you mix your coins the value of a coin from your perspective becomes the average cost of a coin. So if you paid $1 for a coin and $100 for another coin, put both into something that made the distinction impossible, and then sold a coin for $150, you would have to pay taxes on $150 - ($100 + $1)/2 or $99.5 of income.
Note that turning into non-Bitcoin is the event, type of Bitcoin does not matter, but anything but a Bitcoin does.
2. Technically you would have an income on your gains of xxx-w%. I don't know offhand if you could write off the expense, but I doubt it.
3. You are talking about bitcoins being bitcoins, so no taxable event. Whether it counts as an expense for writing off purposes is another point I don't know. This would likely be a loss so could be deducted.
Your edit: Assuming you account for the value of the bitcoins gained at the time you gained them as income (which you should have) then you can consider that as the cost of the bitcoins. If you never counted the value of the bitcoins when you gained them then your cost basis is $0, so the entire value of the cash out is income. There may also be penalties involved in that but they likely won't care for small amounts of original value.
1) You pay them! Gain is measured the same way it is with any other asset (including any non-USD currency): sale price less acquisition cost (aka "cost basis" in tax parlance) and certain maintenance expenses. There are other adjustments which probably aren't applicable to digital currency. In this case, it doesn't appear that w was entirely y or z coins, and probably includes coins from both groups. Since the z have a different acquisition cost, generally the calculation is split into smaller sub-calculations to the extent the data is available (gain on sale of the y coins sold, and gain on sale of the z coins sold). The cost basis of goods acquired as compensation is generally the amount treated as income for other tax purposes, usually the fair market value.
If a = y coins sold and b = z coins sold, then gain should be...
=[sales price allocable to a coins - purchase purchase allocable to a coins] + [sales price allocable to b coins - purchase purchase allocable to b coins]
=[[a/w * w sales price - [a/y* y purchase price]] + [b/w * w sales price - [b/z* z purchase price]
2) It should be possible to add the cost of the cracker into the "cost basis" of the xxx-w coins, which should affect the amount of taxable gain on a later sale of some or all of those coins. However, there should not be any immediate or current year tax implications.
3) There are some write-offs for lost or stolen goods. Don't know how applicable they would be to digital goods like Bitcoin since nobody has actually gotten to that point yet! It's not really been established whether digital goods can be "lost" for tax purposes. If analogizing the tangible property, its likely that a court would eventually say they can be lost and thus written-off, but no courts actually gone out and said it...yet. (There have been cases dealing with this on non-tax grounds.) However, in this situation, the tax from #1 is still there, at best there could be a deduction for the losses incurred in #3.
If a = y coins sold and b = z coins sold, then gain should be...
=[sales price allocable to a coins - purchase purchase allocable to a coins] + [sales price allocable to b coins - purchase purchase allocable to b coins]
=[[a/w * w sales price - [a/y* y purchase price]] + [b/w * w sales price - [b/z* z purchase price]
2) It should be possible to add the cost of the cracker into the "cost basis" of the xxx-w coins, which should affect the amount of taxable gain on a later sale of some or all of those coins. However, there should not be any immediate or current year tax implications.
3) There are some write-offs for lost or stolen goods. Don't know how applicable they would be to digital goods like Bitcoin since nobody has actually gotten to that point yet! It's not really been established whether digital goods can be "lost" for tax purposes. If analogizing the tangible property, its likely that a court would eventually say they can be lost and thus written-off, but no courts actually gone out and said it...yet. (There have been cases dealing with this on non-tax grounds.) However, in this situation, the tax from #1 is still there, at best there could be a deduction for the losses incurred in #3.
Hey, thanks for your availability. This is my situation: I bought a few bitcoins on Coinbase (US account), made some money, sold them. Is that profit taxable?
Probably. Making money = income, and income is taxable. The question really is...what type of income?
For the most part, unless you've held the coins for longer than a calendar year, the income is short-term capital gains, or as it is frequently known to tax advisors, ordinary income with a special name.
For the most part, unless you've held the coins for longer than a calendar year, the income is short-term capital gains, or as it is frequently known to tax advisors, ordinary income with a special name.
Thanks a lot.
If my BTC withdrawals total less than $10,000 in a year, do I still have to worry about paying?
Possibly, it's not a matter of withdrawals, it's a matter of how much you have/had in the account. If at any point during the year, your bitcoin account held in a foreign exchange would have been worth more than $10,000 when converted to USD, you're supposed to file the FBAR form (TD-F 90-22.1) by June 30th of the following year.
gamblor956 could one get you on the phone/skype/mail?
Unfortunately, no. While my firm is generally okay with me providing non-specific comments like this anonymously online, or to provide legal advice pro bono or for compensation, I'm not allowed to provide client-specific tax advice separately from my employment without prior approval.
If Mr. Robbins hadn't blown his gasket, I would have suggested contacting him. Unfortunately, I've since reviewed his LinkedIn profile and I can't in good conscience recommend an advisor who has been practicing for less than a year, has no tax background (LL.M, prior accounting employment, or even just experience from time spent in practice), and has demonstrated poor judgment in an online board linked to his real-life profile. Bitcoin taxation isn't a settled issue; most of the concepts are extensions and analogizations from other areas of tax law which can't be fully understood in only a few months of professional practice.
My recommendation: if you're on the West Coast, reach out to Loyola Law School's LL.M program and ask them to recommend an alum; if you're on the East Coast, reach out to NYU or UMiami's LL.M programs. LL.M programs are usually very good at helping connect prospective clients to their alumni.
If Mr. Robbins hadn't blown his gasket, I would have suggested contacting him. Unfortunately, I've since reviewed his LinkedIn profile and I can't in good conscience recommend an advisor who has been practicing for less than a year, has no tax background (LL.M, prior accounting employment, or even just experience from time spent in practice), and has demonstrated poor judgment in an online board linked to his real-life profile. Bitcoin taxation isn't a settled issue; most of the concepts are extensions and analogizations from other areas of tax law which can't be fully understood in only a few months of professional practice.
My recommendation: if you're on the West Coast, reach out to Loyola Law School's LL.M program and ask them to recommend an alum; if you're on the East Coast, reach out to NYU or UMiami's LL.M programs. LL.M programs are usually very good at helping connect prospective clients to their alumni.
YOU ARE FREAKING KIDDING ME RIGHT?
THIS IS NOT YOUR ARTICLE. YOU CITE TO MY WEBSITE AND SAY THAT YOU ARE THE AUTHOR??
GAMBLOR956 IS NOT AUTHOR OF ARTICLE
AUTHOR OF ARTICLE IS AVAILABLE BY CONTACT INFO ON THE WEBSITE!!!
THIS IS NOT YOUR ARTICLE. YOU CITE TO MY WEBSITE AND SAY THAT YOU ARE THE AUTHOR??
GAMBLOR956 IS NOT AUTHOR OF ARTICLE
AUTHOR OF ARTICLE IS AVAILABLE BY CONTACT INFO ON THE WEBSITE!!!
Calm down, dude. I never claimed to be the author of your article, and I quite specifically stated that my article was on Bitcoin holdings, not transactions, as the bulk of your article is. Writing an overview about Bitcoin-related tax issues doesn't make you the author of every Bitcoin tax article that will ever be written. There are a lot of tax advisors out there with an interest in Bitcoin; I've spoken with at least a dozen who are submitting articles to various print journals discussing Bitcoin and digital currency-related tax issues.
Finally, while we're on the subject of contact info... I can't help but notice that you appear to be employed by an accounting firm. I've actually done business with your firm, and I don't think they would appreciate one of their associates publishing an online tax article without first going through the internal review process and having it vetted. (You should re-read your employment contract, almost every law firm and accounting firm has something on this subject in there.) Moreover, you may want to expand upon your Circular 230 warning and the legal advisory notice at the start of the article, since both are inadequate. Finally, you really should change every instance of would to should because your are implying a level of certainty that doesn't (and can't) yet exist about the tax treatment of Bitcoins. (This is why I used should and probably in my answers--I'm not offering a covered opinion, merely expressing the potential application of the current state of the law to the provided facts as I understand them.)
You weren't that hard to find on LinkedIn, and your behavior on this board reflects poorly on yourself and your firm.
Finally, while we're on the subject of contact info... I can't help but notice that you appear to be employed by an accounting firm. I've actually done business with your firm, and I don't think they would appreciate one of their associates publishing an online tax article without first going through the internal review process and having it vetted. (You should re-read your employment contract, almost every law firm and accounting firm has something on this subject in there.) Moreover, you may want to expand upon your Circular 230 warning and the legal advisory notice at the start of the article, since both are inadequate. Finally, you really should change every instance of would to should because your are implying a level of certainty that doesn't (and can't) yet exist about the tax treatment of Bitcoins. (This is why I used should and probably in my answers--I'm not offering a covered opinion, merely expressing the potential application of the current state of the law to the provided facts as I understand them.)
You weren't that hard to find on LinkedIn, and your behavior on this board reflects poorly on yourself and your firm.
I attempted to express my apology but was "hellbanned," so I made this account just to make the one post.
I had received several emails referring to "my" comments on this board and was obviously upset because I clearly was not communicating with anyone on this board. People were taking an inference we were the same person that I now clearly see was not intended, but did not in-the-moment. Apologies again.
I have read through some of your posts and agree with everything you've put down.
As to the rest of your post, I appreciate the comments and suggestions.
I had received several emails referring to "my" comments on this board and was obviously upset because I clearly was not communicating with anyone on this board. People were taking an inference we were the same person that I now clearly see was not intended, but did not in-the-moment. Apologies again.
I have read through some of your posts and agree with everything you've put down.
As to the rest of your post, I appreciate the comments and suggestions.
The person you are replying to never made such a claim. Remind me not to hire you as an attorney in the future.
Additional info for people from the Netherlands:
Owning Bitcoin and trading in Bitcoin for anything (goods or other currency) are legal as far as we know. Unless you own a business dealing with Bitcoin, all you need to do to be legal is add the profits that you make to your income. That's all. I'm not sure about the tax rules when you have a business in Bitcoin, but it's still legal to do anything with it.
Owning Bitcoin and trading in Bitcoin for anything (goods or other currency) are legal as far as we know. Unless you own a business dealing with Bitcoin, all you need to do to be legal is add the profits that you make to your income. That's all. I'm not sure about the tax rules when you have a business in Bitcoin, but it's still legal to do anything with it.
Is BTC just sitting around in your account, gaining in valuation relative to the euro, considered "profit?"
I don't know about the Netherlands, but in most countries, capital gains of private citizens are taxed when realized. I.e. if you hold a stock worth 100€ in 2009, 150€ in 2010 and 110€ in 2011, and then in 2012 you sell it for 120€, there is a capital gain of 20€ in 2012, but none in the other years.
This seems odd as you haven't actually gained anything, the market's relative values of different things has just changed. As opposed to like actually making money from getting dividends from the stock.
Same rules apply if you sold your stock - you'll be taxed on the capital gain.
This is what I meant. Well explained!
If so, how does that work? If I exchange USD for Euros, and the dollar weakens against the euro, am I taxed?
Is it an issue of intent? If I exchange for investment purposes, it's taxed, but for practical purposes, it's not?
Is it an issue of intent? If I exchange for investment purposes, it's taxed, but for practical purposes, it's not?
Bitcoin is considered a property since it is not specifically categorized otherwise, so it works a little different than currencies.
But answering that question is very complex for business, you probably don't need to worry about small gains as a person.
But answering that question is very complex for business, you probably don't need to worry about small gains as a person.
If you buy a (large enough) amount of some currency; later sell it, and the difference makes you a profit - then it's taxable income.
Intent doesn't matter as such - if you do it for 'practical purposes', then you most likely don't realize the gains (don't trade USD->EUR->USD, but do USD->EUR->buy stuff in Europe) or have very small volume (lots USD->lots EUR->go on trip->convert a bit EUR back to USD).
Intent doesn't matter as such - if you do it for 'practical purposes', then you most likely don't realize the gains (don't trade USD->EUR->USD, but do USD->EUR->buy stuff in Europe) or have very small volume (lots USD->lots EUR->go on trip->convert a bit EUR back to USD).
The article mentions there is a $200 exemption for personal transactions. However this only applies to personal transactions, not investments.
This also appears to not yet apply to Bitcoin, only "recognized" currencies like the Euro.
This also appears to not yet apply to Bitcoin, only "recognized" currencies like the Euro.
This is super interesting to me. If you exchange your money from one currency to another (USD, Euro, etc.) and profit from doing this, do you need to pay taxes? If not, is BTC treated as a currency, or as a security (eg. FB, TSLA) where you would obviously have to pay capital gains taxes.
I'm willing to bet the compliance rate on bitcoin taxation is going to be slightly lower than the compliance rate on people who buy gold coins at X and sell them at > X.
Section 9006 of the Affordable Care Act (ObamaCare) almost partially closed this loophole but it was repealed.
Section 9006 of the Affordable Care Act (ObamaCare) almost partially closed this loophole but it was repealed.
I'm not so sure.. when you consider the ways that exist of converting BTC into your local currency, most of them have reporting rules for transactions and aggregates over a certain amount.
I really wish the IRS would concern itself with USD only.. BTC is going to be a nightmare to tax, let alone enforce.
Hoping people are conscientious, here. The recent hearing about Bitcoin was positive, it does not need the association of being a tax cheat's friend to ruin it!
I really wish the IRS would concern itself with USD only.. BTC is going to be a nightmare to tax, let alone enforce.
Hoping people are conscientious, here. The recent hearing about Bitcoin was positive, it does not need the association of being a tax cheat's friend to ruin it!
when you consider the ways that exist of converting BTC into your local currency, most of them have reporting rules for transactions and aggregates over a certain amount
I've bought most of my bitcoins from Craigslist handing cash to local bitcoin sellers.
Many people use https://localbitcoins.com/
There are definitely at least a few ways to buy and sell bitcoin without leaving a paper trail.
I've bought most of my bitcoins from Craigslist handing cash to local bitcoin sellers.
Many people use https://localbitcoins.com/
There are definitely at least a few ways to buy and sell bitcoin without leaving a paper trail.
If bitcoin becomes a large enough issue for IRS, then there's definitely at least a few ways for them to proceed.
For example, they can subpoena localbitoins.com and such sites for all their user info, and do a full tax audit on them - after all, in taxes generally it's your problem to provide a paper trail for your taxable income/expenses, and if you can't do it, it only hurts you.
For example, if you buy 1 bitcoin for $500 and sell for $800, you pay taxes on the $300 difference; but if you have no trail whatsoever for the $500 transaction, then tough luck, you'll be taxed on the whole $800. Oh, and that assumes that you did 'tax yourself' by properly declaring it; if you want them to tax you, then expect that to be tripled as a penalty; and if you're using any 'coin mixing' services then that smells like tax fraud which would move the pain from a few dollars to risk of prison.
I'm not a tax lawyer, but you might need one.
For example, they can subpoena localbitoins.com and such sites for all their user info, and do a full tax audit on them - after all, in taxes generally it's your problem to provide a paper trail for your taxable income/expenses, and if you can't do it, it only hurts you.
For example, if you buy 1 bitcoin for $500 and sell for $800, you pay taxes on the $300 difference; but if you have no trail whatsoever for the $500 transaction, then tough luck, you'll be taxed on the whole $800. Oh, and that assumes that you did 'tax yourself' by properly declaring it; if you want them to tax you, then expect that to be tripled as a penalty; and if you're using any 'coin mixing' services then that smells like tax fraud which would move the pain from a few dollars to risk of prison.
I'm not a tax lawyer, but you might need one.
Wouldn't that would work against you unless you cash out your gains slowly to avoid being flagged?
I mean, if you have no proof of the OTC transaction, then on whichever amount the government tried to contest they may try to tax you on the full value of the coins at time of sale versus only taxing you on the (presumably positive) price delta.
I mean, if you have no proof of the OTC transaction, then on whichever amount the government tried to contest they may try to tax you on the full value of the coins at time of sale versus only taxing you on the (presumably positive) price delta.
Some of us wish that the IRS would also concern itself with US states and territories only.
The essence is that the IRS is going to invest in a lot of kneecapping wrenches to get any sort of meaningful compliance from BTC users under the current system, as the only way to seize properly secured coin when the owner is unwilling is to somehow make him willing.
Thus, if you can't file your bitcoin taxes on a space smaller than a postcard, you're probably not going to get a lot of voluntary compliance, no matter how much people actually support paying taxes. Think about the use tax on interstate retail sales. Hardly anyone pays it because no one cares to tally up every Internet purchase they made, figure the amount of tax owed, and send it along when that information is not already available to the taxing authority.
There is no consequence to not doing it, and doing it correctly costs both a small amount of money and an enormous amount of time, which is arguably even more valuable.
The essence is that the IRS is going to invest in a lot of kneecapping wrenches to get any sort of meaningful compliance from BTC users under the current system, as the only way to seize properly secured coin when the owner is unwilling is to somehow make him willing.
Thus, if you can't file your bitcoin taxes on a space smaller than a postcard, you're probably not going to get a lot of voluntary compliance, no matter how much people actually support paying taxes. Think about the use tax on interstate retail sales. Hardly anyone pays it because no one cares to tally up every Internet purchase they made, figure the amount of tax owed, and send it along when that information is not already available to the taxing authority.
There is no consequence to not doing it, and doing it correctly costs both a small amount of money and an enormous amount of time, which is arguably even more valuable.
Taxes have always been based on voluntary compliance. Despite all of the grumbling and complaining, people actually do pay their taxes (and understand why they are paying them).
There will always be some amount of non-compliance. In those instances, the IRS and DOJ pursue criminal charges (i.e., Wesley Snipes). For the most part, however, the IRS just wants to receive the taxes. If frequently offers amnesty to people who belatedly realize they owe back taxes (meaning, usually no penalties or criminal charges, but interest accumulation does does apply).
There will always be some amount of non-compliance. In those instances, the IRS and DOJ pursue criminal charges (i.e., Wesley Snipes). For the most part, however, the IRS just wants to receive the taxes. If frequently offers amnesty to people who belatedly realize they owe back taxes (meaning, usually no penalties or criminal charges, but interest accumulation does does apply).
>I really wish the IRS would concern itself with USD only...
This wouldn't work at all. If that happens, why wouldn't people switch to using Euros? Certainly there would be difficulties with convincing other people to take Euro, but if the cost of things decreased 20-30% because of no taxation on non-USD currency, people would switch.
This wouldn't work at all. If that happens, why wouldn't people switch to using Euros? Certainly there would be difficulties with convincing other people to take Euro, but if the cost of things decreased 20-30% because of no taxation on non-USD currency, people would switch.
Primer on Bitcoin Taxation in America...
What is someone were to trade one cryptocurrency for another?
For example, if I bought Litecoins with Bitcoins, and later sold for a gain in Bitcoins, how would I be taxed? From the article it seems I would only be taxed until I ultimately realized my gains in USD. Would I have to maintain a record of all my "altcoin" transactions in this case?
For example, if I bought Litecoins with Bitcoins, and later sold for a gain in Bitcoins, how would I be taxed? From the article it seems I would only be taxed until I ultimately realized my gains in USD. Would I have to maintain a record of all my "altcoin" transactions in this case?
In certain circumstances, that could be treated as a "like-kind exchange" governed by Sec. 1031 which is not subject to taxation until the property received in exchange is sold (see http://www.irs.gov/uac/Like-Kind-Exchanges-Under-IRC-Code-Se...).
However, if that doesn't apply, you should generally owe taxes on any gain resulting from the conversion. Based on the types of properties excluded from like-kind exchange treatment, you should probably have taxable gain (or loss!) from the exchange.
However, if that doesn't apply, you should generally owe taxes on any gain resulting from the conversion. Based on the types of properties excluded from like-kind exchange treatment, you should probably have taxable gain (or loss!) from the exchange.
By transitive property, the only transactions that should count are ones that convert USD to anything, and ones that convert anything to USD. So if you invest $10 in BTC, then do some magical trading and take out $1000, then you gained $990. I have no idea how this actually works, or if you could say that you mined the $990 and broke even on the $10, or if you have to provide a paper trail for every single cryptocurrency transaction that led you to posses the money, but this is definitely going to get hairy...
"By transitive property, the only transactions that should count are ones that convert USD to anything, and ones that convert anything to USD."
According to US tax law, any accession to wealth is taxable when the gain is realized (yes, there are exceptions to timing and basis). So, if you mined a BTC and spent $1 doing it, then used that 1 BTC to purchase some LTC when the value of the BTC was $100, you gained $99 at the time you traded it for LTC. That gain is realized at the time of the exchange and taxable at that time.
According to US tax law, any accession to wealth is taxable when the gain is realized (yes, there are exceptions to timing and basis). So, if you mined a BTC and spent $1 doing it, then used that 1 BTC to purchase some LTC when the value of the BTC was $100, you gained $99 at the time you traded it for LTC. That gain is realized at the time of the exchange and taxable at that time.
Applying math analogies to tax law is not valid and I'm pretty sure your conclusion is incorrect. Exchanging one cryptocurrency for another would probably be considered a barter transaction, and you would be required to report capital gains as if you had exchanged into USD first and performed the transaction with USD, even if that's not what you did.
If you exchange one mutual fund for another, you pay capital gains (this is one reason IRAs are so tax advantageous). Typically during bartering, you also owe capital gains even if you never receive USD. It therefore seems possible that you may owe capital gains taxes when you buy Litecoins with Bitcoins.
There's generally no "this must become USD" rule before you owe capital gains tax.
I am not an accountant or tax lawyer.
There's generally no "this must become USD" rule before you owe capital gains tax.
I am not an accountant or tax lawyer.
[deleted]
Hmm, really? To effectively enforce this (in a BTC only world), they would need to constantly be de-anonymising the blockchain. That would require dark-pools to be illegal (in the long run), which would require a unified world government.
It's either that, or simply expect people to hand them money on good faith.
It's either that, or simply expect people to hand them money on good faith.
I'm surprised that people can be this naive.
They don't need to actually trace your money, they just need to know if you have more money than you reported as income.
This is called "tax evasion" and the IRS catches people doing much more complicated things than bitcoin every day.
They don't need to actually trace your money, they just need to know if you have more money than you reported as income.
This is called "tax evasion" and the IRS catches people doing much more complicated things than bitcoin every day.
The same way as enforcing for cash - you collect most of it on good faith, and for the 'bad faith' cases you try to catch some % of violators and punish them harshly enough so that the rational choice is to declare truthfully upfront.
The linked article is almost exclusively about a non-BTC-only-world, though. The two main issues it tackles: 1) tax consequences of selling bitcoins for USD; and 2) reporting requirements for holding bitcoins in a foreign exchange.
If you ever find yourself in the nirvana of a BTC only world, expect the tax regime to be structured differently.
There are many historical examples on how to do effective taxation without looking at your transactions.
For example, a classic approach is simply to assign you a flat tax amount per year, and periodically visit you to check "how you're living" to reassess how much you'll have to pay.
It's generally worse than the current approach (less accurate, even more prone to corruption), but it works sufficiently well, and would work even in bitcoin-only world.
For example, a classic approach is simply to assign you a flat tax amount per year, and periodically visit you to check "how you're living" to reassess how much you'll have to pay.
It's generally worse than the current approach (less accurate, even more prone to corruption), but it works sufficiently well, and would work even in bitcoin-only world.
Just a note for those that don't feel like "good guys" funding wars and spying and perhaps don't believe the systems of "democracy" give them much choice.
Tax collectors have a very difficult time keeping up with such advances; in the case of BTC the small timers won't receive more than random scrutiny and the big timers have many tools to protect themselves.
Given the difficulties inherent in taking everyone's money worldwide tax collectors rely on proven tactics such as example making of the famous and releasing inflated information about their abilities. The accountancy and legal professions are understandably partners in this effort.
This community is exceptionally intelligent but also quite risk averse so non-complicit folk should try not to take scary anecdotes over the reality of the advantages bitcoin holders with regard to taxes.
Tax collectors have a very difficult time keeping up with such advances; in the case of BTC the small timers won't receive more than random scrutiny and the big timers have many tools to protect themselves.
Given the difficulties inherent in taking everyone's money worldwide tax collectors rely on proven tactics such as example making of the famous and releasing inflated information about their abilities. The accountancy and legal professions are understandably partners in this effort.
This community is exceptionally intelligent but also quite risk averse so non-complicit folk should try not to take scary anecdotes over the reality of the advantages bitcoin holders with regard to taxes.
I've pointed this out before in other discussions, but my contacts in the IRS freaking love Bitcoin because it makes their job so much easier. Tracking Bitcoins may be difficult, but it's a cakewalk compared to tracking physical cash transactions.
Taxes have always been based on voluntary compliance and disclosure in the US because that is the "freest" way to handle tax collection. If a significant number of people choose to be non-compliant in Bitcoin, the IRS will simply create a Bitcoin collection task force, modeled after its current Small Business Owner task force (SBO's are remarkably bad at complying with taxes). Because they won't find everyone, they'll throw the book at the few they do find, to increase the compliance rate without actually having to resort to more draconian measures that would truly impair freedom.
Taxes have always been based on voluntary compliance and disclosure in the US because that is the "freest" way to handle tax collection. If a significant number of people choose to be non-compliant in Bitcoin, the IRS will simply create a Bitcoin collection task force, modeled after its current Small Business Owner task force (SBO's are remarkably bad at complying with taxes). Because they won't find everyone, they'll throw the book at the few they do find, to increase the compliance rate without actually having to resort to more draconian measures that would truly impair freedom.
A Canadian Government Fact Sheet http://www.cra-arc.gc.ca/nwsrm/fctshts/2013/m11/fs131105-eng...
Canadian governmental guidance is just as vague (for a layman) as IRS guidance. Broadly speaking, the government issued a statement saying that digital currencies are taxable. Exactly how they're going to be characterized (income vs. capital gains) is the key question for many people.
Reading both the digital currency fact sheet linked and the referenced Canada Income Tax Act[1] doesn't give a clear indication of how bitcoins will be characterized.
Back taxes, penalties and accrued interest are nasty surprises to be receiving down the road. Whether the amounts in question are modest or large, it's never fun to be on the receiving end. Unfortunately, I speak from experience. The age-old issue is brought to the forefront here where taxdollars pay for income tax agencies to pursue you and prove your innocence. Given that audits are supposedly a small percentage of the overall tax-filing population, once you are selected or flagged, the onus is on the filer to substantiate all claims and characterizations, and hope that the tax agencies concur.
[1] http://www.cra-arc.gc.ca/E/pub/tp/it479r/README.html
Reading both the digital currency fact sheet linked and the referenced Canada Income Tax Act[1] doesn't give a clear indication of how bitcoins will be characterized.
Back taxes, penalties and accrued interest are nasty surprises to be receiving down the road. Whether the amounts in question are modest or large, it's never fun to be on the receiving end. Unfortunately, I speak from experience. The age-old issue is brought to the forefront here where taxdollars pay for income tax agencies to pursue you and prove your innocence. Given that audits are supposedly a small percentage of the overall tax-filing population, once you are selected or flagged, the onus is on the filer to substantiate all claims and characterizations, and hope that the tax agencies concur.
[1] http://www.cra-arc.gc.ca/E/pub/tp/it479r/README.html
Yeah, experts can talk about taxing bitcoin, and not talk about taxing high frequency trading.
I hate to sound like a rebel, but sometimes I just don't like how some people lurk around an issue they can be experts about while dismissing political ones. Ivory tower crap.
I hate to sound like a rebel, but sometimes I just don't like how some people lurk around an issue they can be experts about while dismissing political ones. Ivory tower crap.
Bitcoin taxation is not ivory tower crap, it's a mostly straight-forward application of existing laws to a somewhat novel concept. In a nutshell, it's a living demonstration of the evolution of the law that many legal practitioners are excited to be a part of. (Unlike litigation-related legal fields, tax law in general is not exciting. Moreover, tax law usually changes in response to statutory and regulatory changes, so getting to be part of an actual organic change to tax law is a rare experience.)
OTOH, talking about taxing high frequency trading is ivory tower crap, because current law doesn't impose any such taxes. Thus, any discussion would be merely theoretical and academic.
OTOH, talking about taxing high frequency trading is ivory tower crap, because current law doesn't impose any such taxes. Thus, any discussion would be merely theoretical and academic.
> because current law doesn't impose any such taxes.
that's what I'm talking about dummy.
that's what I'm talking about dummy.
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If you have questions about US compliance obligations regarding Bitcoins held in non-US wallets (meaning every major exchange, such as BTCChina, BitStamp, MtGov, and BTC-e), feel free to ask and I'll try to respond over the course of the next day or two.