IRS: bitcoins are property for tax purposes in U.S.

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Phineas J. Whoopee
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IRS: bitcoins are property for tax purposes in U.S.

Post by Phineas J. Whoopee » Tue Mar 25, 2014 2:09 pm

According to Reuters, the IRS has come out with a statement that virtual currencies count as property for tax purposes, including being taxable if paid to an employee, if paid to another, or (probably) if they generate a capital gain or loss.

I should think that implies the value of stolen bitcoins is deductible as a casualty loss.

Does this new development change the virtual currency equation?

PJW

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LH
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by LH » Tue Mar 25, 2014 2:35 pm

well, its basically not treated as a currency under law?

Tell me this, if I have a forex account, and sell 100 US dollar, buy yen. Then reverse the trade, sell yen, buy US dollar, and end up with 110 US dollars..... Is that a taxable event?

I always thought no, but I am not sure.


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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by chaz » Tue Mar 25, 2014 2:44 pm

Does binary code have value?
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Phineas J. Whoopee
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by Phineas J. Whoopee » Tue Mar 25, 2014 2:46 pm

chaz wrote:Does binary code have value?
Ask Microsoft.
PJW

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kenyan
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by kenyan » Tue Mar 25, 2014 2:59 pm

Phineas J. Whoopee wrote:
chaz wrote:Does binary code have value?
Ask Microsoft.
PJW
Reminds me of the Onion article where Microsoft patented ones, zeroes - forcing all competitors to work in analog.
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Phineas J. Whoopee
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by Phineas J. Whoopee » Tue Mar 25, 2014 3:08 pm

kenyan wrote:...
Reminds me of the Onion article where Microsoft patented ones, zeroes - forcing all competitors to work in analog.
The Onion is wise beyond its own recognition. Speaking as a person familiar with both software and hardware, a digital computer is just an analog computer simulating a digital computer.
PJW

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Ged
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by Ged » Tue Mar 25, 2014 4:55 pm

OK, so that doesn't help much. A key question is whether it's treated as a collectible subject to ordinary taxes, or a capital asset where capital gains treatment is available.

Anyone know?

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Phineas J. Whoopee
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by Phineas J. Whoopee » Tue Mar 25, 2014 5:05 pm

Ged wrote:OK, so that doesn't help much. A key question is whether it's treated as a collectible subject to ordinary taxes, or a capital asset where capital gains treatment is available.

Anyone know?
The Reuters article I referenced, as updated a few minutes ago, gives us some information: conditionally capital but definitely not collectible:
CAPITAL OR ORDINARY?

"The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer," the agency said.

If a taxpayer holds virtual currency as a capital asset - like stocks or bonds or other investment property - gains or losses are realized as capital gains or losses, the agency said.

Where virtual currency is not held as a capital asset, but rather as inventory or other property mainly for sale to customers in a trade or business, ordinary gains or losses are generally incurred, the IRS said.

Capital gains and losses are taxable and deductible at different rates and amounts than ordinary gains and losses.

Bitcoin "miners" who use computers to validate bitcoin transactions must include the fair market value of the virtual currency as gross income on the date of receipt, the IRS said.

"This is going to be unfavorable to bitcoin miners because they're going to have to include in income the fair market value of the virtual currency on the date they mined it," said William Lewis, a lawyer in Sunnyvale, California, who represents a start-up company creating a platform for virtual currencies.

"It's going to make life difficult for a lot of people who have been mining over the past year, who have to go back and see what the values were on those dates when they mined it."
[Edited to add]
I originally overlooked your underlying assumptions. Collectibles are not taxed at ordinary income tax rates; they're just subject to a higher maximum capital gains rate. Furthermore, how could anybody conflate Bitcoin with anything collectible? It has no physical manifestation. Yes, you can give your money to producers of memorabilia, but if you do, any adverse tax consequences are your own fault and nobody else's.

PJW

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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by Leeraar » Tue Mar 25, 2014 5:37 pm

And,

The number of actual Bitcoin owners contributing to this thread is bigger than none?

L.
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Phineas J. Whoopee
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by Phineas J. Whoopee » Tue Mar 25, 2014 5:43 pm

Leeraar wrote:And,

The number of actual Bitcoin owners contributing to this thread is bigger than none?

L.
I ain't got none.
PJW

neofight
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by neofight » Tue Mar 25, 2014 6:12 pm

I do. Not a lot, but some. Now you can all rage and/or laugh at me for a bit, debate endlessly the difference between risky investments vs speculation vs gambling, and have a few continuous offenders periodically interject uninformed but pithy non-sequiturs :)

All done? Good, then I propose we all get back to discussing actual topics related to this board's subject. And since this thread is about bitcoin taxation, here's a question:

Would treatment of bitcoin as property for tax purposes mean that wash sales do not apply? In other words, could one tax-loss-harvest and just repurchase immediately any time the price dips to ensure you always have the $3k/year loss deduction?

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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by Phineas J. Whoopee » Tue Mar 25, 2014 6:19 pm

My reading of the article is that for individuals or institutions all the normal capital rules apply, unless one is maintaining inventory as part of a Bitcoin business; like if, for example, one was a Bitcoin dealer or market maker. Perhaps a Bitcoin bank, should there ever be such a thing, would qualify.

As an individual not maintaining inventory for buying and selling to customers, the article makes it clear ordinary capital asset rules apply. It doesn't say explicitly, but presumably that means wash sale rules are in effect just like for any other capital asset. It also doesn't say anything about the 0% capital gain tax in the 10% or 15% bracket, or the extra 3.9% tax on investment income at higher levels, but I don't think it would be reasonable for us to expect it to go into every last detail.

PJW

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Oicuryy
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by Oicuryy » Tue Mar 25, 2014 6:22 pm

Here is the IRS notice.
http://www.irs.gov/pub/irs-drop/n-14-21.pdf

Meanwhile, in Denmark bitcoin trades are tax-free.
http://www.coindesk.com/denmark-declare ... -tax-free/

Ron
Money is fungible | Abbreviations and Acronyms

neofight
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by neofight » Tue Mar 25, 2014 6:32 pm

I did not realize that capital assets were subject to wash sale rules? The IRS notice I found on wash sales talks only about stock or securities, saying:
A wash sale occurs when you sell or otherwise dispose of stock or securities (including a contract or option to acquire or sell stock or securities) at a loss and, within 30 days before or after the sale or disposition, you:
Buy substantially identical stock or securities,
Acquire substantially identical stock or securities in a fully taxable trade,
Enter into a contract or option to acquire substantially identical stock or securities, or
Acquire substantially identical stock or securities for your individual retirement arrangement (IRA) or Roth IRA
The 1040D instructions here are similarly specific - they talk about wash sales for stock or securities, but the section on capital gains or losses makes no mention at all of wash sale restrictions.

I Am Not A Tax Lawyer so maybe there's something obvious I'm missing here - are normal capital assets i.e. houses subject to wash sale rules?

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Ketawa
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by Ketawa » Tue Mar 25, 2014 6:47 pm

I already filed my taxes claiming a short term loss of about $90 for my fun time holding 0.2 bitcoins last December. At least the IRS now approves!

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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by mikef40320 » Tue Mar 25, 2014 7:57 pm

What about bitcoins you mined? Are you able to deduct electricity costs, amortization of graphics cards, etc, etc.?

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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by ccieemeritus » Wed Mar 26, 2014 3:50 am

Mining bitcoins sounds like a business. Profit = revenue - expenses. Expenses include electricity. Make sure you make a profit or the irs will consider it a hobby. Fill this out on schedule c. Unless the graphic cards are really expensive they are probably below the threshold for expensing in the year you purchase them (check this. I am not a lawyer-as you will see in a moment).

I did schedule c for the few hundred bucks I made on google ads on a website (I'm not touching bit coins). I made a profit (not a hobby!) but below minimum wage if I accounted for my time.

Then 3 years later the city I live in sent me a letter demanding payment of a business license tax...for 3 years.
My insignificant profits were wiped out retroactively. At least they were kind enough to waive the late fees after I wrote a polite letter explaining how pathetic my business was.

Of course this also means that the Feds or state (CA) is helpfully sharing schedule c data with local cities to maximize business tax revenue. Nice.

So go ahead and fill out schedule c for your bitcoin mining operation but watch out for your locality wanting its piece of the action.

I hope you sold those bitcoins.

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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by nisiprius » Wed Mar 26, 2014 8:29 am

Sounds like the big take-home is that everyone with a significant quantity of bitcoin should be keeping scrupulously accurate records of everything they can think of... in case it becomes clearer what the rules are and first impressions and newspaper stories about what to do weren't correct, and in case it is necessary to go back and recalculate taxes or file amended returns or answer an IRS CS2000 letter or something like that.

I can easily imagine the IRS could change its mind, or law could be passed, that might be applied retroactively.

So you need to have the data so that you can calculate or recalculate your taxes to be calculated varying or changed--whether be currency, property, a business, a collectible, whatever.
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by Random Musings » Wed Mar 26, 2014 12:10 pm

The biggest question is who is going to track all of this? The exchanges? The individual? Companies that take it in exchange for other goods and services?

If it is truly not a form of "cash", it would make me hesitiate to accept it as a form of payment.

RM
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by chaz » Wed Mar 26, 2014 1:10 pm

It looks like dogecoin has value:

http://jalopnik.com/doge-and-dogecoin-a ... ednesdayAM

Interesting.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by neofight » Wed Mar 26, 2014 11:10 pm

So here's another question for you guys: if BTC is capital property, why can I not use it to acquire other property in a like-kind property swap agreement, and pay no tax on the appreciation in value at the time of the swap? Clearly you cannot trade BTC for a house this way (the properties are not like-kind), but by my understanding of property exchange rules, I could exchange BTC to an altcoin this way. Or even (my mind == blown if this is a correct reading, but I can't say why it isn't legal) swap BTC to BTC when the price drops.

Is this a correct understanding of like-kind exchanges?

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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by LH » Thu Mar 27, 2014 12:18 am


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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by chaz » Thu Mar 27, 2014 12:12 pm

Just saw this:
http://boingboing.net/2014/03/27/dogepa ... rypto.html

A class on crypto-currency.
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by jon-nyc » Thu Mar 27, 2014 2:07 pm

Random Musings wrote:The biggest question is who is going to track all of this? The exchanges? The individual? Companies that take it in exchange for other goods and services?

If it is truly not a form of "cash", it would make me hesitiate to accept it as a form of payment.

RM

To your first point, I assume it's all traceable in the blockchain. Even by the IRS.


To your second point, this ruling means bitcoins are not fungible in the US. That would make it impractical to use it as a payment system here, except illicitly.

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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by neofight » Thu Mar 27, 2014 2:41 pm

Examples of payment systems that are not US fiat, widely used already in the US, include: gift cards, paypal, frequent flier miles. People figure out how to charge & get paid in these ways, presumably not just for illicit activities (I've never heard of anyone selling dime bags for United miles :)).

Regarding tracing, I would assume that the cryptocurrency vendors & exchanges (i.e. Coinbase, Circle, Coinsetter, Kraken, Bitstamp, etc.) will provide reporting just as banks & brokerages do now. In theory online wallet providers (Xapo, Blockchain.info, Bitgo, Greenaddress.it, etc) might do the same thing - Blockchain.info already tracks historical prices for transactions on the blockchain ("this 100BTC was worth $X at time of the move").

There are also some 3rd party providers likely to start up to meet this need. All the reputable vendors and exchanges offer transaction history export, and there are tools and online providers (e.g. Bitcointaxes.info, Cryptobasis) who can import this data and produce cost basis accounting reports. YMMV on sharing transaction history with online services (I'm skeptical about it) but the transaction history exports generally do not include much PII, so maybe it will be deemed acceptable by users. I might just end up building my own since processing transaction history exports is almost trivial.

Fun fact: I can already get far better information about my historical transactions involving bitcoin, than I can with my transactions involving PayPal or airline miles.

I'm still wondering if like-kind property exchanges would now be valid for BTC->BTC swaps or BTC->altcoin swaps, assuming it goes through an intermediary and conforms to the IRS rules about the time inbetween swaps. This seems like a rather out-there use of property exchange rules and maybe something the IRS would overturn on audit, but there does seem to be a sizeable hole in their current ruling about treating it purely as property.

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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by jon-nyc » Thu Mar 27, 2014 7:14 pm

neofight wrote:Examples of payment systems that are not US fiat, widely used already in the US, include: gift cards, paypal, frequent flier miles. People figure out how to charge & get paid in these ways, presumably not just for illicit activities (I've never heard of anyone selling dime bags for United miles :)).
I wouldn't put paypal in the same category. It's a method of paying in dollars, there are no units of paypal that might be worth one dollar amount one day and another the next. Gift cards are denominated in dollars, though as a medium of exchange they'd be discounted since they can only be redeemed in limited places. Now you're left with frequent flier miles. Ok, they are 'widely used' but are as a 'payment system' they represent an infinitesimal percentage of transactions, indeed it can be fairly approximated at 0.0000000000%. Bitcoin bulls seem to aspire to something substantially greater than that, and this ruling by the IRS makes that even harder to imagine than it was before (which is a pretty low bar, admittedly).


And while I also have not heard of people buying dime bags with United miles, I certainly have heard of people buying drugs with Bitcoin. If you asked me to name another product (not currency) that is more often traded for Bitcoin, I would come up blank. Though maybe human trafficking and illicit arms sales are close?

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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by linenfort » Sun Aug 17, 2014 8:46 pm

Hmm, I received some fractional bitcoins, but not as "payment for goods or services." A stranger online was simply feeling generous.
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Re: IRS: bitcoins are property for tax purposes in U.S.

Post by docneil88 » Mon Aug 18, 2014 1:08 am

Phineas J. Whoopee wrote:Speaking as a person familiar with both software and hardware, a digital computer is just an analog computer simulating a digital computer. PJW
For those interested, here's a thread I started which I believe helps explains this idea: The dependence of digital upon analog http://www.bogleheads.org/forum/viewtopic.php?p=256860 . Best, Neil

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