
IRS Says Bitcoin Is Property - rbc
http://www.bloomberg.com/news/2014-03-25/bitcoin-is-property-not-currency-in-tax-system-irs-says.html
======
patio11
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
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.

~~~
patio11
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
"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-
In...](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)

------
JumpCrisscross
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
_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
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.

------
scotty79
> “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
If its treated as property then the maximum is 20% of capital gains. Do you
not think you should pay taxes on gains?

~~~
modeless
I think he's talking about mining, which is now subject to income tax (likely
25%) _and_ self-employment tax (15%).

~~~
sliverstorm
In that case, it seems only right that tax should only be on net profits,
right? I.e. after your opex such as equipment costs & electricity?

~~~
patio11
The IRS literally said exactly that, assuming you run your business like a
business. This would require, among other things, adequate record keeping to
substantiate what portion of your electrical costs were necessary and
customary in your business, since you can't deduct the personal use portion of
the bill.

You'd probably have to depreciate equipment rather than deducting it, unless
it has an expected useful life under a year or hits some de minimis threshold.
(The IRS rule on this one is really wonky. Suffice it to say that most Bitcoin
miners have to depreciate not deduct.)

~~~
uiri
I think that given the speed at which bitcoin mining hardware is obsoleted, it
is perfectly reasonable that most ASICs would have an expected useful life of
under a year.

~~~
DrStalker
For tax purposes does it matter when the device is obsolete or when it reaches
the end of it's expected lifespan as functional hardware?

~~~
patio11
The relevant test is "economic useful life", which the IRS helpfully defines:

 _(b) Useful life. For the purpose of section 167 the estimated useful life of
an asset is not necessarily the useful life inherent in the asset but is the
period over which the asset may reasonably be expected to be useful to the
taxpayer in his trade or business or in the production of his income. This
period shall be determined by reference to his experience with similar
property taking into account present conditions and probable future
developments. Some of the factors to be considered in determining this period
are (1) wear and tear and decay or decline from natural causes, (2) the normal
progress of the art, economic changes, inventions, and current developments
within the industry and the taxpayer 's trade or business, (3) the climatic
and other local conditions peculiar to the taxpayer's trade or business, and
(4) the taxpayer's policy as to repairs, renewals, and replacements. Salvage
value is not a factor for the purpose of determining useful life. If the
taxpayer's experience is inadequate, the general experience in the industry
may be used until such time as the taxpayer's own experience forms an adequate
basis for making the determination. The estimated remaining useful life may be
subject to modification by reason of conditions known to exist at the end of
the taxable year and shall be redetermined when necessary regardless of the
method of computing depreciation. However, estimated remaining useful life
shall be redetermined only when the change in the useful life is significant
and there is a clear and convincing basis for the redetermination._

------
jcampbell1
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
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.

~~~
loumf
Mostly this happened to people that got bad advice (I really hope all of the
entrepreneurs reading this site are smarter now).

For most, the issue was exercising their options. This is a tax event -- and
the tax is owed on the difference in your strike price and the current price
of the stock. If you find yourself in this situation -- immediately sell
enough stock to cover the tax.

If you are given stock -- that is the tax event. You need to have enough cash
to cover taxes on stock given to you -- if the stock is illiquid, and this is
a bonus or something, then you should ask for part of the bonus to be in cash
(to cover tax). If the stock is liquid, immediately sell enough to cover tax.

If you are a founder, and your stock just goes up in price, that is not a tax
event.

Being given at-the-money options is not a tax event. You only owe <s>stock</s>
_tax_ once you exercise.

IANAA (not an accountant)

EDIT: replace "stock" with "tax" in the second to last paragraph

~~~
Anderkent
Doesnt selling stock immediately rather than after a year mean your tax rate
on it is higher?

~~~
stevewilhelm
> Doesnt selling stock immediately rather than after a year mean your tax rate
> on it is higher?

This is the exact thinking that got many people in trouble during the dot.com
bubble.

They exercised their options and neglected to sell and hold enough capital to
pay their tax obligation.

Then the bubble burst and stock prices dropped, in some cases to nothing,
within a year. The IRS still wanted the capital gains taxes on the difference
between the option's grant price and the stock price on the day the options
were exercised (aka the taxable event).

It was not uncommon to have people loose their houses and have their wages
garnished to pay off their taxes.

Consider this a cautionary tale when speculatively trading Bitcoin.

~~~
beagle3
But do see my other comments on SEC rule 144 - sometimes you are forbidden
from selling in a way that exposes you to loss risk that cannot be mitigated
without running afoul of security laws.

~~~
stevewilhelm
You can purchase put options or employ other strategies to hedge against risk
when one owns a large position in a single stock.

~~~
beagle3
There was specific language that explicitly said "this is illegal" until the
latest revision. Now, it's implicit, and in inquiries to the SEC they have
repeatedly said "that goes against regulation".

The general idea behind rule 144 very sane: It's supposed to limit pump-and-
dump IPOs and M&As, by forcing anyone who did not pay for their shares
outright to wait 6 months before they can gain anything (and legally, the SEC
is only interested in the overall guarantee - e.g. put options that guarantee
you don't lose are AGAINST the current spirit and the former letter of the
law).

However, the laws apply equally to someone who owns 90% of the shares (who is
in a position to abuse an IPO and M&A) and 0.1% of the shares (who is likely
an employee receiving RSU or options, has zero control, and likely not even
any finances to draw upon)

The tax law is insane, the security regulations are complicated, and their
interplay is ludicrously insanely crazy.

Whenever you see people saying "oh, it's very simple - you just didn't get the
right advice" you can be sure that they have no idea what they are talking
about - either they didn't have to deal with it, or they weren't aware they
were doing something illegal.

------
jstalin
The actual notice from the IRS:

[http://i.cdn.turner.com/money/2014/images/03/25/IRS_Notice_2...](http://i.cdn.turner.com/money/2014/images/03/25/IRS_Notice_2014_21.pdf?iid=EL)

[EDIT] - added actual notice

~~~
andrewla
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-
Guidanc...](http://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidance)

(@jstalin -- feel free to edit your post and I'll delete this one)

------
uptown
"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.

~~~
patio11
This is not an anomalous case in taxing business income. A few startups asked
me to do work on a barter basis. (Can you do a week of marketing work for us
if we build you an iPhone app?) I told them that, if I were to agree to do
that, I'd be legally obligated to value my work at it's market price and file
an informational return to the IRS showing that amount of money given as
payment for services rendered, which they'd be taxed on exactly as if I had
paid them the equivalent sum in cash. (i.e. They'd pay thousands out of pocket
despite never receiving a cent.)

~~~
phogster
Wait, are both parties responsible for paying taxes in this case? In the
normal case the party receiving payment for services rendered is the one that
pays income taxes. Here both are providing and receiving a service at the same
time.

~~~
URSpider94
If the barter is for services (I mow your lawn if you do my taxes), then yes,
both parties would owe income tax on the fair market value of the services --
it would be the same as if they had paid each other the same amount in cash.

If the barter is an exchange of goods for services (I'll do your taxes in
return for 10 dozen eggs from your farm), then the party that received the
goods in exchange for their services owes income tax on the fair market value
of the service provided. The party that provided the goods would owe income
tax on the capital gain of the goods (fair market value minus the cost paid,
or basis).

If both parties are exchanging goods, then it gets more complicated. In some
cases (I trade you the deed for my apartment in the city for the deed for your
beach house), the IRS deems it a "like-kind exchange", which is NOT a taxable
event -- the basis of the old items carries over to the new properties.
However, if I exchange my apartment for your car, then it's not a like-kind
exchange, because the items exchanged are not of like kind (makes sense?), and
both parties pay capital gains (or can claim a loss) vs. the fair market value
of the exchange.

To add to the fun, one can do a delayed like-kind exchange by storing the
proceeds with a "qualified intermediary", a form of escrow agent. This is
often done with real estate, since it means that the counterparties don't have
to be willing to swap deeds. To give a specific example, I could sell my
apartment in the city, deliver the proceeds to a qualified intermediary, and
use them later to buy a beach house, and it would be treated as a tax-free
exchange by the IRS (if the prices of the two properties are equal and some
other criteria are met).

~~~
mehmeta
Excellent post overall, very helpful.

>> However, if I exchange my apartment for your car, then it's not a like-kind
exchange, because the items exchanged are not of like kind (makes sense?), and
both parties pay capital gains (or can claim a loss) vs. the fair market value
of the exchange.

You probably can't claim a capital loss for a car as you can only claim it for
things you hold for investment purposes. Since the car's depreciation is
expected to be because of personal use you can't claim loss on it whereas if
it were to increase for some reason (memorabilia) you'd have to pay gains.

~~~
URSpider94
Fair point, I'd have to be holding the car for investment purposes, or using
it as a business asset, not using it for personal transport.

------
pat2man
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.

~~~
sillysaurus3
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
It is no different than having your money in multiple banks or brokers.

~~~
Smudge
Coinbase is not FDIC insured.

~~~
gnaritas
Neither is your computer or your safe. Coinbase is very likely much safer for
the average consumer than anything they'd do themselves.

~~~
sillysaurus3
That's not true. If I had kept my funds in a secure cold storage wallet, I'd
still have them.

There are plenty of techniques for keeping your coins safe. Just find one and
use it. I've heard Armory is pretty good.

Coinbase is far more dangerous in comparison, because they can go under at any
time for any reason. Human greed is a thing. Always remember that Coinbase has
to rely on some employees to implement their systems, and those same employees
can write some code to steal money from their systems.

~~~
gnaritas
Are you the average user? I doubt it, what I said is very much true and you've
offered nothing to disprove it.

~~~
sillysaurus3
Sorry, you're right, I didn't provide enough detail.

If the average user can figure out how to use bitcoin, then they can figure
out how to use Armory. Most people have an old laptop or computer that they
can afford to keep disconnected from the internet. If it's not connected to
the internet, then it's not susceptible to hacks. It also offers a way of
doing secure backups, so that if your computer is lost in a house fire, you'll
still have your coins.

Even if they don't have an old computer, spending $100 on one off of Ebay or
whatever is possibly the best insurance payment they could make, because it's
just a matter of time until any bitcoin exchange dies. Not only do you have
yourself to worry about, but if you have children then you'll want them to
inherit your wealth. Hard to do if your wealth vanishes because your preferred
exchange went under.

~~~
gnaritas
> If the average user can figure out how to use bitcoin, then they can figure
> out how to use Armory.

I don't agree. Using coinbase is vastly easier than setting up Armory and
managing your own security on your own PC.

> Most people have an old laptop or computer that they can afford to keep
> disconnected from the internet.

They won't understand they need to; they can't even stop opening exe
attachments in their email and running them, you seriously overestimate the
average user.

> If it's not connected to the internet, then it's not susceptible to hacks.

Way over their head.

> It also offers a way of doing secure backups, so that if your computer is
> lost in a house fire, you'll still have your coins.

Doesn't matter, you lost them at the word "install".

------
Zarathust
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
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
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
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.

------
ThomPete
Interestingly Denmarks IRS just ruled that it's not taxable.

(in Danish) [http://epn.dk/samfund/politik/ECE6587289/afgoerelse-
gevinste...](http://epn.dk/samfund/politik/ECE6587289/afgoerelse-gevinster-
fra-bitcoins-er-skattefrie/)

~~~
knome
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
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?

------
rdmcfee
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

~~~
dragontamer
What is so hard about looking through the blockchain and backtracing all of
your trades at a later date?

You know your own public and private key, so you can find all of your
transactions and the date at which you've received or sent off BTC. Come tax
day, you run a single program over all your transactions and you should be
set.

There's no need to go "cloud" on this one, a simple offline blockchain app
would solve the problem.

~~~
dllthomas
You need some sort of data source for what prices were at various points. This
could be offline, but is likely to be big. Still, substantially easier problem
than a lot of tax-related reporting.

~~~
mahyarm
Which exchange price would you use too?

~~~
dllthomas
IANA Accountant, but I would guess until/unless the IRS has blessed some
particular entity, you can use any public-facing exchange but you should
probably be consistent.

------
brudgers
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-k...](http://www.nakedcapitalism.com/2014/03/ucc-
article-9-going-kill-us-bitcoin-us-businesses.html)

------
IgorPartola
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.

~~~
twoodfin
I am warily a supporter of a national sales tax to replace the income tax, but
there are a few problems with it:

\- Making it non-regressive, let alone as close to progressive as our current
system, is damned hard. FAIR Tax-style check-cutting probably isn't enough.

\- The tax would have to be high enough that black market sales would be
extremely tempting. It's comparatively easier to monitor and regulate ~150
million workers, each with a small number of "tax events" per year, vs.
hundreds of billions of taxable transactions.

\- A sales tax has the potential to be at least as complex and distorting as
the income tax, and probably moreso. Politicians likely won't be able to
resist the urge to make favored products cheaper (or cheaper for favored
constituents), and the levers available will be much more direct, as you won't
have to wait until April 15 to see, say, your electric car credit.

~~~
VLM
"Making it non-regressive, let alone as close to progressive as our current
system, is damned hard."

Its not really important or difficult. The state I grew up in has a long list
of poor people exemptions by industry. Everything in the grocery store except
hot deli food is tax free, for example. Tuition, medical care, bunch of other
poor people things all tax free... As a poor person the only taxes you'll
likely ever pay are the 100% or so gasoline sin tax and sales tax on a car. 5%
depreciation on a new car is a fraction of driving it off the lot, and for
used, especially for poor people, there's a wink and nod that if you're not
involving a bank just don't submit anything completely ridiculous, and they
don't enforce sales tax at all on family sales because they know we'd just
avoid it via gift tax if they cracked down and other than divorce situations
you'll never get family members testifying against each other.

Its important to keep the tax rate reasonably low compared to the "real world
poor folks" inflation rate (not the made up one). Another way to think about
it, is I live in a civilized (non-california) area and our cost of living is
much lower. So you can express our 5% sales tax as living about 18 months in
the future, or as living about 1/20th more like Californians. Its just not a
big deal.

Now if you want a euro style 50% then the big problem isn't so much the poor
as all the people trying to evade that kind of tax rate. We already have
plenty of problems with petroleum fuels and tobacco products, imagine those
kind of problems with "everything".

~~~
vidarh
> euro style 50%

As a European, I wonder what you're referring to. My aggregate total tax,
including VAT (I'm in the UK, so the VAT rate is 20% for standard rated goods,
but like in your case there's lots of zero rated goods; I believe the top VAT
rate in the EU is 25%) is ~36% on a salary that puts me well into the "1%".

(VAT accounts for "only" about 4 percentage points of that, as the amount of
my post-income-tax income that goes towards non-zero-rated products is not all
that high).

Marginal tax rates in many European countries can be around or exceeding 50%,
but you'd have to be ludicrously wealthy with a useless accountant to actually
pay anywhere near that, even including VAT, unless you spend all your money on
drinking and driving.

------
anonbanker
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?

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

~~~
maxerickson
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.

------
mindcrime
_“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
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
_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.

------
thematt
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
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
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.

~~~
tbrownaw
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
These days this is quite automatible. Large purchases, like houses and cars,
are public.

------
e15ctr0n
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-bitcoin...](http://blogs.reuters.com/felix-
salmon/2013/04/03/why-bitcoins-rise-is-nothing-to-celebrate/)

------
Kapura
>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.

~~~
sliverstorm
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
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
Well, sure, it would be easy if the pool provided you a 1099. But they don't.

~~~
saalweachter
I believe you just stated the new killer feature for mining pools. Miners will
presumably dump pools which make their taxes harder for pools which make them
easier.

------
unclebucknasty
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?

------
sergiotapia
And how exactly can they know your bitcoin stash amount?

~~~
ewoodrich
If you obtained stock prior to 2011, and sold it, the IRS has no idea what the
cost basis is, so this is voluntarily reported by the filer (and this will
determine your capital gains). Of course, if you fudge this number to the
point it is noticeable, you're looking at between a 20% and 100% penalty, or
possible civil fraud.

Bitcoin is really no different. It doesn't matter if there's no easy way for
the government to keep track of every taxpayer's BTC holdings, because if the
IRS determines at a later time that you have provided inaccurate information,
you're in trouble. Maybe one day exchanges will provide 1099s for sales, but
until then, it's the same rules as any other unreported income.

~~~
hkphooey
_> If you obtained stock prior to 2011, and sold it, the IRS has no idea what
the cost basis is_

Any links to this? Isn't it based on FIFO or LIFO and you just have to be
consistent in your approach? Why specifically 2011? Thanks in advance.

~~~
maxerickson
As of 2011 brokerages are required to keep track of cost basis information.

~~~
URSpider94
.. not just keep track, but report the basis to the IRS.

------
jcyr
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
> 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.

------
politician
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?

------
kevinpet
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
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
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
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.

------
timrosenblatt
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
Yes.

------
Xcelerate
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.

------
wizzard
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
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)

------
rch
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
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
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.

------
antr
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
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
_but it applies only to land and buildings ( "real property")_

And, frequently, automobiles, boats, etc

~~~
genericuser
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
It differs from state to state, basically:

* [http://money.howstuffworks.com/personal-finance/personal-inc...](http://money.howstuffworks.com/personal-finance/personal-income-taxes/personal-property-taxes.htm)

------
zacinbusiness
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
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
Ah interesting. Would price volatility make this practice too difficult? Or
would the market eventually reach a basic equilibrium price?

~~~
derekp7
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.

------
Xcelerate
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
How much did you buy them for? That is your reportable loss.

~~~
Xcelerate
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
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)

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

~~~
jboggan
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.

------
Snail_Commando
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)

------
quakkels
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?

~~~
dragonwriter
> 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.

------
csmeder
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
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
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
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?

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

------
rainmaking
I believe "enforceability" is the key word here.

------
vinchuco
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.

------
dscrd
Mm.

Bitcoin owners say that IRS is an illusion.

------
quotha
Ummm Bitcoin is not property o.O

------
mantrax3
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.

------
Eleutheria
Bitcoin says they don't care what the IRS says.

Take that.

