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Factoring bitcoin in taxation

Anytime you exchange bitcoin for dollars, or any other national fiat money you are creating a record.

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The following content was written by Babylon on July 17, 2010, 09:05:42 PM in the thread Taxation. All content is owned by the author of the bitcointalk.org post. (original)


I am not completely clear on tax law, and I know it varies from place to place.  However, for those of you who feel bitcoin is a way to avoid taxes, it’s anonymous nature may make this easier but anytime you exchange bitcoin for dollars, or any other national fiat money you are creating a record and i would strongly suggest factoring that into your income for taxation.  I know that the eventual goal is a bitcoin economy which does not require exchange to or from another currency, but at the moment that is not the case and the fact that the tax man will get you if you pretend as if income from sale of bitcoins did not occur is something people should remember.

The following content was written by FreeMoney on July 17, 2010, 10:31:37 PM in the thread Taxation. All content is owned by the author of the bitcointalk.org post. (original)


The bogymen you are talking about are not completely clear on the 10k page tax law (in US) either.


The following content was written by Babylon on July 18, 2010, 02:56:25 AM in the thread Taxation. All content is owned by the author of the bitcointalk.org post. (original)


I am not completely clear on tax law, and I know it varies from place to place.  However, for those of you who feel bitcoin is a way to avoid taxes, it’s anonymous nature may make this easier but anytime you exchange bitcoin for dollars, or any other national fiat money you are creating a record and i would strongly suggest factoring that into your income for taxation.  I know that the eventual goal is a bitcoin economy which does not require exchange to or from another currency, but at the moment that is not the case and the fact that the tax man will get you if you pretend as if income from sale of bitcoins did not occur is something people should remember.

Ed and Elaine Brown 
Waco
Ruby Ridge

et all….. Wink


Right, trying to find a way to dodge taxes is generally not a good idea.

The following content was written by mtp on July 18, 2010, 03:25:02 AM in the thread Taxation. All content is owned by the author of the bitcointalk.org post. (original)


Bitcoins are digital bits, hence a digital good, when you give that to someone in exchange for something like other currencies, you are creating a sale and thus a taxable event in the eyes of the IRS, that money you have received is a payment for your digital good and thus taxable income.

Bitcoins as digital bits however provided to someone else as payment (eg. for a service or good), that could be construed as barter income to the person whom received payment however it would be a very hard stretch that would require a centrally stated and official value in a manner which has a comparable exchange rate.

Right now Bitcoin has the advantage here, there is no central authority however, if pressed, I’m sure any government could attach an intrinsic exchange rate to the currency based on the established design of there only being X possible coins in circulation which would have two advantages for Bitcoin legitimacy, one, it establishes a daily reporting rate requirement for the exchange of BTC to the currency of that government (eg. XX BTC to YY USD), two, it would make Bitcoin a legitimately recognized form of payment in the eyes of that government and force acceptance as by setting that rate and required reporting means that it becomes an officially recognized form of currency in that country and, three, it would mean that Bitcoin would have to be developed to be used in portable and mobile formats, perhaps best done through BTC bank support wherein you have a debit card loaded with BTC which can pay in both BTC and native currency with that same BTC based on the exchange rate.

To you as a service or goods provider accepting BTC now, you are simply giving away these services or goods and at this time, based on current tax law, means you get to declare them as a loss until the government can find a means of establishing a rate of exchange which starts a whole new level for BTC.

For the record I am not a lawyer, nor tax professional and thus the views I state are only based upon my personal experience and should not be taken into practice without consulting a proper tax attorney or accountant.

The following content was written by Babylon on July 18, 2010, 03:33:21 AM in the thread Taxation. All content is owned by the author of the bitcointalk.org post. (original)


Bitcoins are digital bits, hence a digital good, when you give that to someone in exchange for something like other currencies, you are creating a sale and thus a taxable event in the eyes of the IRS, that money you have received is a payment for your digital good and thus taxable income.

Bitcoins as digital bits however provided to someone else as payment (eg. for a service or good), that could be construed as barter income to the person whom received payment however it would be a very hard stretch that would require a centrally stated and official value in a manner which has a comparable exchange rate.

Right now Bitcoin has the advantage here, there is no central authority however, if pressed, I’m sure any government could attach an intrinsic exchange rate to the currency based on the established design of there only being X possible coins in circulation which would have two advantages for Bitcoin legitimacy, one, it establishes a daily reporting rate requirement for the exchange of BTC to the currency of that government (eg. XX BTC to YY USD), two, it would make Bitcoin a legitimately recognized form of payment in the eyes of that government and force acceptance as by setting that rate and required reporting means that it becomes an officially recognized form of currency in that country and, three, it would mean that Bitcoin would have to be developed to be used in portable and mobile formats, perhaps best done through BTC bank support wherein you have a debit card loaded with BTC which can pay in both BTC and native currency with that same BTC based on the exchange rate.

To you as a service or goods provider accepting BTC now, you are simply giving away these services or goods and at this time, based on current tax law, means you get to declare them as a loss until the government can find a means of establishing a rate of exchange which starts a whole new level for BTC.

For the record I am not a lawyer, nor tax professional and thus the views I state are only based upon my personal experience and should not be taken into practice without consulting a proper tax attorney or accountant.

Yeah, the whole barter aspect (which is what it is, not giving the product away) is where taxation gets complex.  I certainly would not write the product off as a loss, although not mentioning the bitcoins you received might be ok.  My main point was that if you sell bitcoins for another currency it would be abysmally foolish not to report that as taxable income.

The following content was written by mtp on July 18, 2010, 04:09:14 AM in the thread Taxation. All content is owned by the author of the bitcointalk.org post. (original)


Yeah, the whole barter aspect (which is what it is, not giving the product away) is where taxation gets complex.  I certainly would not write the product off as a loss, although not mentioning the bitcoins you received might be ok.  My main point was that if you sell bitcoins for another currency it would be abysmally foolish not to report that as taxable income.
Perhaps you are right given you have received digital product (coin) however how would you declare this to the IRS as a service provider?

Would it be an exchange of services for product? Your digital coins (a digital product) for my services? At what rate would that be declared at for loss or gain? My services sell for say $19.99, you gave me 50 BTC, would that be taxed at $19.99 or declared at the rate of BTC to the USD as it is a form of currency you accept, where is the rate for BTC officially? If going on a transactional basis you have to look at the complications there, my rate is not going to be the same as another service provider’s rate.

If I took 200 transactions each with different BTC payments you have to consider (especially if price varies) which is more value for loss and gain purposes and which incurs the tax if any applicable and without an established rate officially recognized, it can incur numerous taxation issues. You do an exchange at $1 per 2 BTC, I do one at $1 per $1 BTC, for the IRS this disparity moves that your rate and mine are purely individual however if I say the rate is $0.25 per 1 BTC then I say I sold it at a loss as that would come to about $5 so then I have a loss of $14.99 I can declare. Repeat that for 200 transactions, do you think the IRS would accept that or would they go for the throat and try to establish a rate more closer to my price as barter income at a loss is a full writeoff.

Of course they could scapegoat to say it’s barter hence an equal trade but then where is the tax for them? You traded something for X and you got something at the same value of X, no tax gain, no tax loss… just a lot more paperwork for you and them to go through.

Isn’t tax law fun?

The following content was written by Babylon on July 18, 2010, 04:20:41 AM in the thread Taxation. All content is owned by the author of the bitcointalk.org post. (original)


Yeah, the whole barter aspect (which is what it is, not giving the product away) is where taxation gets complex.  I certainly would not write the product off as a loss, although not mentioning the bitcoins you received might be ok.  My main point was that if you sell bitcoins for another currency it would be abysmally foolish not to report that as taxable income.
Perhaps you are right given you have received digital product (coin) however how would you declare this to the IRS as a service provider?

Would it be an exchange of services for product? Your digital coins (a digital product) for my services? At what rate would that be declared at for loss or gain? My services sell for say $19.99, you gave me 50 BTC, would that be taxed at $19.99 or declared at the rate of BTC to the USD as it is a form of currency you accept, where is the rate for BTC officially? If going on a transactional basis you have to look at the complications there, my rate is not going to be the same as another service provider’s rate.

If I took 200 transactions each with different BTC payments you have to consider (especially if price varies) which is more value for loss and gain purposes and which incurs the tax if any applicable and without an established rate officially recognized, it can incur numerous taxation issues. You do an exchange at $1 per 2 BTC, I do one at $1 per $1 BTC, for the IRS this disparity moves that your rate and mine are purely individual however if I say the rate is $0.25 per 1 BTC then I say I sold it at a loss as that would come to about $5 so then I have a loss of $14.99 I can declare. Repeat that for 200 transactions, do you think the IRS would accept that or would they go for the throat and try to establish a rate more closer to my price as barter income at a loss is a full writeoff.

Of course they could scapegoat to say it’s barter hence an equal trade but then where is the tax for them? You traded something for X and you got something at the same value of X, no tax gain, no tax loss… just a lot more paperwork for you and them to go through.

Isn’t tax law fun?

My point was, ok, let’s say you buy 5 minutes of tarot card reading from me.  That comes to 50 bitcoins at the current rate.  No tax declaration for the moment.  I want to use those coins to get something that isn’t being sold for bitcoin at the moment, so I sell 50 bitcoins to someone for $2.50.  $2.50 is the income that I had better declare.

Now if I take that 50 bitcoins and turn around and buy some computer parts off bitlist, well, then it moves into the complex area you are taking about.

The following content was written by mtp on July 18, 2010, 04:42:00 AM in the thread Taxation. All content is owned by the author of the bitcointalk.org post. (original)


My point was, ok, let’s say you buy 5 minutes of tarot card reading from me.  That comes to 50 bitcoins at the current rate.  No tax declaration for the moment.  I want to use those coins to get something that isn’t being sold for bitcoin at the moment, so I sell 50 bitcoins to someone for $2.50.  $2.50 is the income that I had better declare.

Now if I take that 50 bitcoins and turn around and buy some computer parts off bitlist, well, then it moves into the complex area you are taking about.

Yes, you are correct, based on my knowledge and experience with the IRS and tax law as a business owner, your example is correct however should be run by a tax attorney or CPA first.

It’s my area where I’m having a bit of confusion and problem, I want to accept BTC as a valid form of payment for services…

If it comes under barter law, perhaps the best scenario then would be to establish my once per year rate and hold that rate as I would for prices normally, for instance in my example I could set the rate at $0.25 == 1 BTC which means my pricing for BTC would be four times the charge in USD for equality however for marketing, I could sell at a loss based on that rate and be all perfectly fine in the eyes of the IRS (those scoundrels, making me think this much for something which should be simple) as the rate was established by me in an official manner recognized by my company and thus in turn can be formally recognized in my case by the IRS and held for a sustained period which contrasted to the value of the USD to say the EUR is a miracle of taxation calculation.

This however would place all users paying under BTC into a barter agreement which can complicate issues further as you and I would both have to know details of one another thus breaking anonymity as it would fall under a barter exchange, you have BTC and I’m setting the rate and this makes my company a barter exchange: http://www.irs.gov/businesses/small/article/0,,id=188095,00.html

The flipside of this is if I go on a rate to be established by someone else (eg. the market exchange), I can use 1099-MISC or my normal 1040C however even as income the sales would be at a loss in BTC still and thus I can still declare loss for the sales in a recurring manner which would probably still get the IRS up in knots trying to figure out BTC to USD.

The following content was written by Babylon on July 18, 2010, 04:51:21 AM in the thread Taxation. All content is owned by the author of the bitcointalk.org post. (original)


I don’t see how you can declare a loss on sold services.  Perhaps you are selling your services below market value when you sell them for bitcoin, but you are still not losing money.  Now if you are paying someone else to perform those services, then perhaps you are losing money.  Theoretically your company could be paying you to perform that service, but in that case you need a source of income to pay yourself with, bitcoins don’t count if you are paying yourself in dollars.

The following content was written by Bitcoiner on July 18, 2010, 04:54:59 AM in the thread Taxation. All content is owned by the author of the bitcointalk.org post. (original)


Quote
Isn’t tax law fun?

http://en.wikipedia.org/wiki/Agorism

Disclaimer: I do not recommend anyone break the law. You do so at your own risk. Grin

The following content was written by mtp on July 18, 2010, 05:19:25 AM in the thread Taxation. All content is owned by the author of the bitcointalk.org post. (original)


Let’s put this to numbers…

Rate of BTC to USD = $0.25 (defined through whatever means of rate determination)

Service cost to users in USD $2
Service cost to users in BTC 4
Service cost to me in USD $1.50
Service cost to me in BTC 6

That makes it a loss in BTC to USD for that same plan thus a tangible loss, could I raise prices? Yes. Could I drop BTC? Yes. Is it a demonstrable loss in profit on that item? Yes. Is it a demonstrable loss in profit on that item according to Fair Market Value? Yes (same service sold in USD).

Loss in any currency can be declared as loss, it’s done when you price in multiple currencies, for instance, EUR vs. USD, if the EUR tanks at the time of conversion to USD, you’ve incurred a tangible loss.

The following content was written by mtp on July 18, 2010, 07:22:34 AM in the thread Taxation. All content is owned by the author of the bitcointalk.org post. (original)


I have a small business but I dont have to declare income untill I earn a certain amount in profit each year.Untill then it is considered a “hobby” which remains untaxed.Then I can claim any losses from the preceeding three years to reduce the amount payable – if any.I hope and pray I have the problem of having to declare bitcoin income. Cheesy

I have an LLC and three DBAs setup for the LLC, I definitely clear hobby maximum per year.

That’s why I’m looking at this now, I think tomorrow (today being Sunday) I’ll call my accountant to see what he says about it, bet it’ll be one of those two hour explain what I’m doing and what it is and make it basic conversations for a 30 second answer and summary.

EDIT:

If anyone is interested, review publication 525 from the IRS, under Barter it states:

Quote
Example 3. You are self-employed and a
member of a barter club. The club uses credit
units as a means of exchange. It adds credit
units to your account for goods or services you
provide to members, which you can use to
purchase goods or services offered by other
members of the barter club. The club subtracts
credit units from your account when you receive
goods or services from other members. You
must include in your income the value of the
credit units that are added to your account, even
though you may not actually receive goods or
services from other members until a later tax
year.

In my case if I accept it at the rate of $0.25 USD to 1 BTC that means I can declare losses, gains, etc… as normal on my normal tax forms without further requirements at this time.

BTC not being formal cash (think LR, etc…) and membership being acceptance, generation, etc… of BTC via client, this I believe would cover it so the .05 BTC I got earlier (thanks faucet) would be declared as income and taxed measured in United States dollars based on the conversion rate of the foreign currency as of the date of the contract for sale.

So as I’m viewing the rate at $0.25 per BTC and accepting it at that rate, I have a tax liability of $0.0125 for that income, if going by my other form of payment which is via Paypal the current ask as of close is $0.075 which amounts to $0.00375 which is rounded up to the whole cent so $0.01.

This of course means, if I’m selling something in BTC for a price less than I pay to provide it, I can declare a loss however does not mean I can declare a loss when stacked against the USD at the alternative price I charge in that currency.

…. I believe now, a nap is in order.

Editor-in-chief and serial coder & blogger.

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