Bitcoin to be taxed as property, not currency by IRS

the_darkness

New Member
Mar 22, 2014
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So for any crypto users in the US, today the IRS announced their approach to taxation of Bitcoin, which will presumably set the precedent for any other cryptocurrency, including Darkcoin: http://blogs.wsj.com/totalreturn/2014/03/25/qa-the-new-irs-rules-on-bitcoin/

Original document: http://www.irs.gov/pub/irs-drop/n-14-21.pdf

The key highlights include:
  • crypto will be treated as property, not currency; hence if you sell a crypto it will be a capital gain
  • mining will count as a trade where you are generating income; you will thus have to treat it as income and may need to pay self-employment tax
  • being paid in coins also will count as income and be taxed accordingly per the market value on date of receipt
  • coins will be valued based on a "reasonable" conversion to USD
  • there are potentially onerous record-keeping issues for people using crypto as currency, as technically any time you exchange crypto for more than your purchase price (e.g. buy at $5 and sell at $10 valuation) you will be incurring capital gains
  • However generally the IRS does in the past has not been interested in payments below $600
  • individuals who did not file taxes on bitcoin profits in the past may be subject to penalty, although a vague penalty relief clause may be available if there were "reasonable" reasons for not filing
How do I see things going?
Hard to say. Treating crypto as property is somewhat good in that it means it will behave like a stock. E.g. if you just hold it over a year you will not realize any tax costs. You only will be taxed if it is sold for fiat. It's less clear how trading alts for bitcoin will be treated; I suspect that would also count as a capital gain. This decision will definitely encourage the use of cryptos more as investments like stocks and less as currencies. There is a silver lining in that currencies are subject to significant regulation, but it does potentially complicate the use of cryptos in commerce. In particular it means that any time you transformed DRK to something else (e.g. alternative coin, goods online, etc.) you will technically have to keep a record. This will make it difficult to justify using cryptos for everyday purchases, as it would be like selling your stock in Google to pay for your morning coffee etc. The info available seems to say they're mostly interested in practice in transfers of $600 or more however so day-to-day purchases may still be possible.

If nothing else it's good that there are clear rules as the biggest risk to cryptos is regulation. The uncertainty around that is likely preventing a lot of people from buying in. If there is a clear rulebook to play by then more people may get interested in crypto opportunities.
 

TanteStefana

Grizzled Member
Foundation Member
Mar 9, 2014
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I took a copy of it and of all my transactions so far. I have to figure out how to determine the value of all my coins from when I first started mining via the first existing exchanges. When I cash these babies in, I want to be sure they don't accuse me of anything I didn't do :p
 

DieCommieScum

Member
Mar 9, 2014
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I think the announcement is of little meaning, personally.

By the books type were likely to report their gains anyway out of an abundance of caution, agorists never were, I don't see how this changes that formula. With this guidance though, I see mandatory 1099's coming down the pike from legit operators like BitPay.
 

LazarusLong10

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Mar 26, 2014
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I have two major questions about the new IRS guidelines. I realize you all probably aren't tax experts, but if anyone knows the answer to either of these, I'd be really grateful.

1. Price increases don't count as capital gains if the coins aren't held as an investment. How do you not hold coins as an investment?

2. You can get big tax breaks as a miner if you consider yourself self-employed rather than a hobbyist. This is big since I plan to build an expensive new rig over the summer and would love to call it a business expense. If you've made a profit for 3 years in a row then you are automatically considered to be self-employed, but that doesn't apply to me. So, how do you declare yourself self-employed? Also, if I don't get ROI on the rig by December (which I won't), can I roll over the deduction to the next year?

In case anyone gets the wrong impression, I hate taxes as much as any hard-core libertarian, but I pay them for the same reason I refrain from driving 100 mph on the interstate - at the moment it's less trouble and less expensive to obey the law - or at least not to flaunt it so flagrantly that I'm almost certain to get caught. The IRS won't care if I make/spend a few hundred dollars in crypto, but a few thousand is likely to get noticed - even DRK.
 

24601

New Member
Mar 22, 2014
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I am actually afraid how it is going to affect the mining. Because mining counts as income, regardless of whether you spend it, put it into cold storage, or trade it for fiat, it puts weird new pressures on the mining economy, doesn't it? If there is a large disincentive to mine crypto, the networks could become vulnerable if hashrates decrease.

I am really ignorant about all this stuff, but as I understand it, could this encourage people to buy with fiat and hold for a while to reduce their capital gains? I could see that as potentially being a positive thing for altcoins, as you'd be more inclined to bet on the longterm.

Thoughts?
 

kirk202

New Member
Jun 24, 2014
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Ogden Utah
I'm not a tax expert either but I'll try and give you an answer. These answers are based on all of the profits/losses being passed just to you as proprietor or an LLC. The IRS website is a good source, but if you call them and ask the same questions 2 or 3 times you'll usually get that many different answers.
1. Price increases don't count as capital gains if the coins aren't held as an investment. How do you not hold coins as an investment?
If you were/are using them to mine, then what you'd make would be considered income. It could be considered a business then you could deduct equipment & expenses. The if you sold you coins and made a profit it would be considered an investment and if held long term has the advantage of lower taxes. The IRS deal with the dollar rising in value directly, only when you make money in the stock market, Forex, etc so they can only tax crypto currency this way. Most Fiat currency devalues so its not a concern to IRS.

2. You can get big tax breaks as a miner if you consider yourself self-employed rather than a hobbyist. This is big since I plan to build an expensive new rig over the summer and would love to call it a business expense. If you've made a profit for 3 years in a row then you are automatically considered to be self-employed, but that doesn't apply to me. So, how do you declare yourself self-employed? Also, if I don't get ROI on the rig by December (which I won't), can I roll over the deduction to the next year?
I think you have to make a profit 3 out of the 5 years otherwise its recognized as a hobby. If your losses exceed the income then you can take up to $3,000 deduction on your personal each year and the amount over the $3,000 is rolled into the next tax year. So, if I filed as a business I'd have 5 years to show 3 years profit. If I was in business for 3 years without being able to show a profit I wouldn't want to file the 4th year as it would raise a red flag with IRS. You should also check with a professional to see how your assests/equipment should be handled, depreciated or expensed.

Hopefully some of this makes sense.
 
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