The IRS and bitcoins
 

How do you have a currency, bitcoins, that can increase in value between the time you receive it for services rendered and when you spend it? How do you track and pay tax on the monetary gain of appreciating currency?

To be legally compliant with the IRS any appreciation in a sold asset must be taxed. Who keeps track of this? Or is every bitcoin transaction an IRS violation?

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if i sell my car for a profit, i don't have to claim that as income.

bitcoin attracts people based on the premise that they don't have to pay taxes or report anything to the IRS and can circumvent government intervention. they somehow think they're gonna change the world or something. they're dreaming. i wonder who they will report to when their bitcoins get stolen from their computer.

:1orglaugh:1orglaugh

ANY gains from sales of personal property/assets must be included in your income for tax purposes.

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To be IRS compliant with a bitcoin transaction you would have to state the value of the bitcoin when acquired, the value when sold, pay tax on the appreciation. Imagine making a rent payment with Apple stock, same thing.

An accounting nightmare that is your responsibility to document on a "first in, first out" basis.

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haha.. really? I think you need a new accountant. Otherwise, i propose we sell the same $300.00 car back and forth between each other for absurd amounts of money so we can avoid income taxes all together. We'll just be two guys who both happened to sell our cars for 100X what they were worth. :)

apparently, i was misinformed when i sold my truck last year. 1st vehicle i sold for a gain.

When you sell your car, only the portion of the selling price that exceeds the adjusted basis of the car is taxable gain. For example, if your car has an adjusted basis of $5,000 and you sell the car for $6,000, you have a gain of $1,000. If your basis is less than or equal to what you paid for the car, you don't have to include the income from the sale on your tax return.

Correct you pay tax on the gain.

In a bitcoin transaction almost every transaction will be for a different amount value wise than the bitcoin was acquired for. This variance on a first in/first out value basis will need to be accounted for to be IRS compliant.

This alone makes bitcoins worthless as a form of payment unless you are trying to scam the system.

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As far as bitcoin payments for services rendered … at the time of payment you would need to value the bitcoin income based on the dollars value that day. That is your taxable income amount for IRS purposes.

Again who in the hell is going to bother doing that? What a bookkeeping nightmare!

If your intention is to avoid IRS guidelines and be off the grid good luck. In the event of an audit almost every transaction can be viewed as tax evasion.

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are bitcoins considered income or capital gains?

Ya think? How old are you? 15?

Correct. Unless its a capital gains issue like selling houses. Even that has changed.

But not to worry folks. uncle sam will find a way.

also, doesn't the irs account for bartering? wouldn't what you describe fall under this category of transactions?

in bartering, the value of a thingie is dynamic right?

If you buy them for speculation they are treated as any other investment. Capital gains kick in if held for a minimum amount of time.

If you take them as payment for goods or services they need to be valued the day they are received and then taxed as ordinary income.

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that was a quote from a tax website.

but no, i am not 15.

obviously, i was incorrect in what i thought and posted in my 1st post, not sure why you feel the need to try and insult someone just because they are misinformed and also already cleared up the confusion.

says a lot more about you than me.

The answer in general to all your questions is this "if you come out ahead, you'll be taxed on it". Additionally, all questions are only relevant to the last 6 months and the most current tax code updates, so few could give you competent answers on questions as the answers change quite frequently.

If you barter, you must report on your tax return the fair market value of the products or services you received.

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my question was in regards to this comment by L

it seems to me that this is comparable to a barter type of transaction where the exchange rate is always dynamic yet the irs allows these and accounts for them.

wouldn't that be the fair market value at the ~ time of transaction or is there another way to handle that?

Bartering comes down to declaring fair market value. Since bitcoins are cashed out at a specific dollar amount everyday current value is easy to pinpoint. So a payment for your services on a given day is declared in the dollar value of that days bitcoin.

Since the legal accounting of value is tied exactly to a dollar amount why bother getting paid in bitcoins? You owe the IRS in dollars.

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isee. i am trying to reconcile your comment though, this one

this seems extreme, based on the current info.

this is why good accountants get paid a fortune, there are probably multiple legal ways to do accounting with bitcoins... you could probably structure it all in such a way, that all income would legally be treated as capital gains...

it's all pretty fascinating to me, i am enjoying learning about it. can't wait to see how it all goes.

It is a mess, I already have to do this. Just filed my corporate year end and you should see all the conversions back and forth from Canadian dollars to US dollars... exchange rate is different every minute. It's a mess.

Would you pay when you convert to cash. It is an exchange until you cash out.

dayn mo ….. Example; I pay you xxx in bitcoins. Based on the days bitcoin value to the dollar that's say $500.00. So your income is $500. Now if the bitcoins change in value before you cash them out or trade them to someone else you need to account for that change in value either as a gain or loss.

Again what an accounting nightmare. And a double nightmare if they lose value.

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It's a taxable exchange based on fair market value at the time of exchange. Any appreciation or depreciation when you go to convert is a separate accounting entry.

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you're allowed to use an average for the exchange rate as far as i know.

i hear ya, there's certainly a level of complexity.

but in your view, you decided bitcoins are worthless and to exchange them is a scam?

To me the accounting mess, volatility and internet funny money classification make them unattractive.

Most getting involved will never declare them as income for services or goods provided and will keep any appreciation as free money. A way to beat the system, so yea I view them as a scam and a tool for scammers. I'll bet the IRS will too.

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you could very well be right on the money.

yep ……..
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Anyone who wants to steal my money... why don't you come do it yourself instead of trying to get some suit to do it for you?

I'll be waiting.

You don't have to come out ahead in order to be taxed by the irs

There is no such thing as scamming the IRS since the IRS IS A SCAM in the first place

Governments and bankers will find a way to get rid of bitcoins- the will not allow any freedom when it comes to currencies. Period.

Pretty sure the people using an anonymous "currency" such as bitcoins are not interested in reporting their activities.

Better just to stay away from them altogether. You don't want any of your gains to be quickly erased.

Kind of reminds me of how the weed shops in CA are not allowed to claim any deductions because the federal government and by extension, the IRS, consider their activities illegal.

So if you make $0 for the year the IRS is still going to tax you?

Free money? Without informing the mafia? Sure. As farm animals to the tax farm, it'd be in our best interest to actually support something that gives us the freedom to trade without a gun pointed at us at all times. Just sayin'