MAJOR IRS Ruling today

Charles mentioned at the London meetup that Bitcoin would be good for securely storing your savings, or something along those lines. After today's IRS ruling his words are especially meaningful for those of us in the U.S. and possibly other countries to follow.

Quote from article at link below: "Today’s IRS guidance will provide certainty for Bitcoin investors, along with potential income-tax liability that wasn’t specified before. 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."

The article aslo says: "The ruling takes effect immediately and covers past and future transactions and tax returns." This is very wrong for the IRS to try to do as there is no way people would have kept records on all their spending, nor will they keep those kinds of records in the future.

This is not a good thing as far as using Bitcoin as a currency, however, it IS a good thing for those utilizing bitcoin to securely hold their savings and for those who trade bitcoins as they can utilize capital gains treatment rather than the income tax treatment which traders of foreign currencies have to use in the U.S.


http://www.bloomberg.com/news/2014-03-25/bitcoin-is-property-not-currency-in-tax-system-irs-says.html

BITCN
IRS: Bitcoin is property rather than currency, can be taxed
The IRS says it will apply rules used to govern stock trades and barter transactions, rather than currency, towards Bitcoin (BITCN). Bloomberg notes the ruling means a $2 cup of coffee purchased via Bitcoins originally bought for $1 would yield a $1 capital gain for the coffee buyer, and $2 of income for the seller. As with stocks, Bitcoins held for more than a year would be subject to a lower tax rate (capital losses can be deducted from gains), and different tax rules will apply for dealers.Coinbase is currently showing a Bitcoin bid-ask spread of $583.04-$586.04.

Hopefully Ethereum can address tax challenges. Thanks to all the Ethereum guys for working to make the world a better place!

Comments

  • jw1jw1 Member Posts: 27
    edited March 2014
    Hmm.. this is interesting. There are even tax implications for mining. I think the real question here is whether "ether" will be a "convertible virtual currency". Check out the verbiage from the IRS doc http://fincen.gov/statutes_regs/guidance/pdf/FIN-2013-G001.pdf :

    "The Internal Revenue Service (IRS) is aware that “virtual currency” may be used to pay
    for goods or services, or held for investment. Virtual currency is a digital representation
    of value that functions as a medium of exchange, a unit of account, and/or a store of
    value. In some environments, it operates like “real” currency -- i.e., the coin and paper
    money of the United States or of any other country that is designated as legal tender,
    circulates, and is customarily used and accepted as a medium of exchange in the
    country of issuance -- but it does not have legal tender status in any jurisdiction.
    Virtual currency that has an equivalent value in real currency, or that acts as a
    substitute for real currency, is referred to as “convertible” virtual currency"

    Would ether, in and of itself (i.e. before any conversion to an altcoin), be a "convertible virtual currency" then? Or would ether only be considered a "convertible virtual currency" when the first exchange allows conversion of ether directly to USD? It is just that if ether is only convertible to USD after first being converted to an altcoin like bitcoin, I'm not so sure it is a "convertible virtual currency". So comments welcome!
  • maidenlakemaidenlake Member Posts: 44 ✭✭
    I would assume, perhaps wrongly, that the IRS would treat ether the same as bitcoin... as property, in which case I suppose there would be ramifications for every level of use / investment.
  • maidenlakemaidenlake Member Posts: 44 ✭✭
    Here are a few excerpts from a question / answer article from WSJ. Link below excerpts.

    Today the Internal Revenue Service issued Notice 2014-21 in an effort to clarify the tax treatment of bitcoin and other virtual currencies before the April 15 tax deadline. The guidance applies to both current and past transactions involving virtual currencies. Here’s a summary of what the IRS said.

    How is virtual currency treated for federal tax purposes?

    Bitcoin and other virtual currencies are treated as property, not as a currency. Therefore, an investor who buys bitcoin would typically have a capital gain or loss when it’s sold but wouldn’t have foreign-currency gains and losses.

    For 2014, the top rate on long-term capital gains is 23.8% for most joint filers with adjusted gross income above $457,600 ($406,750 for singles).

    If bitcoin had been ruled a currency, it would have been subject to a complex tax regime in which 60% of profits are considered capital gains and 40% are considered ordinary gains for most taxpayers, according to Jonathan Horn, a certified public accountant practicing in New York.

    Does a person who makes a payment using bitcoin have a gain or loss on the transaction?

    This clarification means that people who use bitcoin in small amounts, such as to buy a meal, could face onerous record-keeping issues.

    http://blogs.wsj.com/totalreturn/2014/03/25/qa-the-new-irs-rules-on-bitcoin/
    ----------------------------------------------------------------------------------
    I hope tax implications around the world will be at least somewhat settled soon so that the cryptocurrency community can adapt and move on down the road to focus on more lofty issues.
  • tym4ttym4t Nagata-ku, Kobe-shi, Hyogo-ken, JapanMember Posts: 71 ✭✭✭
    Could this ruling be applied to other types of in game virtual currencies like Second Life's Linden Dollars or WoW gold? Both of those have existing online exchanges that people could convert fiat to and from. It seems like every software based token that can be exchanged for fiat would fall under this ruling. Should I start adding my SWTOR credits as a line item in my federal tax return?
  • TuskTusk Member Posts: 33
    edited June 2014
    Sorry I'm not familiar with US Tax codes, If Bitcoin and other virtual currencies are treated as property, not as a currency. Is the capital gain apply only when the virtual currencies are converted to recognised currency like USD, or does the capital gain apply when you bater it for any other goods or service. If only the former, then there is no tax liability as long as you stay in virtual currencies and don't convert to USD or Fiat currency? hopefully someone can clarify this for me thanks
  • maidenlakemaidenlake Member Posts: 44 ✭✭
    Here is a link to the IRS publication and quotes from it below the link.

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

    SECTION 3. SCOPE
    In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.

    SECTION 4. FREQUENTLY ASKED QUESTIONS

    Q-1: How is virtual currency treated for federal tax purposes?

    A-1: For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.

    Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?

    A-6: Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency. See Publication 544, Sales and Other Dispositions of Assets, for information about the tax treatment of sales and exchanges, such as whether a loss is deductible.

    Q-7: What type of gain or loss does a taxpayer realize on the sale or exchange of virtual currency?

    A-7: The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset. See Publication 544 for more information about capital assets and the character of gain or loss.
  • WillWill Member Posts: 2
    Maybe regulation will encourage adoption. Still, I agree that this isn't good for BTC as a currency. What I'm wondering is just how elastic the term "convertible virtual currency" is.
  • maidenlakemaidenlake Member Posts: 44 ✭✭
    I wonder the same thing, Will. The market of "convertible virtual currencies" had to expand significantly before the government even took notice. It is now in the next stage of the government making decisions which will positively or negatively impact its future growth. Glad to see Japan recognizing that allowance for growth is called for rather than regulation.
  • wetplantwetplant Member Posts: 16
    In the US, the next stage of regulation is likely by the CFTC (U.S. Commodity Futures Trading Commission) for any contracts involving Bitcoins (i.e., futures, swaps, options, and anything resembling a prediction market). The first wave of regulation will likely implicate Bitcoin to fiat contracts. Ultimately, if the CFTC wanted to, it could regulate bitcoin to bitcoin contracts. Fortunately, forward contracts maybe spared (although the distinction between a forward and a future is murky).
  • maidenlakemaidenlake Member Posts: 44 ✭✭
    Very interesting, @wetplant. Ramifications of taxation and regulation will occur (including price swings), but just as Bitcoin (and others) rebounded after the aforementioned IRS ruling and other bad news, future blows in the form of regulation, etc. will not hinder growth for long, in my opinion. Thanks for your input which I had not considered prior to reading your post.
  • wetplantwetplant Member Posts: 16
    The cat is out of the bag. But, these are the roadblocks that existing companies will seek to use to slow down and try to regain control of the growth.
  • maidenlakemaidenlake Member Posts: 44 ✭✭
    Good point, @wetplant, and it is good to keep in mind what may transpire in the next phase. If users / traders are mentally prepared for what is to come perhaps they will not overreact.
  • CryptoWalletiraCSCryptoWalletiraCS Member Posts: 2
    Well everything these days is being taxed, so i'm really expecting that bitcoin will be taxed in time.
  • mbrandombrando Member Posts: 19
    edited February 10
    Hello,

    So for the calculation of gain or loss, when mining currency, when is the currency considered born or live since the mining process yields fractions of a currency per ms, sec, min, hour, day etc. What is the date of ownership used to calculate gain or loss on date ownership is transferred?

    When a stock is bought you have to buy one share. However, crypto currency that is mined is created and used in fractions. I'm trying to get my head around how determine gain or loss.

    I found my answer here:

    FIFO rules should be optional. You should be able to choose between “First in First Out” FIFO and “Last in Last Out” LIFO. https://cryptocurrencyfacts.com/fifo-rules-and-cryptocurrency/

    Thanks,
    Mike
  • CryptoWalletiraCSCryptoWalletiraCS Member Posts: 2
    IRS already is trying to hunt its tax evasions via the blockchain, maybe in the near future everyone is already taxed.

    Here is the link for the full article: https://www.cryptowalletira.com/news/tax-evasion-hunt-blockchain/
  • Ericjh801Ericjh801 Utah, USAMember Posts: 360 ✭✭
    edited February 20
    Pay your taxes, problem solved.

    I personally use https://bitcoin.tax/r/2XpGLoYcZ to help figure mine out. It works and it's not that expensive.
  • lwadz88lwadz88 Member Posts: 17
    I want to be just as law abiding as the last person...but the IRS is going to have a really hard time tracking down hundreds of "coffee" purchases, determining cost basis, and all the works for millions of people.
  • mbrandombrando Member Posts: 19
    They won't track down coffee purchase. They will just make their own estimated tax in their favor.
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