Taxes on Bitcoin

[Number Six]

Zero Hedge has been running a series of articles on "Bitcoin" as it continues to trade well over $1100. The question is, how would it be taxed assuming a speculator made significant profits?

"The capital gain rules for precious metals are very clear, especially if you’re a US taxpayer. But the IRS has literally issued ZERO guidance on Bitcoin.

"If, for example, Bitcoin is considered a ‘currency’ by the IRS, then Bitcoin gains should be taxed as ordinary income according to IRC section 988(a)(1)(A).

"But if Bitcoins are considered to be a long-term investment, such as shares of Google that you hold for more than a year, than it should be taxed at lower capital gains rates.

"And what about if your Bitcoins are stolen? Are such losses deductible like other investment losses? Or would it be treated like personal property as if your car was stolen?

"And what if you’re a US taxpayer holding Bitcoins at an overseas-based brokerage? Would this ‘account’ need to be reported on foreign financial disclosure forms?

"Everything is up in the air. And while the IRS has issued fairly clear guidance on precious metals, they haven’t made a peep about Bitcoin… leaving, once again, the onus on the taxpayer to figure everything out."
http://www.zerohedge.com/news/2013-12-0 ... em-bitcoin

[Arthur Rubin]

Zero Hedge doesn't seem to understand tax law.

In regard capital gains, if it were a currency, it would be illegal, so it should be considered an investment not subject to the "collectible" regulations that precious metals are subject to. (I have no idea whether a Bitcoin would be an allowed investment in an IRA. Comments?)

I see no way a rational person could see a stolen Bitcoin as an investment loss. It would definitely be a theft loss.

As for foreign investment reporting, the IRS hasn't provided guidance, but they haven't provided much guidance for anything other than checking and savings accounts.

[Jeffrey]

Wait, why would it be illegal if it were a currency.

[Cathulhu]

As Arthur has very correctly pointed out, bitcoins would not qualify for capital gain treatment. They aren't shares of stock or real estate, they're electronic currency. Gains and losses on buying and selling would be ordinary income. And if your bitcoins are stolen, that's a theft loss. On personal returns, writing off a theft is an itemized deduction, and subject to some killer limitations. The biggie is that your loss has ten percent of your adjusted gross income subtracted from it, and what's left over is your writeoff. Provided you can itemize.

[Burnaby49]

As Arthur has very correctly pointed out, bitcoins would not qualify for capital gain treatment. They aren't shares of stock or real estate, they're electronic currency. Gains and losses on buying and selling would be ordinary income. And if your bitcoins are stolen, that's a theft loss. On personal returns, writing off a theft is an itemized deduction, and subject to some killer limitations. The biggie is that your loss has ten percent of your adjusted gross income subtracted from it, and what's left over is your writeoff. Provided you can itemize.

That's in the US. We don't have a theft loss deduction in Canada. Something's stole? Tough. Then again we can't deduct mortgage and consumer interest from our taxes either.

Gains on bitcoins up here could be either income or capital depending on the situation. Broadly speaking how gains are classified depends on whether the vendor is in the business of buying and selling properties for gain or is just an investor. One hallmark is whether the property can provide income apart from an increase in its value. Dividends from shares, rental on an apartment . . . The classic example is real property. Somebody buys a large plot of bare land, holds on to it for ten years without deriving any income from it, and sells it for a big gain. He'll be assessed as income. However the taxpayer can (and very often does) go to Tax Court to argue that his intent was long-term investment rather than resale. Planned to build shopping centre, couldn't get financing, dog died, whatever. Sometimes they win, sometimes lose. While there is a very large body of Tax Court decisions on the income v. capital issue there is no real precedence since each case is very much driven by its specific facts.

However it gets complicated because other factors come into play. How long was the property held, any similar transactions? Quite subjective. I'd say bitcoin would tend to be assessed as income because there is no way to derive a return from bitcoin ownership except for an increase in value. All academic speculation, in the real world, who's going to report it unless they have a loss?

[Number Six]

There was quite a controversy at the Lew Rockwell site after Dr. Gary North ran a critical piece about bitcoin as a ponzi scheme and then backers of virtual currency struck back; the controversies may be how it and other products of computer systems should be defined. http://www.lewrockwell.com/2013/12/gary ... s-money-2/

[Arthur Rubin]

Wait, why would it be illegal if it were a currency.

Sorry, what I was thinking was incorrect. 18 U.S.C. § 486 makes it illegal to "utter" or "pass" any gold or silver coin as "current money". It doesn't apply to platinum, palladium, or virtual coins. See the "Liberty Dollar" thread for more details.

[notorial dissent]

Bitcoin really isn't any different than having a gift card, either specific or general. The difference is that using it is more complicated, and if you lose it, you've lost it. So, the illegality in Bitcoin, is not in and of itself, but in the possible uses of it. That Bitcoin has appreciated over time was a bit unexpected, but it seems it has, and it has also become the target of a major scam as well, in that one of the Silk Road replacements vanished with all the money that was in that system at that time, and who knows what other information as well. If I had been buying something through that site, I think I would be more than a bit concerned, and not just about what they lost when it disappeared.

I haven't heard of any actual hacking of the system, but if it hasn't already, it will sometime in the near future.

[Number Six]

The hacking/heist has been to the tune of around a hundred million dollars in the last few days:

http://www.coindesk.com/sheep-marketpla ... -bitcoins/

http://www.washingtonpost.com/blogs/the ... d-hacking/

Not unexpected.

[notorial dissent]

I hadn't heard about the other incidents, but no great surprise.

[Burzmali]

I haven't heard of any actual hacking of the system, but if it hasn't already, it will sometime in the near future.

The actual method of hacking the system itself is well known and part of the design. If you possess a significant % of the hashing power, you have a chance of being able to insert fake transactions. On the flip side, the more people that use bitcoins, the higher the hashing rate and the harder it is to hack.

[notorial dissent]

Well, isn't that just extra special clever, a super duper encrypted cyber currency with a built hacker's entry point.

[Burzmali]

Well, isn't that just extra special clever, a super duper encrypted cyber currency with a built hacker's entry point.

Ask they say, the risks you know are the risks you can prepare for. I think it is telling that with billions of dollars worth in circulation, no one has found a flaw in the algorithms large enough to drive an exploit through. The fundamental algorithms are all open source, everyone in the world can look at them and hunt, should they choose. The current hashing rate is high enough that it would take governmental levels of resources to attempt to force false transactions through, and even then it is quite possible that there is unused resources in place to counter such an attempt.

[Philipjones866]

The big reason why most casino patrons start to play at bitcoin casinos is because of their huge instant tax-free payouts. BetCoin™ for example features this 100% tax free deals; plus, most bitcoin casino has generous bonuses and commissions.

[Famspear]

I don't follow the saga of Bitcoin, but I just saw this headline from CNN:

Mt.Gox site disappears, Bitcoin future in doubt

http://money.cnn.com/2014/02/25/technol ... x-bitcoin/

[Arthur Rubin]

The big reason why most casino patrons start to play at bitcoin casinos is because of their huge instant tax-free payouts. BetCoin™ for example features this 100% tax free deals; plus, most bitcoin casino has generous bonuses and commissions.

Tax free? Not if you get caught!

[Fmotlgroupie]

I don't follow the saga of Bitcoin, but I just saw this headline from CNN:

Mt.Gox site disappears, Bitcoin future in doubt

http://money.cnn.com/2014/02/25/technol ... x-bitcoin/

It seems like the real bitcoin casinos are exchanges like Mt Gox...

[notorial dissent]

My sense, is that if the casinos are using bitcoin, then they probably aren't legal to begin with, and the suckers clients have about the same chances they used to in any back room gambling establishment, i.e. none. If the casinos aren't reporting the winnings, they would be in violation of the tax reporting laws at the very least, and probably a whole host of others outside my experience.

The problem with handing your bitcoin over to an exchange or a bank, is that at that point you lose control of it, apparently in recent case, for good.

A point of curiosity, if you make a purchase from someone and transfer the bitcoin, what recourse do you have when you don't get what you supposedly paid for?

[Burzmali]

My sense, is that if the casinos are using bitcoin, then they probably aren't legal to begin with, and the suckers clients have about the same chances they used to in any back room gambling establishment, i.e. none. If the casinos aren't reporting the winnings, they would be in violation of the tax reporting laws at the very least, and probably a whole host of others outside my experience.

To be fair, btc junkies are crypto-nerds at heart. A fair number of the casino games that have turned up are "provably" fair. For example, in a game of Craps, the dice roll is published (in encrypted form) before bets are closed. After the roll is revealed, the key for the encrypted dice roll is displayed so that the players can confirm that roll wasn't biased based on the bets on the table. Finding a collision (a second key with a different result) would be impossible in the time span of the game.

A point of curiosity, if you make a purchase from someone and transfer the bitcoin, what recourse do you have when you don't get what you supposedly paid for?

Same as if you pay cash for something on the Internet by mailing the money to a PO box.

[wserra]

The big reason why most casino patrons start to play at bitcoin casinos is because of their huge instant tax-free payouts.

"[H]uge instant tax-free payouts"? Why, just like bank robberies.