[USA] IRS Declares Virtual Currency to Be Property, Not Currency

[Stan]

But if you barter trade something that's worth $1500 for something else that's worth $1500, how is that a gain?

If you buy something for 10¢ and use it later to buy something that is worth $10,000, then under IRS rules for barter, you have to pay tax on the $9,999.90 gain.

See above, it is a Like-Kind Exchange and you can defer taxes on it.  You can do a Like-Kind Exchange for capital property that is not one of the excluded categories.  Virtual currencies are not one of the excluded categories.

Stan's point above about BitAssets is based on the idea of Like-Kind Exchange, which I am hoping will pass the Laugh Test.  It should, as BitAssets are like Ziploc bags with different amounts of poker chips in them. One kind has $1 worth, another kind €1, yet another kind ¥1 worth, etc., but they all are just little plastic bags containing the same kind of poker chip.

Buying a Lambourghini with some bitcoins that one bought for 5¢ each a few years ago obviously would not be a Like-Kind Exchange.

Actually, the more I think about it the more I'm viewing XTS as a black box.  Like stock in a single company, I don't need to know which departments were profitable or whether the managers moved funds around between departments.  I own the stock and I pay taxes when I sell it based on how well those departments did collectively while I owned the company.  If it has been classified as property, then all that activity under the hood is just making improvements or depreciation to the value of the property which is not realized until actually sold.

[bitbadger]

But if you barter trade something that's worth $1500 for something else that's worth $1500, how is that a gain?

If you buy something for 10¢ and use it later to buy something that is worth $10,000, then under IRS rules for barter, you have to pay tax on the $9,999.90 gain.

See above, it is a Like-Kind Exchange and you can defer taxes on it.  You can do a Like-Kind Exchange for capital property that is not one of the excluded categories.  Virtual currencies are not one of the excluded categories.

Stan's point above about BitAssets is based on the idea of Like-Kind Exchange, which I am hoping will pass the Laugh Test.  It should, as BitAssets are like Ziploc bags with different amounts of poker chips in them. One kind has $1 worth, another kind €1, yet another kind ¥1 worth, etc., but they all are just little plastic bags containing the same kind of poker chip.

Buying a Lambourghini with some bitcoins that one bought for 5¢ each a few years ago obviously would not be a Like-Kind Exchange.

No, trading bitcoins for a Lamborghini would definitely not be a Like-Kind Exchange.  The IRS rules are very specific about Like-Kind Exchanges.  Even trading a pickup truck for a Lamborghini would not constitute a like-kind exchange, although trading a Ferrari for a Lamborghini would be a like-kind exchange.  It is my interpretation that standard crypto-currencies (i.e., those not explicitly tied to outside assets) qualify for like-kind exchanges, as they are not on the excluded list (see quoted section below).

I am not sure about BitAssets though.  In particular, BitUSD might constitute a "debt" or IOU, which is equivalent to money, so therefore any trade resulting in the transfer of BitUSD could constitute a "sale" which is a taxable event.  (I know that Ripple's implementation of USD trading involves the explicit creation of IOU-style USD instruments by third parties.) And some BitAssets might correspond with shares of stock, which are specifically excluded from Like-Kind Exchanges, so trades in and out of those BitAssets might be taxable events as well.  I think that it will depend on the BitAssets in question, but IMO anybody trading in BitAssets should be prepared to fully document all of their trades and pay taxes on them accordingly.

I do not think that the argument that all BitAssets are essentially the same financial instrument (i.e., they are all BitShares) will pass the smell test.  If people start using Bitcoin Colored Coins to represent interests in real estate, there is obviously a difference between a Colored Coin of nominal denomination 0.01BTC which carries an ownership interest in a house, and standard BTC used as a currency.  Trading 100 BTC for that Colored Coin would technically just be trading BTC for BTC, but the addition of real estate makes it obviously not a Like-Kind Exchange.

What property qualifies for a Like-Kind Exchange?

Both the relinquished property you sell and the replacement property you buy must meet certain requirements.

Both properties must be held for use in a trade or business or for investment.   Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.

Both properties must be similar enough to qualify as "like-kind."  Like-kind property is property of the same nature, character or class.  Quality or grade does not matter. Most real estate will be like-kind to other real estate.  For example, real property that is improved with a residential rental house is like-kind to vacant land.  One exception for real estate is that property within the United States is not like-kind to property outside of the United States.  Also, improvements that are conveyed without land are not of like kind to land.

Real property and personal property can both qualify as exchange properties under Section 1031; but real property can never be like-kind to personal property. In personal property exchanges, the rules pertaining to what qualifies as like-kind are more restrictive than the rules pertaining to real property.  As an example,  cars are not like-kind to trucks.

Finally, certain types of property are specifically excluded from Section 1031 treatment. Section 1031 does not apply to exchanges of:

    Inventory or stock in trade
    Stocks, bonds, or notes
    Other securities or debt
    Partnership interests
    Certificates of trust

http://www.irs.gov/uac/Like-Kind-Exchanges-Under-IRC-Code-Section-1031

Once again, I am not an accountant or other financial or legal professional, and the information in this post does not constitute legal, accounting, or other professional advice.

[CWEvans]

But if you barter trade something that's worth $1500 for something else that's worth $1500, how is that a gain?

If you buy something for 10¢ and use it later to buy something that is worth $10,000, then under IRS rules for barter, you have to pay tax on the $9,999.90 gain.

See above, it is a Like-Kind Exchange and you can defer taxes on it.  You can do a Like-Kind Exchange for capital property that is not one of the excluded categories.  Virtual currencies are not one of the excluded categories.

Stan's point above about BitAssets is based on the idea of Like-Kind Exchange, which I am hoping will pass the Laugh Test.  It should, as BitAssets are like Ziploc bags with different amounts of poker chips in them. One kind has $1 worth, another kind €1, yet another kind ¥1 worth, etc., but they all are just little plastic bags containing the same kind of poker chip.

Buying a Lambourghini with some bitcoins that one bought for 5¢ each a few years ago obviously would not be a Like-Kind Exchange.

[CWEvans]

I don't live in the USA, so I'm not familiar with the laws there, but I don't understand how bitcoin can be seen as property.

Bitcoin is owned by no one, the keys to the network are found and free. Although the keys allow manipulation of corresponding entries on the public digital ledger, there is no real "ownership" involved. It just so happens that people are more easily convinced to operate in your favour with the help of money, but that favourable position is not your personal property. As I see it.

I think all the analogies with gold have come back to bite the bitcoin-users.

Tax officials in many countries are treating the units that the digits in software wallets represent as things that have value.

The accounting for holdings of PTS, BTS, etc. is pretty straightforward, and now anyone operating in the USA has had a major source of uncertainty removed.

[JoeyD]

I don't live in the USA, so I'm not familiar with the laws there, but I don't understand how bitcoin can be seen as property.

Bitcoin is owned by no one, the keys to the network are found and free. Although the keys allow manipulation of corresponding entries on the public digital ledger, there is no real "ownership" involved. It just so happens that people are more easily convinced to operate in your favour with the help of money, but that favourable position is not your personal property. As I see it.

I think all the analogies with gold have come back to bite the bitcoin-users.

[bitbadger]

But if you barter trade something that's worth $1500 for something else that's worth $1500, how is that a gain?

If you buy something for 10¢ and use it later to buy something that is worth $10,000, then under IRS rules for barter, you have to pay tax on the $9,999.90 gain.

See above, it is a Like-Kind Exchange and you can defer taxes on it.  You can do a Like-Kind Exchange for capital property that is not one of the excluded categories.  Virtual currencies are not one of the excluded categories.

[CWEvans]

But if you barter trade something that's worth $1500 for something else that's worth $1500, how is that a gain?

If you buy something for 10¢ and use it later to buy something that is worth $10,000, then under IRS rules for barter, you have to pay tax on the $9,999.90 gain.

[yellowecho]

All I know if that declaring capital gains for every trade would be ridiculously difficult.  When I trade on an exchange, even if I buy an Ask its not from a single individual... and often from many accounts in small increments.  Declaring capital gains for each of those transactions would be insane! 

I think the real danger is that the IRS is going to get full visibility of the accounts of US based exchanges such as Coinbase... which will probably be bullish for Bitshares X.

[puppies]

If true that would be great news.   It would greatly simplify things for me as I have no intention of cashing out any time soon.   This is also how I understood things to work prior to the irs announcement.   

It would be considered a gain if you had paid less than $1500 for the good you had bartered per http://www.irs.gov/publications/p17/ch14.html as discussed specifically

How To Figure Gain or Loss

You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property.
Gain.   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain.

Loss.   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss.

Adjusted basis.   The adjusted basis of property is your original cost or other original basis properly adjusted (increased or decreased) for certain items. See chapter 13 for more information about determining the adjusted basis of property.

Amount realized.   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). Amount realized includes the money you receive plus the fair market value of any property or services you receive. If you received a note or other debt instrument for the property, see How To Figure Gain or Loss in chapter 4 of Publication 550 to figure the amount realized.

If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. For more information, see Publication 537.
Fair market value.   Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts.

Example.

You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. Your gain is $3,000 ($10,000 − $7,000).

That example uses stocks, which are specifically exempted from being eligible for like-kind exchanges.
http://www.irs.gov/uac/Like-Kind-Exchanges-Under-IRC-Code-Section-1031

Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.

....snip....

Both the relinquished property you sell and the replacement property you buy must meet certain requirements.

Both properties must be held for use in a trade or business or for investment.   Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.

Both properties must be similar enough to qualify as "like-kind."  Like-kind property is property of the same nature, character or class.  Quality or grade does not matter. Most real estate will be like-kind to other real estate.  For example, real property that is improved with a residential rental house is like-kind to vacant land.  One exception for real estate is that property within the United States is not like-kind to property outside of the United States.  Also, improvements that are conveyed without land are not of like kind to land.

Real property and personal property can both qualify as exchange properties under Section 1031; but real property can never be like-kind to personal property. In personal property exchanges, the rules pertaining to what qualifies as like-kind are more restrictive than the rules pertaining to real property.  As an example,  cars are not like-kind to trucks.

Finally, certain types of property are specifically excluded from Section 1031 treatment. Section 1031 does not apply to exchanges of:

    Inventory or stock in trade
    Stocks, bonds, or notes
    Other securities or debt
    Partnership interests
    Certificates of trust

So, are crypto-currencies any of the above?  They are not stocks or securities.  Unless you make a business of selling them to retail customers, they are not your inventory or stock in trade.  Therefore they should be eligible for a like-kind exchange, which is non-taxable.  You are only taxed when you "sell" them, i.e. convert to "money".

[luckybit]

They are a lot like baseball cards that are used as a currency / stock.

It's really confusing for me. It's clearly not a security but that doesn't stop everyone from being paranoid about the SEC.

[bitbadger]

It would be considered a gain if you had paid less than $1500 for the good you had bartered per http://www.irs.gov/publications/p17/ch14.html as discussed specifically

How To Figure Gain or Loss

You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property.
Gain.   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain.

Loss.   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss.

Adjusted basis.   The adjusted basis of property is your original cost or other original basis properly adjusted (increased or decreased) for certain items. See chapter 13 for more information about determining the adjusted basis of property.

Amount realized.   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). Amount realized includes the money you receive plus the fair market value of any property or services you receive. If you received a note or other debt instrument for the property, see How To Figure Gain or Loss in chapter 4 of Publication 550 to figure the amount realized.

If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. For more information, see Publication 537.
Fair market value.   Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts.

Example.

You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. Your gain is $3,000 ($10,000 − $7,000).

That example uses stocks, which are specifically exempted from being eligible for like-kind exchanges.
http://www.irs.gov/uac/Like-Kind-Exchanges-Under-IRC-Code-Section-1031

Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.

....snip....

Both the relinquished property you sell and the replacement property you buy must meet certain requirements.

Both properties must be held for use in a trade or business or for investment.   Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.

Both properties must be similar enough to qualify as "like-kind."  Like-kind property is property of the same nature, character or class.  Quality or grade does not matter. Most real estate will be like-kind to other real estate.  For example, real property that is improved with a residential rental house is like-kind to vacant land.  One exception for real estate is that property within the United States is not like-kind to property outside of the United States.  Also, improvements that are conveyed without land are not of like kind to land.

Real property and personal property can both qualify as exchange properties under Section 1031; but real property can never be like-kind to personal property. In personal property exchanges, the rules pertaining to what qualifies as like-kind are more restrictive than the rules pertaining to real property.  As an example,  cars are not like-kind to trucks.

Finally, certain types of property are specifically excluded from Section 1031 treatment. Section 1031 does not apply to exchanges of:

    Inventory or stock in trade
    Stocks, bonds, or notes
    Other securities or debt
    Partnership interests
    Certificates of trust

So, are crypto-currencies any of the above?  They are not stocks or securities.  Unless you make a business of selling them to retail customers, they are not your inventory or stock in trade.  Therefore they should be eligible for a like-kind exchange, which is non-taxable.  You are only taxed when you "sell" them, i.e. convert to "money".

[puppies]

The crux of the matter is that trades of property for property are taxed as if they are sales based upon the value of the property traded.  If that property is a service that you provide you are taxed at the market value of that service.  If that property is a good you created you are taxed at the market value of the good, although you can write off costs.  If that property is a good you purchased you are taxed at the difference between what you paid for it and the market value at time of trade.  If you have held the good for more than 1 year the appreciated is taxed at the lower capital gains rate.  If held less than a year it is reported and taxed as income.

The value of the property traded is the same.  Take my example from above.  I first trade 1.0BTC for 25LTC.  Both the 1.0BTC and the 25LTC are valued at $1,000.  I later trade 25LTC for 1.5BTC.  The 25LTC and the 1.5BTC are both valued at $1500.  There is no gain made in either trade.

This doesn't work when you're reading old rules about stock markets.  There is no stock exchange in the world that will let me trade 1 share of stock in Company A for 3 shares of stock in Company B without first selling the Company A share for fiat (i.e., currency, i.e., money -- foreign currencies are recognized as "money" by the IRS), and then buying the 3 shares of Company B with that money.  So if I have realized a monetary gain in Stock A, I must report that gain and pay taxes on it at the time of the sale.

if you read all of http://www.irs.gov/publications/p17/ch14.html it makes it pretty clear that the IRS believes it has the right to steal your property (collect taxes) even on exchanges that never touch the dollar.

I should not have specified just the USD, it applies to all fiat or otherwise recognized currencies/"money" throughout the world.

Once again http://www.irs.gov/pub/irs-drop/n-14-21.pdf leads me to believe that the organized group of thugs we call the IRS believes that mining rewards are to be counted as income within the year they are mined.  Specifically

Q-8: Does a taxpayer who “mines” virt
ual currency (for example, uses computer
resources to validate Bitcoin transactions
and maintain the public Bitcoin
transaction ledger) realize gross income
upon receipt of the virtual currency
resulting from those activities?
A-8:
Yes, when a taxpayer successfully “mines”
virtual currency, the fair market value
of the virtual currency as of
the date of receipt is includible in gross income. See
Publication 525,
Taxable and Nontaxable Income
, for more information on taxable
income

This is why I said that miners should pay out their mining earnings to fiat ASAP, and buy back cryptos using fiat to hold for capital gains.

but barter trades that never touch a currency unit are still taxable as if they were converted to USD on both sides.

But if you barter trade something that's worth $1500 for something else that's worth $1500, how is that a gain?

It would be considered a gain if you had paid less than $1500 for the good you had bartered per http://www.irs.gov/publications/p17/ch14.html as discussed specifically

How To Figure Gain or Loss

You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property.
Gain.   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain.

Loss.   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss.

Adjusted basis.   The adjusted basis of property is your original cost or other original basis properly adjusted (increased or decreased) for certain items. See chapter 13 for more information about determining the adjusted basis of property.

Amount realized.   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). Amount realized includes the money you receive plus the fair market value of any property or services you receive. If you received a note or other debt instrument for the property, see How To Figure Gain or Loss in chapter 4 of Publication 550 to figure the amount realized.

If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. For more information, see Publication 537.
Fair market value.   Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts.

Example.

You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. Your gain is $3,000 ($10,000 − $7,000).

By calling it property they are treating it as barter. Barter still gets taxed at the $ price of the property.

So there is no way around the draconian taxes.

exactly.  unless you are willing to do battle with the armed murderers, which I am in no way willing to do.

[bitbadger]

By calling it property they are treating it as barter. Barter still gets taxed at the $ price of the property.

So there is no way around the draconian taxes.

But if you barter trade something that's worth $1500 for something else that's worth $1500, how is that a gain?

[luckybit]

By calling it property they are treating it as barter. Barter still gets taxed at the $ price of the property.

So there is no way around the draconian taxes.

[bitbadger]

The crux of the matter is that trades of property for property are taxed as if they are sales based upon the value of the property traded.  If that property is a service that you provide you are taxed at the market value of that service.  If that property is a good you created you are taxed at the market value of the good, although you can write off costs.  If that property is a good you purchased you are taxed at the difference between what you paid for it and the market value at time of trade.  If you have held the good for more than 1 year the appreciated is taxed at the lower capital gains rate.  If held less than a year it is reported and taxed as income.

The value of the property traded is the same.  Take my example from above.  I first trade 1.0BTC for 25LTC.  Both the 1.0BTC and the 25LTC are valued at $1,000.  I later trade 25LTC for 1.5BTC.  The 25LTC and the 1.5BTC are both valued at $1500.  There is no gain made in either trade.

This doesn't work when you're reading old rules about stock markets.  There is no stock exchange in the world that will let me trade 1 share of stock in Company A for 3 shares of stock in Company B without first selling the Company A share for fiat (i.e., currency, i.e., money -- foreign currencies are recognized as "money" by the IRS), and then buying the 3 shares of Company B with that money.  So if I have realized a monetary gain in Stock A, I must report that gain and pay taxes on it at the time of the sale.

if you read all of http://www.irs.gov/publications/p17/ch14.html it makes it pretty clear that the IRS believes it has the right to steal your property (collect taxes) even on exchanges that never touch the dollar.

I should not have specified just the USD, it applies to all fiat or otherwise recognized currencies/"money" throughout the world.

Once again http://www.irs.gov/pub/irs-drop/n-14-21.pdf leads me to believe that the organized group of thugs we call the IRS believes that mining rewards are to be counted as income within the year they are mined.  Specifically

Q-8: Does a taxpayer who “mines” virt
ual currency (for example, uses computer
resources to validate Bitcoin transactions
and maintain the public Bitcoin
transaction ledger) realize gross income
upon receipt of the virtual currency
resulting from those activities?
A-8:
Yes, when a taxpayer successfully “mines”
virtual currency, the fair market value
of the virtual currency as of
the date of receipt is includible in gross income. See
Publication 525,
Taxable and Nontaxable Income
, for more information on taxable
income

This is why I said that miners should pay out their mining earnings to fiat ASAP, and buy back cryptos using fiat to hold for capital gains.  EDIT: There is a distinction here as well.  If you are mining as a "business" then you can report your gains as a self-employed individual, see Question 9 on the linked PDF, "Is an individual who “mines” virtual currency as a trade or business subject to self-employment tax on the income derived from those activities?"  IIRC, the distinction between a "business" and the folks who would need to include it under their "gross income" (as in Question 8, which you quoted) comes under the "Business or Hobby" rules, which I won't get into here, but IMO it's always safer to classify money-making enterprises as a Business although it involves more paperwork.  Suffice it to say, if you mine more than $1000 worth of cryptos in a year, you should probably count it as a Business.

but barter trades that never touch a currency unit are still taxable as if they were converted to USD on both sides.

But if you barter trade something that's worth $1500 for something else that's worth $1500, how is that a gain?