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

[puppies]

  However, trading 25 LTC for 1.5 BTC is still a like-for-like exchange.

This has not been proven in any court case. You're taking a huge gamble here saying the courts would make that decision. What is the history of like-for-like exchange? Where is the precedent?

Because they just called it property!  READ what I wrote above!  A "sale" involves "money"!  Cryptos are not "money"!  This is exactly why they released this statement, to provide guidance since nobody has ever gone to court over it!

If you're wrong in this gamble you will owe the IRS potentially thousands if not millions of dollars.

Pfffffff! LOL, thousands if not millions?  Can I just ask, how old are you, and have you ever dealt with the IRS beyond simply filing your taxes?  I can tell you, my entire crypto-currencies bought sold and owned totals to about $5000, max.  The IRS can fine you, but the fines have to be reasonable and tied to the amount un-reported/un-paid/cheated/whatever.  If I had made tens of millions of dollars in crypto trades, then maybe they could go after me for millions, if I didn't report ANY of it properly.

People make out the IRS to be some crazy entity that can ruin your life and throw you in jail.  I can tell you, it will take many years of outright tax evasion to reach that point.  I personally have had to pay ~$2000 in fines, penalties and interest to the IRS over the years for various small stuff.  (I'm self-employed, and I do my own taxes, so sometimes stuff gets messed up, or turned in late.)  They're actually pretty reasonable, and they can't charge you anything grossly disproportionate to the amounts involved.  If you owe $20k in taxes, and you don't pay it, they can't charge you $200k for it, no matter how blatantly you broke the law.

I agree.  My defense rests almost exclusively on being a very small fish.  In my experience they only really go after the big fish (unless they are politically well connected) or those that attempt to teach others how they can game the system.

I am neither of those.

[bitbadger]

  However, trading 25 LTC for 1.5 BTC is still a like-for-like exchange.

This has not been proven in any court case. You're taking a huge gamble here saying the courts would make that decision. What is the history of like-for-like exchange? Where is the precedent?

Because they just called it property!  READ what I wrote above!  A "sale" involves "money"!  Cryptos are not "money"!  This is exactly why they released this statement, to provide guidance since nobody has ever gone to court over it!

If you're wrong in this gamble you will owe the IRS potentially thousands if not millions of dollars.

Pfffffff! LOL, thousands if not millions?  Can I just ask, how old are you, and have you ever dealt with the IRS beyond simply filing your taxes?  I can tell you, my entire crypto-currencies bought sold and owned totals to about $5000, max.  The IRS can fine you, but the fines have to be reasonable and tied to the amount un-reported/un-paid/cheated/whatever.  If I had made tens of millions of dollars in crypto trades, then maybe they could go after me for millions, if I didn't report ANY of it properly.

People make out the IRS to be some crazy entity that can ruin your life and throw you in jail.  I can tell you, it will take many years of outright tax evasion to reach that point.  I personally have had to pay ~$2000 in fines, penalties and interest to the IRS over the years for various small stuff.  (I'm self-employed, and I do my own taxes, so sometimes stuff gets messed up, or turned in late.)  They're actually pretty reasonable, and they can't charge you anything grossly disproportionate to the amounts involved.  If you owe $20k in taxes, and you don't pay it, they can't charge you $200k for it, no matter how blatantly you broke the law.

[puppies]

I think it might be more complicated than that.  I'm not an expert in any way, but in reading http://www.irs.gov/publications/p17/ch14.html I stumbled across

What Is a Sale or Trade?

This section explains what is a sale or trade. It also explains certain transactions and events that are treated as sales or trades.

A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money.

A trade is a transfer of property for other property or services and may be taxed in the same way as a sale.

I am glad that you posted this, it brings us to the crux of the matter.  See the distinction made up there between a sale and a trade?  A sale occurs when property is traded for money.  A trade occurs when property is traded for property.  The IRS has stated that crypto-currencies are property and not money.

Since crypto-currencies are called property by the IRS, and not money, the conversion or exchange of one crypto for another cannot be called a "sale".  It is hard to argue that any crypto is a "mortgage, note, or other promise to pay money".  Perhaps when BitUSD is created, it could be considered a "promise to pay money" and thus transfers/exchanges in/out of BitUSD would be considered sales.  I know that the Ripple exchanges trade explicit "IOU's" issued by private companies.  That part is tricky, and I'm not prepared to provide an opinion on that.

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 appreciation is taxed at the lower capital gains rate.  If held less than a year it is reported and taxed at the income tax rate.

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.

Let's take a hypothetical.  I have 1 BTC.  It is worth $1000, I bought it from Coinbase for $1000.  I trade it on an exchange, directly for 25 LTC.  This is an equivalent exchange. I have not made or lost money on the exchange.  The two amounts are equal, in dollar terms.

Now I wait a while, the value of LTC has gone up, I trade those 25 LTC for 1.5 BTC.  1 BTC is still worth $1000.  Now what has happened?  I have gained $500 in value from the appreciation of the LTC.  However, trading 25 LTC for 1.5 BTC is still a like-for-like exchange.  I had $1500 worth of LTC, now I have $1500 worth of BTC.  I don't have $1500, I have $1500 worth of BTC.  I haven't realized any gains.  My gains come from the appreciation of LTC, not the trade itself. 

If I could pay taxes in BTC (i.e. if BTC were recognized as a "currency" by the IRS and not a piece of property), then maybe I would have to pay 20% in capital gains on my BTC.  But I can't pay taxes in BTC, BTC are not currency or money, so my taxes are deferred until I transfer my 1.5 BTC to Coinbase and receive $1500 in my bank account.

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.

1) mining and/or premining rewards- When you receive your rewards (need more clarity on if this is moment of confirmation or moment of payout from a pool to external address.  probably the former if my understanding of stock awards is accurate and relevant) this is taxed as income at fair market value.  This must be reported as income.

Mining is the same as creating an asset for sale.  Say you have a business making furniture.  You buy $100 worth of wood, add your labor and create a table that you are going to sell for $1000.  Do you pay taxes when you make the table?  No, you pay taxes when you sell the table and get $1000.

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

[color=redWhats more important, the armed murderers on the payroll of the organized group of thugs will enforce this interpretation.[/color]

Stock awards are different.  The company awards you $20k in stock on 1/1/14, the company records $20k in expenses (so they don't have to pay taxes on that $20k) and you record $20k as income (so you do have to pay taxes on that $20k).  If the valuation were allowed to "float" until you actually sold the stock, the accounting would be all screwed up.  So you record $20k as income, you pay taxes on that $20k, you hold the stock for 5 years and it turns into $30,000.  You sell for $30k, and you pay taxes on the profit of $10k, since $20k was your basis.

Topic 409 - Capital Gains and Losses

Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for is a capital gain or a capital loss. Generally, an asset's basis is its cost; however, if you received the asset as a gift or inheritance, refer to Topic 703 for information about your basis. You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less than your basis. Losses from the sale of personal-use property, such as your home or car, are not deductible.

Once again, refer to the definition of sale at the top -- cryptos are not money, you cannot "sell" anything for cryptos according to the IRS.

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

Leads me to believe that if you have held a property for less than a year and you trade it for another property any gain in the value since you received that property is taxed at the income tax rate.

Yes, if you buy BTC and hold it for less than a year before you sell it, your gains will be taxed at your income tax rate.  This is the same as counting it as self-employment income.

3) Capital gains from barter trades or sales of assets-  If you have held a property more than a year and then sell and or trade it for another property you will report it as capital gains, and pay the capital gains tax rate.

Yes, this should be how it works, the IRS has not stated anything to contradict this.

Now, this may lead to the need for some creative accounting if you're a miner.  You should sell all of your mining earnings and convert them into USD.  This is considered your self-employment income.  If you want to hold cryptos long-term, you should purchase them from your USD holdings instead of just holding on to your mining earnings.  This clearly puts the cryptos mined into the "income" side and the long-term cryptos into the "capital gains" side.  If you mine some coins and hold them for 3 years, ALL of the appreciation would likely have to be considered as "income" and be taxed at the higher income rate rather than the long-term capital gains rate.

NOTE: I am not a CPA or any kind of tax, financial, or legal professional, and my statements do not constitute legal, accounting, or other professional advice.  (And any CPA who came on here and gave such advice would be pretty dumb, it could expose him to liability.)

In the end, it is up to the individual to interpret the tax laws, and to follow precedents from tax courts.  If you use a CPA for your taxes, your CPA will do it in a way that he feels legally comfortable, but it may not be to your maximum advantage.  If you do your own taxes, you are left to interpret the laws yourself, and as long as you take a reasonable, straightforward interpretation and file and pay your taxes properly in good faith then you cannot be prosecuted for tax fraud, although you may face administrative fines if you are found to have under-paid.  You are not obligated to interpret rules in such a way as to maximize your taxes paid.

**edit**  fixed grammar in first quote that might not have been easily understood and fixed missing tag that made my response hard to see.  It's been a long time since I was an active member of a forum please let me know if I am breaking some forum protocol that has been invented in the last decade

[bitbadger]

So when the government hacks into and spies on the exchange you think the information isn't going to get passed to the IRS? The IRS can see everything and have legal authority to hack into the exchange to find out the tax situation.

There is a thing called a warrant, and in-admissible evidence.  I would like to see the IRS try to come after you with illegally obtained evidence.

Not only that but they can hack into your bank accounts, or sneak and search your house while you're away on a vacation. There is nothing you can do to stop the IRS from eventually figuring out how to tax cryptocurrency and I don't see why we should even try to avoid taxes.

They don't need to hack into my bank accounts, they can presumably see them all the time.  My bank accounts are a completely separate matter from holdings that I might have in cryptocurrency.  I advocate playing the "straight and narrow" when it comes to anything going in or out of your bank accounts.  Just assume the IRS has a full copy of everything.

But that is not what the clarification is saying you should do. It's saying when you receive payment in cryptocurrency you have to report the cash amount. They don't care about the cryptocurrency or when you cash out, they say it's taxed the moment you receive the payment at whatever it was when you received it.

When you receive payment for goods or services rendered, yes.  If you're simply trading, no.

Then if it goes up in price before you can spend it you must pay capital gain on top of income taxes.

This is true.

Because I can't trade my emails for USD or other fiat?  And because emails aren't some fungible currency in limited supply?  I mean, that is a bizarre comparison.

So if you and I agree that emails are worth money, now it can be taxed?

It's not bizarre at all if you think about the origins of cryptocurrency and Bitcoin in particular.[/quote]

If emails can be worth money per se, then yes their conversion into or out of fiat money would be subject to taxation.

That free means no capital gains taxes. So what I mean to say is we should follow Denmark and make it capital gains free.

Income taxes are fine although it would be better if we didn't have to worry about that, I would say we could compromise there but capital gains taxes suck for a young industry like this.

There is nothing in the world that is not subject to capital gains taxes!  You buy a house, you sell it for more later, you pay capital gains (except for a few special exceptions, since the IRS treats real property as a special case).  You buy a car, you sell it for more later, you pay capital gains.  You buy a baseball card, you sell it for more later, you pay capital gains.  (Assuming you hold it for more than a year; if you hold it for less than a year, it is considered self-employment income.)  You buy a Tickle Me Elmo toy, you sell it for more later, you pay capital gains.

It ends up being like a sales tax on every transaction.

No, it's not like a sales tax, since 1) capital gains can be offset by capital losses; and 2) a conversion from one crypto-currency into another does not create a taxable event.

Capital gains taxes are a tax on cryptocurrency trades.

You trade between Bitcoin and Litecoin and you must pay a capital gains tax. That is something none of us like and it does not benefit the industry as a whole to have it like that right now.

No, see my above post and the distinction that the IRS makes between a "sale" (which must include money) and a "trade" (which is trading property).  Crypto-currencies are property and not money.  And actually, thank God that they ruled this way, or else we would have to pay taxes on every transaction.

It worked fine for the Internet. Did you pay the Internet sales taxes in the 1990s?

Sales tax is a completely different subject.  Sales tax is regulated by the individual states, not the federal government.  Since the beginning of sales taxes, sales taxes were exempt on items purchased in other states.  It worked this way when you ordered something from a paper catalog from out-of-state.  You didn't pay sales tax because the seller was out-of-state.  When the Internet came along, it inherited the same rules that already existed.  Even in the 90's, Internet companies charged sales tax to in-state customers.

That isn't what lawyers have said, or accountants. I suggest you talk to a professional before trying to interpret tax laws on your own.

Who?  The IRS just released these rules today, have you already talked to a lawyer or accountant about it?  Has a lawyer or accountant publicly stated their interpretations of these rules?

[luckybit]

The blockchain is public, but exchanges aren't.  Addresses aren't connected (if you're careful).  If I send 1.0 BTC to BTer.com from address 1ABC, and exchange it for 3 crypto-currencies, trade and profit, and eventually withdraw 2.0 BTC from BTer.com to address 1XYZ, how the hell can they even know that 1ABC and 1XYZ are connected?  That's the whole point, addresses are anonymous.

So when the government hacks into and spies on the exchange you think the information isn't going to get passed to the IRS? The IRS can see everything and have legal authority to hack into the exchange to find out the tax situation.

Not only that but they can hack into your bank accounts, or sneak and search your house while you're away on a vacation. There is nothing you can do to stop the IRS from eventually figuring out how to tax cryptocurrency and I don't see why we should even try to avoid taxes.

I'm not going to be hiding anything from the IRS.  When I get a payout in USD, I will count those USD as income.  My entire crypto mining and trading operation will be taxed as self-employment income.  I am already self-employed in my day job, so I'm familiar with how to do it.

But that is not what the clarification is saying you should do. It's saying when you receive payment in cryptocurrency you have to report the cash amount. They don't care about the cryptocurrency or when you cash out, they say it's taxed the moment you receive the payment at whatever it was when you received it.

Then if it goes up in price before you can spend it you must pay capital gain on top of income taxes.

Because I can't trade my emails for USD or other fiat?  And because emails aren't some fungible currency in limited supply?  I mean, that is a bizarre comparison.

So if you and I agree that emails are worth money, now it can be taxed?

It's not bizarre at all if you think about the origins of cryptocurrency and Bitcoin in particular.

What do you mean by "tax free"?  It IS tax-free at this point.  You don't pay taxes on your BTC holdings any more than you pay taxes on your stock holdings, or your USD holdings, or your EUR holdings. 

That free means no capital gains taxes. So what I mean to say is we should follow Denmark and make it capital gains free.

Income taxes are fine although it would be better if we didn't have to worry about that, I would say we could compromise there but capital gains taxes suck for a young industry like this.

It ends up being like a sales tax on every transaction.

I have never seen a call for taxing crypto-currencies per se.  If they were wanting to charge a tax of 5% per transaction, that is what I would call a tax on crypto-currencies, and I would fight it tooth and nail.  Or if they required you to hand in 10% of your crypto holdings, yearly.  That would be absurd.  But if you profit from a business, and those profits are realized as dollars in your bank account, you owe taxes on those profits.  Clear and simple.

Capital gains taxes are a tax on cryptocurrency trades.

You trade between Bitcoin and Litecoin and you must pay a capital gains tax. That is something none of us like and it does not benefit the industry as a whole to have it like that right now.

Sorry, but crypto-currencies are never going to get whatever kind of special, protected, un-taxed status that you desire in your dreamworld.  It would be horribly unfair.

It worked fine for the Internet. Did you pay the Internet sales taxes in the 1990s?

I'm taking the stance (and I believe that it is a defensible stance) that as long as I'm in crypto-currencies, period, it doesn't count as changing financial instruments.  It is a like-kind exchange, which is tax-deferred.  Pay taxes when you cash out.  It's not income until it's dollars in your bank account.  Simple as that.

That isn't what lawyers have said, or accountants. I suggest you talk to a professional before trying to interpret tax laws on your own.

We should be able to do better than Denmark. To think we can't make cryptocurrency tax free is called quitting before negotiation starts. Denmark managed to give cryptocurrency tax free status so I guess it's unfair that US citizens have to pay taxes while they don't have to in Denmark?

Maybe they are just smarter people in Denmark and our policy should be similar to Denmark. The current capital gains treatment stifles innovation and cripples the industry. We should not be worried about taxes when we innovate.

http://www.reddit.com/r/Bitcoin/comments/21cb9y/new_decision_bitcoin_gains_are_tax_free_in_denmark/

Let's push to make capital gains on cryptocurrency 0%. Capital gains taxes hurt economic growth in this industry and don't even make the government enough money to matter.

http://www.irs.gov/taxtopics/tc409.html leads me to believe that capital gains will only apply when a property has been held for more than a year  specifically I am referring to

Capital gains and losses are classified as long-term or short-term. If you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. To determine how long you held the asset, count from the day after the day you acquired the asset up to and including the day you disposed of the asset.

and

Note: Net short-term capital gains are subject to taxation at your ordinary income tax rate.

I am assuming that most trades of crypto are held less than a year.  Therefore they should be taxed as income.  All you really need to know is the value of any traded assets at the beginning of the year and/or at time of purchase (if mined then the value at time of mining would also be taxable as income)  and the value at last time traded.

Short term capital gains are taxed too. You're thinking of long term capital gains taxes.
If all we had to worry about was income taxes then paying taxes would be easy.

Income taxes are even higher than capital gains by the way so thats not good news.

[fuzzy]

Meanwhile, leading gold and silver advocate Mike Maloney just had a few nice things to say about crypto currencies vs. the banking system.

http://hiddensecretsofmoney.com/blog/BitcoinDestroysBankingLeechesMikeMaloney

very good stuff. 

We should be able to do better than Denmark. To think we can't make cryptocurrency tax free is called quitting before negotiation starts. Denmark managed to give cryptocurrency tax free status so I guess it's unfair that US citizens have to pay taxes while they don't have to in Denmark?

Maybe they are just smarter people in Denmark and our policy should be similar to Denmark. The current capital gains treatment stifles innovation and cripples the industry. We should not be worried about taxes when we innovate.

http://www.reddit.com/r/Bitcoin/comments/21cb9y/new_decision_bitcoin_gains_are_tax_free_in_denmark/

Let's push to make capital gains on cryptocurrency 0%. Capital gains taxes hurt economic growth in this industry and don't even make the government enough money to matter.

perfectly stated...
Only they are not smarter than us (with "us" usually considered the US).  We are still the World Super Power, which is no small thing.  I will say one thing, however, and that is that we should fight for the freedom of these technologies JUST like we do for the internet.  Quitting before negotiations is the best comment there imo.  This movement will not go away and the only way they can beat it is to play nice and get the scraps or go through a long and potentially violent revolution with a whole spectrum of potential outcomes.  Of course, then again, when one realizes that nearly every decision in the financial sector that centralized bodies have made has turned out to be the wrong one...who knows if there will be rational "laws" written. 

I for one await the day when human interaction is not manipulated and/or coerced by central authorities.     

[puppies]

The blockchain is public, but exchanges aren't.  Addresses aren't connected (if you're careful).  If I send 1.0 BTC to BTer.com from address 1ABC, and exchange it for 3 crypto-currencies, trade and profit, and eventually withdraw 2.0 BTC from BTer.com to address 1XYZ, how the hell can they even know that 1ABC and 1XYZ are connected?  That's the whole point, addresses are anonymous.

So when the government hacks into and spies on the exchange you think the information isn't going to get passed to the IRS? The IRS can see everything and have legal authority to hack into the exchange to find out the tax situation.

Not only that but they can hack into your bank accounts, or sneak and search your house while you're away on a vacation. There is nothing you can do to stop the IRS from eventually figuring out how to tax cryptocurrency and I don't see why we should even try to avoid taxes.

I'm not going to be hiding anything from the IRS.  When I get a payout in USD, I will count those USD as income.  My entire crypto mining and trading operation will be taxed as self-employment income.  I am already self-employed in my day job, so I'm familiar with how to do it.

But that is not what the clarification is saying you should do. It's saying when you receive payment in cryptocurrency you have to report the cash amount. They don't care about the cryptocurrency or when you cash out, they say it's taxed the moment you receive the payment at whatever it was when you received it.

Then if it goes up in price before you can spend it you must pay capital gain on top of income taxes.

Because I can't trade my emails for USD or other fiat?  And because emails aren't some fungible currency in limited supply?  I mean, that is a bizarre comparison.

So if you and I agree that emails are worth money, now it can be taxed?

It's not bizarre at all if you think about the origins of cryptocurrency and Bitcoin in particular.

What do you mean by "tax free"?  It IS tax-free at this point.  You don't pay taxes on your BTC holdings any more than you pay taxes on your stock holdings, or your USD holdings, or your EUR holdings. 

That free means no capital gains taxes. So what I mean to say is we should follow Denmark and make it capital gains free.

Income taxes are fine although it would be better if we didn't have to worry about that, I would say we could compromise there but capital gains taxes suck for a young industry like this.

It ends up being like a sales tax on every transaction.

I have never seen a call for taxing crypto-currencies per se.  If they were wanting to charge a tax of 5% per transaction, that is what I would call a tax on crypto-currencies, and I would fight it tooth and nail.  Or if they required you to hand in 10% of your crypto holdings, yearly.  That would be absurd.  But if you profit from a business, and those profits are realized as dollars in your bank account, you owe taxes on those profits.  Clear and simple.

Capital gains taxes are a tax on cryptocurrency trades.

You trade between Bitcoin and Litecoin and you must pay a capital gains tax. That is something none of us like and it does not benefit the industry as a whole to have it like that right now.

Sorry, but crypto-currencies are never going to get whatever kind of special, protected, un-taxed status that you desire in your dreamworld.  It would be horribly unfair.

It worked fine for the Internet. Did you pay the Internet sales taxes in the 1990s?

I'm taking the stance (and I believe that it is a defensible stance) that as long as I'm in crypto-currencies, period, it doesn't count as changing financial instruments.  It is a like-kind exchange, which is tax-deferred.  Pay taxes when you cash out.  It's not income until it's dollars in your bank account.  Simple as that.

That isn't what lawyers have said, or accountants. I suggest you talk to a professional before trying to interpret tax laws on your own.

We should be able to do better than Denmark. To think we can't make cryptocurrency tax free is called quitting before negotiation starts. Denmark managed to give cryptocurrency tax free status so I guess it's unfair that US citizens have to pay taxes while they don't have to in Denmark?

Maybe they are just smarter people in Denmark and our policy should be similar to Denmark. The current capital gains treatment stifles innovation and cripples the industry. We should not be worried about taxes when we innovate.

http://www.reddit.com/r/Bitcoin/comments/21cb9y/new_decision_bitcoin_gains_are_tax_free_in_denmark/

Let's push to make capital gains on cryptocurrency 0%. Capital gains taxes hurt economic growth in this industry and don't even make the government enough money to matter.

http://www.irs.gov/taxtopics/tc409.html leads me to believe that capital gains will only apply when a property has been held for more than a year  specifically I am referring to

Capital gains and losses are classified as long-term or short-term. If you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. To determine how long you held the asset, count from the day after the day you acquired the asset up to and including the day you disposed of the asset.

and

Note: Net short-term capital gains are subject to taxation at your ordinary income tax rate.

I am assuming that most trades of crypto are held less than a year.  Therefore they should be taxed as income.  All you really need to know is the value of any traded assets at the beginning of the year and/or at time of purchase (if mined then the value at time of mining would also be taxable as income)  and the value at last time traded.

[luckybit]

  However, trading 25 LTC for 1.5 BTC is still a like-for-like exchange.

This has not been proven in any court case. You're taking a huge gamble here saying the courts would make that decision. What is the history of like-for-like exchange? Where is the precedent?

If you're wrong in this gamble you will owe the IRS potentially thousands if not millions of dollars.

This is why we should push not to have capital gains at all on cryptocurrency. If the capital gains tax is 0% then it simplifies the taxes for everyone involved. The IRS does not want to have to deal with looking at every trade and we don't want to have to track it.

[bitbadger]

I think it might be more complicated than that.  I'm not an expert in any way, but in reading http://www.irs.gov/publications/p17/ch14.html I stumbled across

What Is a Sale or Trade?

This section explains what is a sale or trade. It also explains certain transactions and events that are treated as sales or trades.

A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money.

A trade is a transfer of property for other property or services and may be taxed in the same way as a sale.

I am glad that you posted this, it brings us to the crux of the matter.  See the distinction made up there between a sale and a trade?  A sale occurs when property is traded for money.  A trade occurs when property is traded for property.  The IRS has stated that crypto-currencies are property and not money.

Since crypto-currencies are called property by the IRS, and not money, the conversion or exchange of one crypto for another cannot be called a "sale".  It is hard to argue that any crypto is a "mortgage, note, or other promise to pay money".  Perhaps when BitUSD is created, it could be considered a "promise to pay money" and thus transfers/exchanges in/out of BitUSD would be considered sales.  I know that the Ripple exchanges trade explicit "IOU's" issued by private companies.  That part is tricky, and I'm not prepared to provide an opinion on that.

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.

Let's take a hypothetical.  I have 1 BTC.  It is worth $1000, I bought it from Coinbase for $1000.  I trade it on an exchange, directly for 25 LTC.  This is an equivalent exchange. I have not made or lost money on the exchange.  The two amounts are equal, in dollar terms.

Now I wait a while, the value of LTC has gone up, I trade those 25 LTC for 1.5 BTC.  1 BTC is still worth $1000.  Now what has happened?  I have gained $500 in value from the appreciation of the LTC.  However, trading 25 LTC for 1.5 BTC is still a like-for-like exchange.  I had $1500 worth of LTC, now I have $1500 worth of BTC.  I don't have $1500, I have $1500 worth of BTC.  I haven't realized any gains.  My gains come from the appreciation of LTC, not the trade itself. 

If I could pay taxes in BTC (i.e. if BTC were recognized as a "currency" by the IRS and not a piece of property), then maybe I would have to pay 20% in capital gains on my BTC.  But I can't pay taxes in BTC, BTC are not currency or money, so my taxes are deferred until I transfer my 1.5 BTC to Coinbase and receive $1500 in my bank account.

1) mining and/or premining rewards- When you receive your rewards (need more clarity on if this is moment of confirmation or moment of payout from a pool to external address.  probably the former if my understanding of stock awards is accurate and relevant) this is taxed as income at fair market value.  This must be reported as income.

Mining is the same as creating an asset for sale.  Say you have a business making furniture.  You buy $100 worth of wood, add your labor and create a table that you are going to sell for $1000.  Do you pay taxes when you make the table?  No, you pay taxes when you sell the table and get $1000.

Stock awards are different.  The company awards you $20k in stock on 1/1/14, the company records $20k in expenses (so they don't have to pay taxes on that $20k) and you record $20k as income (so you do have to pay taxes on that $20k).  If the valuation were allowed to "float" until you actually sold the stock, the accounting would be all screwed up.  So you record $20k as income, you pay taxes on that $20k, you hold the stock for 5 years and it turns into $30,000.  You sell for $30k, and you pay taxes on the profit of $10k, since $20k was your basis.

Topic 409 - Capital Gains and Losses

Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for is a capital gain or a capital loss. Generally, an asset's basis is its cost; however, if you received the asset as a gift or inheritance, refer to Topic 703 for information about your basis. You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less than your basis. Losses from the sale of personal-use property, such as your home or car, are not deductible.

Once again, refer to the definition of sale at the top -- cryptos are not money, you cannot "sell" anything for cryptos according to the IRS.

Leads me to believe that if you have held a property for less than a year and you trade it for another property any gain in the value since you received that property is taxed at the income tax rate.

Yes, if you buy BTC and hold it for less than a year before you sell it, your gains will be taxed at your income tax rate.  This is the same as counting it as self-employment income.

3) Capital gains from barter trades or sales of assets-  If you have held a property more than a year and then sell and or trade it for another property you will report it as capital gains, and pay the capital gains tax rate.

Yes, this should be how it works, the IRS has not stated anything to contradict this.

Now, this may lead to the need for some creative accounting if you're a miner.  You should sell all of your mining earnings and convert them into USD.  This is considered your self-employment income.  If you want to hold cryptos long-term, you should purchase them from your USD holdings instead of just holding on to your mining earnings.  This clearly puts the cryptos mined into the "income" side and the long-term cryptos into the "capital gains" side.  If you mine some coins and hold them for 3 years, ALL of the appreciation would likely have to be considered as "income" and be taxed at the higher income rate rather than the long-term capital gains rate.

NOTE: I am not a CPA or any kind of tax, financial, or legal professional, and my statements do not constitute legal, accounting, or other professional advice.  (And any CPA who came on here and gave such advice would be pretty dumb, it could expose him to liability.)

In the end, it is up to the individual to interpret the tax laws, and to follow precedents from tax courts.  If you use a CPA for your taxes, your CPA will do it in a way that he feels legally comfortable, but it may not be to your maximum advantage.  If you do your own taxes, you are left to interpret the laws yourself, and as long as you take a reasonable, straightforward interpretation and file and pay your taxes properly in good faith then you cannot be prosecuted for tax fraud, although you may face administrative fines if you are found to have under-paid.  You are not obligated to interpret rules in such a way as to maximize your taxes paid.

[luckybit]

The blockchain is public, but exchanges aren't.  Addresses aren't connected (if you're careful).  If I send 1.0 BTC to BTer.com from address 1ABC, and exchange it for 3 crypto-currencies, trade and profit, and eventually withdraw 2.0 BTC from BTer.com to address 1XYZ, how the hell can they even know that 1ABC and 1XYZ are connected?  That's the whole point, addresses are anonymous.

So when the government hacks into and spies on the exchange you think the information isn't going to get passed to the IRS? The IRS can see everything and have legal authority to hack into the exchange to find out the tax situation.

Not only that but they can hack into your bank accounts, or sneak and search your house while you're away on a vacation. There is nothing you can do to stop the IRS from eventually figuring out how to tax cryptocurrency and I don't see why we should even try to avoid taxes.

I'm not going to be hiding anything from the IRS.  When I get a payout in USD, I will count those USD as income.  My entire crypto mining and trading operation will be taxed as self-employment income.  I am already self-employed in my day job, so I'm familiar with how to do it.

But that is not what the clarification is saying you should do. It's saying when you receive payment in cryptocurrency you have to report the cash amount. They don't care about the cryptocurrency or when you cash out, they say it's taxed the moment you receive the payment at whatever it was when you received it.

Then if it goes up in price before you can spend it you must pay capital gain on top of income taxes.

Because I can't trade my emails for USD or other fiat?  And because emails aren't some fungible currency in limited supply?  I mean, that is a bizarre comparison.

So if you and I agree that emails are worth money, now it can be taxed?

It's not bizarre at all if you think about the origins of cryptocurrency and Bitcoin in particular.

What do you mean by "tax free"?  It IS tax-free at this point.  You don't pay taxes on your BTC holdings any more than you pay taxes on your stock holdings, or your USD holdings, or your EUR holdings. 

That free means no capital gains taxes. So what I mean to say is we should follow Denmark and make it capital gains free.

Income taxes are fine although it would be better if we didn't have to worry about that, I would say we could compromise there but capital gains taxes suck for a young industry like this.

It ends up being like a sales tax on every transaction.

I have never seen a call for taxing crypto-currencies per se.  If they were wanting to charge a tax of 5% per transaction, that is what I would call a tax on crypto-currencies, and I would fight it tooth and nail.  Or if they required you to hand in 10% of your crypto holdings, yearly.  That would be absurd.  But if you profit from a business, and those profits are realized as dollars in your bank account, you owe taxes on those profits.  Clear and simple.

Capital gains taxes are a tax on cryptocurrency trades.

You trade between Bitcoin and Litecoin and you must pay a capital gains tax. That is something none of us like and it does not benefit the industry as a whole to have it like that right now.

Sorry, but crypto-currencies are never going to get whatever kind of special, protected, un-taxed status that you desire in your dreamworld.  It would be horribly unfair.

It worked fine for the Internet. Did you pay the Internet sales taxes in the 1990s?

I'm taking the stance (and I believe that it is a defensible stance) that as long as I'm in crypto-currencies, period, it doesn't count as changing financial instruments.  It is a like-kind exchange, which is tax-deferred.  Pay taxes when you cash out.  It's not income until it's dollars in your bank account.  Simple as that.

That isn't what lawyers have said, or accountants. I suggest you talk to a professional before trying to interpret tax laws on your own.

We should be able to do better than Denmark. To think we can't make cryptocurrency tax free is called quitting before negotiation starts. Denmark managed to give cryptocurrency tax free status so I guess it's unfair that US citizens have to pay taxes while they don't have to in Denmark?

Maybe they are just smarter people in Denmark and our policy should be similar to Denmark. The current capital gains treatment stifles innovation and cripples the industry. We should not be worried about taxes when we innovate.

http://www.reddit.com/r/Bitcoin/comments/21cb9y/new_decision_bitcoin_gains_are_tax_free_in_denmark/

Let's push to make capital gains on cryptocurrency 0%. Capital gains taxes hurt economic growth in this industry and don't even make the government enough money to matter.

[puppies]

That's not the advice I received. Don't assume the IRS isn't tracking it and it's actually very easy to track since the blockchain is public and exchanges have to pay taxes or face compliance.

The blockchain is public, but exchanges aren't.  Addresses aren't connected (if you're careful).  If I send 1.0 BTC to BTer.com from address 1ABC, and exchange it for 3 crypto-currencies, trade and profit, and eventually withdraw 2.0 BTC from BTer.com to address 1XYZ, how the hell can they even know that 1ABC and 1XYZ are connected?  That's the whole point, addresses are anonymous.

Rather than assume they can't, assume they can and will. Do you want to be the person who loses a fortune due to tax issues?

I'm not going to be hiding anything from the IRS.  When I get a payout in USD, I will count those USD as income.  My entire crypto mining and trading operation will be taxed as self-employment income.  I am already self-employed in my day job, so I'm familiar with how to do it.

So why aren't you paying a tax on your emails? After all it's impossible to think that something like email could be tax free.

Because I can't trade my emails for USD or other fiat?  And because emails aren't some fungible currency in limited supply?  I mean, that is a bizarre comparison.

If you don't try to make it tax free of course it wont be. It's the same with network neutrality, how you have people pushing for that, or privacy. Why do you assume the IRS can't track our transactions on the one hand but on the other you say we shouldn't push to make it tax free?

What do you mean by "tax free"?  It IS tax-free at this point.  You don't pay taxes on your BTC holdings any more than you pay taxes on your stock holdings, or your USD holdings, or your EUR holdings.  But when you cash them out, they are taxed as income.  As they should be.  (Putting aside for now that the IRS and income tax is possibly illegal, immoral, blah blah blah... ok, assuming that the IRS has the right to tax your income, it has a right to tax income made by mining or trading crypto-currencies.  Period.)  A business that deals in cryptos is no different from a business that deals in stocks, bonds, baseball cards, classic cars, or barrels of oil.  If the business profits, it will be taxed.  If it is a small business, unincorporated, with a single owner, then it is taxed as self-employment income.

We should push for the most favorable tax status possible and that is tax free. It may not be tax free forever but if it is tax free for a while it allows the industry to develop unimpeded and unhindered. There will be trillions of dollars for the government to make in taxes in a mature industry but we wont get there if we crush innovation.

I have never seen a call for taxing crypto-currencies per se.  If they were wanting to charge a tax of 5% per transaction, that is what I would call a tax on crypto-currencies, and I would fight it tooth and nail.  Or if they required you to hand in 10% of your crypto holdings, yearly.  That would be absurd.  But if you profit from a business, and those profits are realized as dollars in your bank account, you owe taxes on those profits.  Clear and simple.

If I buy 1.0 BTC for $500, hold it for 2 years, and sell it for $1500, what do I owe taxes on?  The $1000 gain.  The gain is what is taxed, not the BTC.  If I mined 25 BTC in 2009 and have not sold them, and I sell them for $25k in 2014, what do I owe taxes on?  $25k, minus whatever the costs in hardware and electricity were in 2009 (which would probably not be much, but if you claimed $1000 for the PC then you could probably pass muster with the IRS).

Sorry, but crypto-currencies are never going to get whatever kind of special, protected, un-taxed status that you desire in your dreamworld.  It would be horribly unfair.

Indeed, I wonder if you go from BitUSD to BitGold to BitBTC to XTS and back a hundred times without ever leaving BitShares X did you ever really change financial instruments?

I'm taking the stance (and I believe that it is a defensible stance) that as long as I'm in crypto-currencies, period, it doesn't count as changing financial instruments.  It is a like-kind exchange, which is tax-deferred.  Pay taxes when you cash out.  It's not income until it's dollars in your bank account.  Simple as that.

If I were to sell BTC for USD, and then use USD to buy LTC, I would have to treat the sale of BTC as taxable, and note the purchase of LTC as a cost basis for whenever I sell those LTC or other cryptos which I might use the LTC to acquire.  But if I simply exchange BTC for LTC, there's no taxable event.  The direct exchange of BTC to LTC is not tied to any cost basis in USD.  It's simply trading one baseball card for another.  Until I sell my baseball cards for fiat, I don't have a taxable event.

I think it might be more complicated than that.  I'm not an expert in any way, but in reading http://www.irs.gov/publications/p17/ch14.html I stumbled across

What Is a Sale or Trade?

This section explains what is a sale or trade. It also explains certain transactions and events that are treated as sales or trades.

A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money.

A trade is a transfer of property for other property or services and may be taxed in the same way as a sale.

and

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.

There seems to me to be 3 different ways to be taxed. 

1) mining and/or premining rewards- When you receive your rewards (need more clarity on if this is moment of confirmation or moment of payout from a pool to external address.  probably the former if my understanding of stock awards is accurate and relevant) this is taxed as income at fair market value.  This must be reported as income.

2) income from barter trades of property for property- http://www.irs.gov/taxtopics/tc409.html

Topic 409 - Capital Gains and Losses

Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for is a capital gain or a capital loss. Generally, an asset's basis is its cost; however, if you received the asset as a gift or inheritance, refer to Topic 703 for information about your basis. You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less than your basis. Losses from the sale of personal-use property, such as your home or car, are not deductible.

Capital gains and losses are classified as long-term or short-term. If you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. To determine how long you held the asset, count from the day after the day you acquired the asset up to and including the day you disposed of the asset.

Capital gains and deductible capital losses are reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, and on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets. If you have a net capital gain, that gain may be taxed at a lower tax rate than your ordinary income tax rates. The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year. The term "net long-term capital gain" means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years. Generally, for most taxpayers, net capital gain is taxed at rates no higher than 15%. Some or all net capital gain may be taxed at 0% if you are in the 10% or 15% ordinary income tax brackets. However, beginning in 2013, a new 20% rate on net capital gain applies to the extent that a taxpayer’s taxable income exceeds the thresholds set for the new 39.6% ordinary tax rate ($400,000 for single; $450,000 for married filing jointly or qualifying widow(er); $425,000 for head of household, and $225,000 for married filing separately). For more information, refer to Publication 505, Tax Withholding and Estimated Tax.

There are a few other exceptions where capital gains may be taxed at rates greater than 15%:

    The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
    Net capital gains from selling collectibles (like coins or art) are taxed at a maximum 28% rate.
    The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

Note: Net short-term capital gains are subject to taxation at your ordinary income tax rate.

If you have a taxable capital gain, you may be required to make estimated tax payments. Refer to Publication 505, Tax Withholding and Estimated Tax for additional information.

If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed is the lesser of $3,000, ($1,500 if you are married filing separately) or your total net loss as shown on line 16 of the Form 1040, Schedule D (PDF). If your net capital loss is more than this limit, you can carry the loss forward to later years. You may use the Capital Loss Carryover Worksheet found in either Publication 550, Investment Income and Expenses, or the Form 1040, Schedule D Instructions (PDF), Capital Gains and Losses, to figure the amount eligible to be carried forward.

Additional information on capital gains and losses is available in Publication 550, Investment Income and Expenses, and Publication 544, Sales and Other Dispositions of Assets. If you sell your main home, refer to Topics 701 and 703, and Publication 523, Selling Your Home.

Leads me to believe that if you have held a property for less than a year and you trade it for another property any gain in the value since you received that property is taxed at the income tax rate.

3) Capital gains from barter trades or sales of assets-  If you have held a property more than a year and then sell and or trade it for another property you will report it as capital gains, and pay the capital gains tax rate.

I would love to have a lawyer or CPA weigh in on this.  The IRS code is so long and convoluted that I don't think any one person really understands it.  lots of people understand it better than I do though.

**edit** cleaned up quotes of irs.gov to make it promote clarity

[bitbadger]

That's not the advice I received. Don't assume the IRS isn't tracking it and it's actually very easy to track since the blockchain is public and exchanges have to pay taxes or face compliance.

The blockchain is public, but exchanges aren't.  Addresses aren't connected (if you're careful).  If I send 1.0 BTC to BTer.com from address 1ABC, and exchange it for 3 crypto-currencies, trade and profit, and eventually withdraw 2.0 BTC from BTer.com to address 1XYZ, how the hell can they even know that 1ABC and 1XYZ are connected?  That's the whole point, addresses are anonymous.

Rather than assume they can't, assume they can and will. Do you want to be the person who loses a fortune due to tax issues?

I'm not going to be hiding anything from the IRS.  When I get a payout in USD, I will count those USD as income.  My entire crypto mining and trading operation will be taxed as self-employment income.  I am already self-employed in my day job, so I'm familiar with how to do it.

So why aren't you paying a tax on your emails? After all it's impossible to think that something like email could be tax free.

Because I can't trade my emails for USD or other fiat?  And because emails aren't some fungible currency in limited supply?  I mean, that is a bizarre comparison.

If you don't try to make it tax free of course it wont be. It's the same with network neutrality, how you have people pushing for that, or privacy. Why do you assume the IRS can't track our transactions on the one hand but on the other you say we shouldn't push to make it tax free?

What do you mean by "tax free"?  It IS tax-free at this point.  You don't pay taxes on your BTC holdings any more than you pay taxes on your stock holdings, or your USD holdings, or your EUR holdings.  But when you cash them out, they are taxed as income.  As they should be.  (Putting aside for now that the IRS and income tax is possibly illegal, immoral, blah blah blah... ok, assuming that the IRS has the right to tax your income, it has a right to tax income made by mining or trading crypto-currencies.  Period.)  A business that deals in cryptos is no different from a business that deals in stocks, bonds, baseball cards, classic cars, or barrels of oil.  If the business profits, it will be taxed.  If it is a small business, unincorporated, with a single owner, then it is taxed as self-employment income.

We should push for the most favorable tax status possible and that is tax free. It may not be tax free forever but if it is tax free for a while it allows the industry to develop unimpeded and unhindered. There will be trillions of dollars for the government to make in taxes in a mature industry but we wont get there if we crush innovation.

I have never seen a call for taxing crypto-currencies per se.  If they were wanting to charge a tax of 5% per transaction, that is what I would call a tax on crypto-currencies, and I would fight it tooth and nail.  Or if they required you to hand in 10% of your crypto holdings, yearly.  That would be absurd.  But if you profit from a business, and those profits are realized as dollars in your bank account, you owe taxes on those profits.  Clear and simple.

If I buy 1.0 BTC for $500, hold it for 2 years, and sell it for $1500, what do I owe taxes on?  The $1000 gain.  The gain is what is taxed, not the BTC.  If I mined 25 BTC in 2009 and have not sold them, and I sell them for $25k in 2014, what do I owe taxes on?  $25k, minus whatever the costs in hardware and electricity were in 2009 (which would probably not be much, but if you claimed $1000 for the PC then you could probably pass muster with the IRS).

Sorry, but crypto-currencies are never going to get whatever kind of special, protected, un-taxed status that you desire in your dreamworld.  It would be horribly unfair.

Indeed, I wonder if you go from BitUSD to BitGold to BitBTC to XTS and back a hundred times without ever leaving BitShares X did you ever really change financial instruments?

I'm taking the stance (and I believe that it is a defensible stance) that as long as I'm in crypto-currencies, period, it doesn't count as changing financial instruments.  It is a like-kind exchange, which is tax-deferred.  Pay taxes when you cash out.  It's not income until it's dollars in your bank account.  Simple as that.

If I were to sell BTC for USD, and then use USD to buy LTC, I would have to treat the sale of BTC as taxable, and note the purchase of LTC as a cost basis for whenever I sell those LTC or other cryptos which I might use the LTC to acquire.  But if I simply exchange BTC for LTC, there's no taxable event.  The direct exchange of BTC to LTC is not tied to any cost basis in USD.  It's simply trading one baseball card for another.  Until I sell my baseball cards for fiat, I don't have a taxable event.

[luckybit]

I'm not seeing it so much like that.... there is no way to track stuff on exchanges and everything.  It would be very hard for you to keep track of it, but more importantly, there is no way for the IRS to keep track of it.  Most people buy (or mine) crypto-currencies, trade, and if they cash out, they use BTC as the final medium before exchange into fiat.  Everything that comes before that (exchanges and whatnot) is pretty much impossible to track.  (Well, some of it is possible to *track*, but most of it is impossible to tie to a particular individual, and once it's moved onto an exchange, you can kiss all address-tracking goodbye.)  As long as you keep a rough [money in - money out] accounting, that should be plenty good enough for the IRS.

That's not the advice I received. Don't assume the IRS isn't tracking it and it's actually very easy to track since the blockchain is public and exchanges have to pay taxes or face compliance.

Rather than assume they can't, assume they can and will. Do you want to be the person who loses a fortune due to tax issues?

There's no way that Bitshares, Bitcoin, or any crypto-currency is ever going to be made "tax-free".  You can trade all day in REAL currencies, but you have to pay taxes on your earnings.  You can trade in baseball cards, but if you make a profit then you have to pay taxes on it.  If you make a (realized) profit then it constitutes income = you pay taxes.

So why aren't you paying a tax on your emails? After all it's impossible to think that something like email could be tax free.

If you don't try to make it tax free of course it wont be. It's the same with network neutrality, how you have people pushing for that, or privacy. Why do you assume the IRS can't track our transactions on the one hand but on the other you say we shouldn't push to make it tax free?

We should push for the most favorable tax status possible and that is tax free. It may not be tax free forever but if it is tax free for a while it allows the industry to develop unimpeded and unhindered. There will be trillions of dollars for the government to make in taxes in a mature industry but we wont get there if we crush innovation.

If you don't want unnecessary taxes on your Bitshares, while I'm not giving tax advice this is how I would think to do it.

Buy your Bitshares and don't sell them until cryptocurrency is made tax free. Just trade within the Bitshares ecosystem. Trade within is still income so you might still be taxed but you wont pay as much.

If you sell and buy Bitshares for Fiat/Bitcoin over and over, that is where you get taxed.

Indeed, I wonder if you go from BitUSD to BitGold to BitBTC to XTS and back a hundred times without ever leaving BitShares X did you ever really change financial instruments?

As far as I understand it, it's the exact same instrument. It's Goxdollar for Goxdollar type transaction. The only time you have a capital gain is when a different capital asset is exchanged for another. An apple exchanged for an apple is the same, apples exchanged for apples are all the same. A BitAsset is like a portion or bag of apples which we know as XTS.

If you were to move off the chain that is when you'll have to worry about capital gain because the price of XTS might increase and then you sell it for BTC or fiat, capital gain.

In addition to that, you probably have to track all your prediction market speculation because if you do make a profit thats still income, but it's not capital gain. I think it's just like if you made a bet with dollars, you don't pay capital gain but you do pay income tax because at the end of the bet you have more dollars than you had before.

With BitUSD it could be made real clear what the tax should be. It could be part of the client itself or an extension so that people can just pay their tax in BitUSD each year on their trades without having to calculate anything as long as they remain in the system.

It sucks, but it's better than tax evasion.

[Stan]

If you don't want unnecessary taxes on your Bitshares, while I'm not giving tax advice this is how I would think to do it.

Buy your Bitshares and don't sell them until cryptocurrency is made tax free. Just trade within the Bitshares ecosystem. Trade within is still income so you might still be taxed but you wont pay as much.

If you sell and buy Bitshares for Fiat/Bitcoin over and over, that is where you get taxed.

Indeed, I wonder if you go from BitUSD to BitGold to BitBTC to XTS and back a hundred times without ever leaving BitShares X did you ever really change financial instruments?

[bitbadger]

Basically it states that Bitcoin mining should be treated like any other business (you get paid in BTC => your earnings are reportable based on USD price of BTC at the time when you receive it), and that crypto-currencies should be treated as capital assets (like stock) rather than as currencies (trading in foreign currencies has its own set of rules, which I am not familiar with).

Basically, it is a very straightforward decision of how crypto-currencies, and businesses that deal in crypto-currencies, should pay their taxes. 

IMO a very good thing.  First, it's good just to be recognized as something that needs addressing by the IRS.  Second, it's not a banning/outlawing/threatening.... it admits that it's out there, and that it is just an asset that can be bought and sold; and if somebody makes money buying and selling it, they should be paying taxes on their earnings.

Not familiar with US legislation. Does anyone have a guess whether this will move the price up or downwoards?

It's not going to move the price but its a pain in the ass for taxpayers to have to try and track every trade. It's probably impossible to do it with the current technology as this would have to be built into clients themselves to work.

Bitshares wont have this problem as much because of how it's designed but if you use Cryptsy it means you have to track every single trade and the capital gains on everything.

If you use all sorts of mining pools, Cryptsy and sites which are shut down or the information is just lost, you'll have to deal with the IRS someday unless we can get a law passed to make cryptocurrency tax free.

Technology doesn't solve every problem. Sometimes you have to work the system to get a favorable bill passed and that is the reason to interface with regulators.

I'm not seeing it so much like that.... there is no way to track stuff on exchanges and everything.  It would be very hard for you to keep track of it, but more importantly, there is no way for the IRS to keep track of it.  Most people buy (or mine) crypto-currencies, trade, and if they cash out, they use BTC as the final medium before exchange into fiat.  Everything that comes before that (exchanges and whatnot) is pretty much impossible to track.  (Well, some of it is possible to *track*, but most of it is impossible to tie to a particular individual, and once it's moved onto an exchange, you can kiss all address-tracking goodbye.)  As long as you keep a rough [money in - money out] accounting, that should be plenty good enough for the IRS.

I think of it as being like "realized gains" for stocks... if you don't sell your stock then you don't need to pay taxes on it, no matter how much it gains.  The sale of stocks creates a taxable event.  If you're mining, you should keep track of your expenses and your earnings, in USD.  If you mine coins and hold them, then you don't have to pay taxes on them until you sell them for USD, because the gains have not been realized.  But if you're mining coins and cashing them out constantly, you need to keep track of all of the cash-out transactions.  I'm sure that Coinbase et al. report their payouts to the IRS.

There's no way that Bitshares, Bitcoin, or any crypto-currency is ever going to be made "tax-free".  You can trade all day in REAL currencies, but you have to pay taxes on your earnings.  You can trade in baseball cards, but if you make a profit then you have to pay taxes on it.  If you make a (realized) profit then it constitutes income = you pay taxes.

The IRS talking about valuing things at their market value at the time of the transaction is mostly in the sections about paying employees in cryptos.  This is the same as paying employees with stock.  The stock is valued at the date of the transaction occurring.  This is, crucially, because the business gets to deduct the employee's salary from their profit when paying taxes, so the business and the employee must value the stock the same.  If the company says that they grants $20,000 in stock to an employee, they get to write off $20,000 as an expense (employee compensation) while the employee must show $20,000 in income (and pay taxes on it).  This keeps the books even.  If the employee holds their $20,000 in stock for 5 years and it goes down to $0, they don't get to say their income was $0 during that time.  They chose not to cash out that stock.  The same thing would apply to paying employees in crypto.