Tax compliance

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There may be tax liabilities encountered when transacting with or trading in bitcoins. Some of those that are possible might be described below.

This page was created by those in the Bitcoin community to help in understanding tax compliance concerns. This is not legal advice nor accounting advice. For either for those consult your attorney or accountant.

Tax Questions

The general tax questions and answers were shared by forum member bitcoinaccountant[1].

Are bitcoins taxable if I earned them by doing a service for someone else, or received them in exchange for something?

Anything that you receive as payment for goods or services is generally taxable income unless it is specifically exempted.

That means, if you mow your neighbor’s lawn, it doesn’t matter if he pays you $20 in cash, or $20 worth of bitcoins. (Or $20 worth of tomatoes for that matter)

In many jurisdictions, you are still legally required to report that as income. When using Bitcoin for payment the taxing authorities may be less likely to be aware of the payments but try to mow 10,000 neighbor’s lawns and not report the income and you will be much more likely to get caught.

Are my bitcoins taxed as income, or as capital gains?

Income that is earned through the exchange of services with another person, whether in the form of bitcoins, dollars, or barter; is included in gross income, and would be subject to income tax at applicable rates. Also these bitcoins could be subject to self employment tax.

In some jurisdictions, income earned through the process of buying and selling bitcoins would also be included in gross income, but would be treated as capital gains.

Note: The above interpretation is based on the assumption bitcoins are treated as a store of value such as gold, or other such commodity. If instead they are treated as a currency or debt, the full gain could be taxed based on market value at the end of each tax year. 3858 IRS Ends Currency ETN Advantage Simply put, the IRS never considers currency a long-term investment. Consequently, if bitcoins are treated as a currency, you will be taxed the same as holding an account in any non-functional (foreign) currency.

How are Bitcoins that I have mined treated for tax purposes?

This is a tricky question, in that bitcoins are really the first digital currency that was created in this manner and actually have a significant value in relation to other currencies. Essentially it is somewhat uncharted territory. Literally bitcoins, and even digital currencies are so new, that there is little to no precedent for some aspects of bitcoin mining, from a tax perspective.

Since Bitcoins are currently traded in various online marketplaces, when someone receives a Bitcoin, they can reasonably calculate it’s value in the local currency. Because of this, it is possible that the taxing authority will treat the receipt of a Bitcoin through a mining pool, or from an individual mining operation, as a taxable event. At that time, the taxpayer would be required to estimate the value of the Bitcoins in dollars and record that amount. This would have to be done either daily or weekly depending on the value of the Bitcoins if their value keeps fluctuating as much as it has the past few weeks. These amounts would be recorded as revenue from bitcoin mining operations and would be taxable less allowed expenses.

When selling mined Bitcoins, however, you would also be taxed on the increase between the value you recorded them at when you first received them, and the value you sold them for.

Another possibility is that the government will consider mined Bitcoins ‘intangible personal property’. As a rule, however, financial instruments are excluded from this particular category. The question is, are bitcoins a financial instrument, or rather, will the taxing authority consider them a financial instrument? We will have to wait and see if bitcoins become popular enough for a position to be taken on that.

What expenses can I deduct/expense/itemize if I set up a Bitcoin mining operation?

That depends on your situation. Generally speaking, though, you can deduct business expenses that are ordinary and necessary. Buying video cards would be both of these, buying a big screen TV to watch while mining would be neither.

Do I need to register as a business/LLC/corporation to mine Bitcoins and deduct expenses?

In most instances, there is no requirement to do so. Whether you decide to form a corporation, register as an LLC, or simply operate as a private individual (sole proprietorship), the basic concept of tax treatment for Bitcoins is going to remain the same. For example, you will report gross income, deduct expenses, and have a net taxable income on which you will be required to pay income tax, as well as possibly self employment tax depending on how your mining business is set up.

Are there any other reporting requirements?

Each jurisdiction will have varying requirements.

Types of Transactions

  • Currency exchange trading
  • Investment as a commodity
  • Purchase of goods and services
  • Barter
  • Compensation / Payroll

Types of Taxes

  • Sales Taxes
  • Value Added Taxes
  • Income Taxes
  • Excise Taxes
  • Payroll Taxes

Recordkeeping

Trading

The records kept might include the same information that appears on a stock or forex brokerage statement: "Date of trade, Description of trade, Qty & Price, and Fees".

Mining

Depending on how the revenue is to be treated, you may need to know when the Bitcoin proceeds were attained[2].

Commerce

Regardless of how revenue is recognized for goods and services whose payment is made using Bitcoins, the recordkeeping requirements are likely to be the same: Reference to sales (e.g., cust # / invoice #), amount received (in BTCs) and date. If sales taxes are payable, then for that purpose documentation might include a calculated based on a weighted average exchange rate that existed at the time of sale.

Payroll

Employers sending bitcoins as compensation would likely record all calculations in the functional currency (e.g., USDs) and then after all withholding amounts are subtracted the net amount of the check is paid out in bitcoins based on the market exchange rate at the time.

Jurisdictions

Below are specific details to individual tax jurisdictions.

U.S.

The IRS issued guidance on the treatment of Bitcoin and other digital currencies in their March 2014-21 Notice [3]. The notice clarified the position that the IRS treats digital currencies as capital assets and are therefore subject to capital gains taxes. Any disposition of these digital currencies, including trading and spending, is a tax event and capital gains must be calculated in USD. When spending, the fair value should be used as the proceeds value. The IRS also clarified that mining is treated as immediate income at the fair or market value of those mined coins on their date of receipt.

While the IRS Notice does confirm that Bitcoin is taxed as property rather than a currency, there are still some unresolved issues. For instance, how should a mined alt-coin income value be determined is there is no direct fiat market, and do alt-coins benefit from Like-Kind Exchanges [4].

There is a Report of Foreign Bank and Financial Accounts (FBAR) filing requirement for financial accounts in a foreign country when the aggregate value of the accounts exceeded $10,000 at any time during the calendar year. While the value of Bitcoins themselves don't count towards the FBAR threshold[5], there is the possibility that requirement applies to cash held in non-US bitcoin exchanges or wallet services[6]. An additional topic that may have a connection to Bitcoin is the Foreign Account Tax Compliance Act (FATCA) filing requirement in the U.S.[7].

The Cryptocurrency Legal Advocacy Group (CLAG) has published memorandum detailing aspects of income taxation in the U.S. regarding Bitcoin[8].

Accounting and Tax Compliance Software

BitcoinTaxes

BitcoinTaxes, launched in January 2014, provides income and capital gains calculations for users of Bitcoin and other digital currencies in the US, UK, Canada, Australia, Germany and other similar tax jurisdictions. Trading records can be imported from all major trading exchanges, including Coinbase, Circle, Bitstamp, and BTC-e, to produce a complete annual trading history. In addition, spending and income records can be imported from wallets and payment processors, such as the core wallets, Blockchain.info and BitPay. Mining transactions are added from mining pools or directly from the appropriate BTC, LTC and DOGE blockchains. Capital gains are then calculated in the user's fiat currency using First-In-First-Out (FIFO) and a number of other cost-basis methods, such as Last-In-first-Out, Closest-Price-First-Out and average costing. Capital gains reports, income reports and balance reports can be downloaded as well as an 8949 attachment file and PDF of Form 8949 for US tax payers.

LibraTax

LibraTax launched in 2014 and will automatically import your transactions from Coinbase, Blockchain and other exchanges. LibraTax also offers several different cost-basis reporting methods - FIFO, LIFO and Libra-Optimized. The latter cost-basis method is a selective cost-basis method, where-in LibraTax will automatically and compliantly match your redemptions of bitcoin to minimize your reportable gains, or if none, maximize your reportable losses. Upon choosing a reporting method, an additional feature becomes available - automatic generation and completion of IRS Form 8949 that needs to be included on all tax returns with bitcoin activity.

LibraTax currently only services individual and business users that need to pay bitcoin-related taxes and/or meet bitcoin tax compliance and reporting guidelines in the U.S.

Kryptofolio+tax

Kryptofolio+tax is a free mobile app (iPhone, Android, Windows Store/Phone) with a fully configurable FIFO (first in first out) portfolio manager and additionally tax calculator for bitcoin, litecoin and other custom configurable crypto-currencies. It works by setting up percentage cuts of capital gain, sales and flat values on specific transaction types. So can therefore be configured to be used in almost any jurisdiction as a supplement to current tax arrangements. It can import transactions either from blockchain.info or via a csv file import direct from a wallet export for all crypto-currencies. For maximum privacy, transactions can be converted to QR codes to be scanned directly into the device without being broadcast. PnL and tax contributions can then be exported and then used to prepare a tax return.

BitPrices

BitPrices is an open-source command-line tool with a companion website mybitprices.info intended for viewing fiat value of transactions on the day they occurred. It is useful for auditing wallet transactions and determining cost basis. The website is free to use and does not require any registration or login. The tool can generate highly customizable transaction reports as well as a schedule D report with realized gains. FIFO and LIFO cost-basis methods are supported. This tool requires a list of all Bitcoin addresses in your wallet including change addresses. A companion tool, hd-wallet-addrs is available that discovers all wallets addresses in an HD wallet, including Copay multisig wallets.

See Also

References

  1. Bitcoin accounting and taxes
  2. How to treat Bitcoin mining income for tax purposes?
  3. IRS Notice 2014-21
  4. IRS Publication 550 - Like-Kind Exchanges
  5. IRS: No Bitcoin Reporting Required for FinCEN Foreign Banking Tax Form
  6. The TD F 90-22.1 Form for Bitcoin
  7. FATCA & BITCOIN (The Financial Berlin Wall)
  8. Staying Between the Lines: A Survey of U.S. Income Taxation and its Ramifications on Cryptocurrencies