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.
- 1 Tax Questions
- 1.1 Are bitcoins taxable if I earned them by doing a service for someone else, or received them in exchange for something?
- 1.2 Are my bitcoins taxed as income, or as capital gains?
- 1.3 How are Bitcoins that I have mined treated for tax purposes?
- 1.4 What expenses can I deduct/expense/itemize if I set up a Bitcoin mining operation?
- 1.5 Do I need to register as a business/LLC/corporation to mine Bitcoins and deduct expenses?
- 1.6 Are there any other reporting requirements?
- 2 Types of Transactions
- 3 Types of Taxes
- 4 Recordkeeping
- 5 Jurisdictions
- 6 See Also
- 7 References
The general tax questions and answers were shared by forum member bitcoinaccountant.
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
- Compensation / Payroll
Types of Taxes
- Sales Taxes
- Value Added Taxes
- Income Taxes
- Excise Taxes
- Payroll Taxes
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".
Depending on how the revenue is to be treated, you may need to know when the Bitcoin proceeds were attained.
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.
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.
Below are specific details to individual tax jurisdictions.
When the exchange rate gain is $200 or less and it is a personal transaction, then the gains need not be claimed - Sec 988 (e) - Application to individuals.
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, there is the possibility that requirement applies to cash held in non-US bitcoin exchanges or wallet services. An additional topic that may have a connection to Bitcoin is the Foreign Account Tax Compliance Act (FATCA) filing requirement in the U.S..
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- Tutorial on multiple currency accounting
- A Lawyer's Take On Bitcoin And Taxes
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- Staying Between the Lines: A Survey of U.S. Income Taxation and its Ramifications on Cryptocurrencies