Sorry for the late reply. Tax season and all...

Quote from: bbulker on April 04, 2013, 04:36:33 AM

How can I tell how much $ to pay in taxes when I receive a bitcoin and all the exchanges say something different?

What if there's an exchange trading at $0.01 (that nobody sells on lol) and another trading at $100, can I calculate the tax from the $0.01 one?

Why not just pay taxes from the income you made by selling the bitcoin?

The IRS accepts fair market value. The exchange that displays a price quote of $0.01 is neither fair nor market value. The fair value of anything is the value that two knowledgeable and willing counterparties are able to trade without being forced to trade. There have been no IRS precedents on BTC, but I'm sure the first BTC audit, whenever that happens, the IRS will use the MTgox price on the date of your trade as the fair market value of your trade.

Quote from: dchou on April 03, 2013, 07:46:12 PM

re: mining, the question is: when is the income recognized?

If I start a mining business, I am expensing the hardware and the electricity, pool management fees, etc.

If I keep all the coins I've mined for two years, there would be no income generated by my mining business until I actually decide to exchange it for fiat. My business would be showing a loss for those years. I am recognizing the income when I sell off my BTC.

If I report the current value of BTC when they are generated as income, I would pay tax once, and then once again on any gains if the value of BTC were to appreciate.

What approach is everyone else taking?

You are looking for an answer to a question the IRS has not answered. As there are no BTC audit decisions I am aware of, there are currently no IRS precedents to guide BTC mining businesses. In the absence of precedence, IRS rules state you should use a "fair and accurate" reflection of your business income and expenses. My opinion on your situation, albeit with little knowledge of your full situation, is that you must recognize regular business income when you receive BTC from the blockchain at the market price at the time of receipt. Then if you hold your BTC for two years, you must then recognize capital gains/losses from your basis price (the price you received your BTC at time of mining) to your sales price at the time of sale of your BTC. You essentially have two business activities, mining (your regular business where you are able to deduct your ordinary and regular business expenses of hardware, electricity, pool management fees) and your secondary business of BTC investment management (which will have investment expenses of it's own that you may deduct.)

Quote from: fergalish on March 14, 2013, 09:45:48 PM

I saw this thread got bumped, and it got me thinking. Well, if you buy & sell bitcoins, or if you trade for bitcoins, the tax implications should be fairly clear. I think in the former case, you declare capital gains when you realise the profit, and in the latter, you declare a dollar-equivalent income at the time of the trade. Right?

The interesting thing is mining. How do you tax wealth that comes "out of nowhere"? Well, let's examine more closely where it does actually come from.

Well, suppose I were to invent a new currency based on... peculiarly shaped stones that only I can find. Well, if no-one accepts my new currency the value is zero. If people start accepting them, then by their very acceptance, they ascribe a value to the stones. So, it's more like a gift than anything. So I might hold up a stone and shout to the masses: "what'll you give me for this?" and everyone shouts back "$100", and someone "gifts" me $100 for my (previously) worthless stone.

Of course, now that bitcoins are somewhat established, and mining is a big business, I suppose calling it a gift wouldn't cut any more. Yeah, it'd have to be income-taxed.

Your mental exercise is interesting involving magical stones, but ultimately fruitless. Anyone, laymen and tax experts alike, can speculate as to the true tax treatment of mining. Tax experts can use their knowledge of existing tax regulations combined with their client's specific business operations and develop a stated opinion. That opinion, however, is not worth the paper it's printed on until the opinion is challenged and ruled upon by the IRS and if necessary, the tax court. When dealing with the IRS, a good general rule to follow is to be open to negotiations. Eventually a bitcoin business will be audited. When you go in and sit down with the IRS, the most important thing to the IRS will be how much they are going to get out of you. Everything else regarding mining, blockchain, magical stones, is just details. If you go into an audit with the IRS accepting the fact that the IRS will get X% out of your income as tax, then the IRS will deal with you "fairly." If you try to use the intricate details of hash rates, double spend, Mtgox price vs localbitcoins price in order to lower your tax rate, the IRS will start demanding that X% to be significantly higher.

The above is not advice. Seek competent professional advice from a trusted source and from a licensed professional.