+1

As long as this is a voluntary program, and combined with a recognition that the exchange can capitalize on for complying with the program so that it is also worth their while - I am up for this.

Especially with Gox, I am looking for alternatives.  This thread led me to the BitSimple website - wondering how they worked.  The suggestion is that they are a broker - which in my world means they are not in the middle of a transaction, but rather somehow generate a commission from the transaction. 

This seemed incredible unless you operated with some control of the wallet, which they say they don't.  In the future, I know this can technically occur when BIP 70-2 comes out in  bitcoin-d in 0.9, but not today.  I went to the BitSimple user agreement and read this:

3.6 When buying or selling bitcoin, you are buying or selling with BitSimple, LLC. BitSimple profits from the differences in the exchange rate offered to you and the exchange rate available to BitSimple. The rate offered to you is not guaranteed to be the best possible exchange rate available. BitSimple does not act as an intermediary or marketplace between other buyers and sellers of bitcoins.

So if I get this right, BitSimple is not a broker at all, but is a principal in a trade, and sets the buy sell prices at which BitSimple will purchase or sell bitcoin, not some third party for whom BitSimple is acting as a broker....

I note the 'spread' I saw was currently $20 per btc.  So if I sell 10btc through BitSimple - I'm really paying $200 implicit in the price?  It does not sound likey they are not a broker at all?  What am I missing?

As you have probably read, the US Atty. for the SDNY has issued a subpoena for Mt. Gox Records according to news reports.

If you had an account at Mt. Gox last year, and if AT ANY TIME DURING THE YEAR the account value exceeded 10k, you may want to file a foreign financial account form - called a 90.22.1 form (also known as FBAR).  Remember CoinDesk reports $1,147.25USD per BTC on 12/04 of last year as the highest value for BTC - Gox was likely higher and is a safer number to use but their site is down.

I have seen nothing on what was requested in the subpoena.  Subpoenas are typically not made public unless released by the individual or corporation who received the subpoena.  I also don't know who was the entity the subpoena was issued to - Mark personally, Tribane, Mt. Gox LLC, the US subsidiary that was subject to the seizures last July, Mutum Sigillum LLC or some other Gox-related entity.

In the meantime, all the more reason that you consider filing the forms..... and presume your account and trading information will be turned over.

Link for info and form is below.  The penalties for not filing are hefty.  If you had several accounts at Gox I suspect they will be looked at as if they were a single account...

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-FBAR

They can start at any time and there are different kind of audits for different purposes.  The IRS has little info on bitcoin I suspect from tax filings as most gains of a material amount happened last year.  Before that it was likely a 'who cares' from a tax perspective.

But there's enough activity at Treasury these days (US) that I have no doubt they are looking into it.  I am surprised that no one here has been contacted or had it come up yet....... but no responses like this to date... and this is the second time we have called for some report of IRS activity.......

There is no license I am aware of in the US required for mining itself.  This may be different for pool operators who's shares may be treated as securities, like stocks - but that is not related to the actual mining. 

This may be some confusion with the New York State's recent hearings on whether a 'bitlicense' is going to be put in place in NY.  But this is a future potential and no license is even on the books yet.  It also appears that such a license by NY is focused on money transmitting and not mining.

True, the IRS has not provided guidance on the taxation of bitcoins and I am not sure that reporting the coinbase of mining income at the time it is awarded is the correct treatment for tax purposes.  I think the accountants and attys. out there can go either way. 

The transaction fees that are included with the coinbase, however, present a different issue to me at least, as these are fees paid by others to miners so that their transaction are included in the block.... this could easily be income for services rendered and taxable when the coinbase is awarded or spendable 99 confirms later......

If anyone has had even an inquiry about how their bitcoin was treated for US Tax purposes by the IRS or a State Tax authority - might you be willing to share in this form to help others?  If so please add to this thread your experience.

I am an accountant and at least for my US mining clients we believe bitcoins are taxed when the coinbase is complete.  This has been helpful to some as they have some significant expenses that they would have lost had they not have had the income to offset those expenses -  from the computers purchased to an allocation of home electrical use and even, for some, depreciation of their home office where their mining activity is conducted.

mgio is correct, a 'business license' or incorporating is not required.  Either or both may help evidencing that you are mining as part of a 'trade or business' as opposed to an 'activity for profit.' The difference between these two is a bit much for a board discussion but your accountant will know what it is and how, in your particular circumstances, it impacts your deductions and your taxes.

No specific IRS ruling says your coinbase award is taxed when you receive it.  We expect the IRS to say so.  Some know some tax people point to gold miners who do not report found gold as income.  This had more to do with the fact that you could not value the gold found because you did not know either its purity or how to reduce it to being a marketable quantity.  Had you been mining and happened on a gold coin, you would be taxed the moment it was found on it's value as the value was reasonably determinable.

So the value of the coinbase is reasonably determinable.  We have the indexes for bitcoin, and while you might argue each index is different, some higher, some lower, and whether you might use daily average price, or bid/ask as of the time the block was added to the block chain or the coinbase was spendable at 99 confirms, I would only suggest that once you chose a way to value it - stick with that method. 

Hope this helps.  Bottom line is..... tell Bill to go see his accountant.  20 bitcoin may be a marginal amount of money if earned in the earlier part of last year.  Tell bill to let his accountant determine if what Bill was doing was a 'hobby' or 'an activity for profit' or a 'trade or business.'  It's a determination that is technical but quick to make.  Your expenses may offset much of the income if the bitcoins were mined before March last.....

Oh and BTW - 20 bitcoins.... nice!

bob

Kosta - I have been a US tax adviser for years and mgio is correct - when you bought your Visa Gift Card with your bitcoins it was a taxable event.  Bitcoin transactions are not only taxed when you convert them to fiat.  You are taxed any time that you trade bitcoin for something else - a car, a boat, fiat, or a Visa Gift Card.

mgio's barter example is spot-on..... you will have gain or loss based upon what you paid for your bitcoin and the value of your Visa Gift Card on the date you exchanged your bitcoins for it.....

There are some that, in your specific example, might suggest that you have what is called a 1031 exchange (a tax area common to real property owners but a bit illusive in the personal property area).  My own conclusion has been that the exchange of bitcoin for a prepaid card will not qualify - but check the your own tax adviser and if they differ for some reason please let others on this list now as this will be useful information....  this area of US tax law is not entirely clear......

bob

There is no guidance on when to recognize mining income kendog77 - I think the IRS will ultimately say it is taxable at time of receipt of the coinbase and valued  using a reasonable valuation method (pull it from coindesk?) either on the date the block is included in the blockchian, the date it has sufficient confirms (6?) so as not to be considered an orphan or the date it reaches the 99 confirms required for it to be spendable.  I think any convention on timing of the three is supportable, but once you select a method you will have to stick with it for other income from the same mining operation.

You might choose to report it on disposition or sale of the BTC but you may need to consider disclosing what you are doing on the return to avoid significant penalties.

Now how you tax it - ordinary income, capital gain, etc., will be more of a conversation between you and your accountant.  They may also disagree with what I state above.... the 'right' answer is not entirely clear and I have spent several hours on mining income recognition.....

Note if you are in a pool or mining as a group the above may be quite different as the mining pool structure will impact how the income is recognized.........

my two cents.

So one could create and send an unfunded coin..... the purchaser can transfer funds with the external public key - they can not withdraw funds without the sealed private key, and a subsequent holder of the coin can confirms the BTC balance with the public key, and accesses the BTC with the private key if they want to break the seal....

Works structurally - but is there some accomplice theory here that might be brought to bear on this?  Is there some way you cold be held accountable as a facilitator even though you have no participation, or even knowledge, of whether or not the coin was funded?

As another tax attorney, I want to note that this is an excellent writeup, and whoever did it put a treat deal of thought into it.  I am hoping he/she follows up here with a repost.

bob

Goat -

First - remember that I am at 7,000 ft. and we love ice and snow.  We're at a 40 inch base here.... and do take a look at how a Tesla handles ice.... you may re-think what you have..... but I digress....

Yes, there are several items surrounding a theft loss that your accountant will sort with you - typically quite quickly but always based upon your own circumstances.  It will depend on whither your bitcoins lost were part of a business, held for the prouction of income, as an investment or as a hobby.... and that it entirely dependent upon your circumstances.

Depending on the above, it may be limited to the basis or fair market value of your bitcoins - so your accountant will likely need both.  

Basis is typically what you purchased the bitcoins for or, if you do pool them, the value under the pooling convention you use (FIFO, Weighted Average, etc.).  For the fair market value of the loss make sure you bring to your accountant some exchange numbers from the likes of Bitstamp, etc. - and a chart works best as the exact 'date' your loss occurred may be as much a guess as anything.  In any event, make sure the exchange price or method you use it is the same exchange you used to value your bitcoin (if you were a miner) in the first place.

Finally, take care to explain the loss clearly.  Your accountant may ask that you file a police report or the like, to help substantiate the loss.  In bitcoin a 'loss' by theft is typically evidenced by little more than a transaction on the block chain.... so you want to think about how this loss can be documented for an agent if you are audited a year or two later who will likely not understand bitcoin. Showing that it was a theft can be a more difficult part of the process.  

As well, determining 'when' the theft occurred is many times interesting.  If you loaned the guy some coins involved in a 'test' - when did it go wrong to the point of being a loss or theft - and when did you discover it.  Did you discover it immediately or did a suspicion ripen into an certainty.  

Also, just fyi - keep in mind a gambling loss is different event than a theft loss, and I am not sure where your loss fits.  You need to be very clear here, as gambling losses are treated quite differently from a theft loss and we're talking about a good deal of money.  It may be critical what you were specifically doing - because if you are 'testing' a gambling site that, to me, is quite different from simply gambling at the site.  Testing implies there is a business going on here - either because you are in the trade or business of gaming as a gambler, or as an owner of a gaming space or location.

This is were one needs to be so cautious and clear.  Let's pretend it was 'gambling.'  The worst of all worlds could arise if the IRS said when you cashed in you effectively 'sold' your bitcoin for its the value of the account you received - a transaction where you have to recognize income and one that you may not be able to net your gambling losses agains.... and then you gambled..... an activity where your losses could be non-deductible... in short, a double whammy.  

Finally, you need to be careful to document in this space the circumstances surrounding the loss to make sure it is not colored as part of an 'illegal' activity.  It's not in the IRS Code, but there are court decisions permitting the IRS to deny the loss deduction simply because it was incurred in an activity that was illegal and 'violated public policy.'

If you want, Goat, email me - you have that info.  I am responding to this depth here so that others who are taken in this space understand that their accountant is critical in dealing with things like this.  I can't tell you where you fall in the spectrum, only the guy who knows your business can.

For that guy, this should be an easy question, they understand your circumstance and your options in how you treat and document the event.  They won't be able to give you certainty, but they will be able to give you a way to report this that is accurate and protects you best should it be questioned later..... if you need someone in the SF bay area - that's where I'm from and I can give you a lead or two......

I doubt US based exchanges have guidance yet - or we would see it as the only guidance they could rely on is a private letter ruling.  IRS private letter rulings are made public.  I can also easily understand why the IRS is not ready to weigh in on this yet - we're still sorting out what bitcoin is ourselves.  From a policy perspective, it is sad that the IRS is in this position.  

Virtual currencies predate bitcoin by over a decade.  The IRS hasn't given any 'safe harbors' for those of us who are willing to do the right thing.  Then again, they have not aggressively pursued the arena that I can see.  I see no court cases or taxpayer challenges.  What a mess for the IRS to have a judge decide how virtual currencies will be taxed.......

It would be nice if the service were to issue  'temporary' guidance while this virtual currency space works itself out.  Many are in for the investment - more like gold.  Many are in it as a currency - to support a consensus based transactional medium.  

As a miner you face, from a cerebral standpoint, the more discrete but interesting judgments..... do you recognize for tax purposes the coinbase when it is awarded or when it is spent - do you recognize it as of the date you become a part of the block-chain, at a safe margin of confirms or at the 100 confirm requirement for spending?  This stuff was pretty inconsequential when it was a $750 issue when this year began.

And since the block time stamp is not an indicator of the time of the coinbase award or its confirmation, tracking will be interesting....

And what do you use for valuation - interday average on Mt. Gox, Bitstamp.... some blend, some running average..... ?

Take heart, though, as your issues are pretty obvious and you have lots of options that are rational and will not be a compliance nightmare once they are made.  I am dealing with a bigger issue right now on those who are determined on using bitcoin for purchasing transactions in a business.  

We are facing some very real compliance issues not only for valuation but also for accounting where bitcoins are regularly used in purchase transactions by a firm...... say you bought your bitcoin for $100, then you used it to buy a portable computer.  The portable may be $800, so there are two transactions here - you made $700 on your bitcoin, you purchased an asset...... Straight forward transaction, but for an individual using Quickbooks (or big boys on an Oracle or SQL solution), it's not easy to track without double entry, and double entry is twice the work.......

All the luck Raize.  Congrats on having the problem you do and I hope you 'ASIC Up' as a friend says, the market only appreciates for bitcoin, and your problem is only worse next year as you pocket some coinbase.......  ditto for you Goat - and I want a ride in that new car.......

Just FYI, before you say they haven't stopped online gaming ...

Do check out Blizzard closing the Daiblo III auction house..... the rationale per Blizzard is its impact on game play, which I am sure it has, but they could have integrated the auction into their gaming  environment in another way but chose not to.... I highly suspect that choosing to just shut it down has quite a bit to do with what is happening in virtual currencies generally....

It's not all about bitcoin out there.  Rather, we're the bad boy on the block, and the block is otherwise quite occupied - gamers and VR envronments (Second Life) were there well before virtual currency took hold.   We need a little image control/brand development, I think......

I peeked up during the holiday and saw the recent 'offering' on this forum for a new 'bitcoin' investment: growing marijuana.  I thought, as the discussion went on about shares for sale and no business plan but what a cool idea...  Just another PR opportunity for FinCEN if they want to bash bitcoin, or the SEC if they feel interested in tempering any positive traction bitcoin might get.

We seem to have a knack of bringing it on ourselves.  We should have outted Silk Road way before they did......

Raize:

FIFO is the default for tax purposes, so absent a strong indication that it distorts your income, and I doubt that would be the case with bitcoin, this is relatively safe method overall.

You can not 'ask' the IRS to come visit you unless you apply for a letter ruling (a kind of guidance ruling along the lines of what Milly Bitcon/Atlantic City did with FinCEN).  Even then the decision is theirs.  I think I recall a prediction on this board that they would provide guidance before April 15th - I'm not holding my breath...

Rather than you test the IRSs position, it would be nice if you chimed in on the foundation to open a dialogue with the IRS or that they take steps to test the waters. 

But if you go it alone be careful what you wish for.  You will find that the government has an incredible number of ways to determine your assets, they are in no hurry, and if they want you, money is quite there for investigative work. You can be a little feisty today and not see it come back to haunt you for years.

There are ways to pressure the IRS to give clarity in the area, which is really what most want.  The virtual world companies have dealt with this for years - and the gamers - Blizzard, Second Life, etc.  I think we need to reach out to them as they have been there for a long time and we don't need to reinvent the wheel..... and by we I really mean we - not you as an individual.  Do not take the IRS on as a personal crusade.  Rather, be a catalyst and help pull a group together to represent us before them.

Hope I interpreted your post correctly......

bob

steverabincpa, my use of the term reward refers to the coinbase transaction - and the miner receives this plus the fees.  One could take the position that the coinbase is lottery-like.  I am not particularly inclined to that as outcome is not certain in a number of for-profit activities.  Fishing and crabbing is the first idea that comes to mind. 

Now steverabincpa - just for fun - check out the way the service treats slot-machine play..... with each trip to vegas being a separate 'transaction' that can not be netted with the other trips........ then think how the block-chain works and what a very silly position the service might take if they said each attempt at a block was an independent transaction.  Pretty fun in the abstract....

The transaction fee is another matter.  To the miner I suspect it is income for service - but the amount these days are so small that I doubt anyone cares.......

achillez - if you're still in the thread - the timing for when the coinbase is to be recognized - if you take the position that it is to be recognized when the reward is allocated to the miner - is again pretty interesting - is it the mean value of bitcoin for the day, and we've had $300 day spreads (forget the differences between Mt. Gox and the others) - say you just use the blend CoinBase reports) as would typically be the case for Estate & Gift taxes, with of course special rules for those favorite holidays!  Even more fun, is it when the block is added to the chain, when you are mature at 99 confirmations..... which can span a day.... Who knows without guidance from the IRS.

steverabincpa is probably right in saying pick your poison, be logical and be consistent - and remember pigs get slaughtered.

We ought to encourage the foundation to chime in o this so that we have some support from somewhere other than a forum.

My understanding is that banks need not register with the states.  Dwolla tried the registration route and as I understand it abandoned the effort when association with another was easier, cheaper, etc.  They focus on thier core business while the bank addresses compliance.

Now if I were to guess Milne is after market share at this point, so profit is a longer term proposition and I can't say the association with the bank fits the model, but the idea is pretty solid and money is willing to follow.....

And yes, BCB, I have chatted with Silicon Valley Bank and they are very aware of their position here......

Anyone look at the idea of purchasing a bank seriously.  We thought finding a federal charter was interesting but have not pursued the practicality yet.  I also like what Milne did at Dwolla through their association with Veridian Credit Union.... you know of other examples that takes care of the register-in-every-state nightmare?  CA registration alone takes months and even for those out of state they want to personally visit.....

understood, but they can not access funds once allocated.......

how would you structure it to allow a coin sale, insure it was funded and finally insure the private key was unknown to anyone absent breaking the seal on the coin...... without being a transmitter?

You know the arena, and all suggestions would be helpful.  As I recall there were multiple FinCEN letters sent.

bob

But a direct fund by the customer might not make sense, as I doin't think an owner of the coin is to be able to access the value without breaking the seal to get access to the private key.

If I understand what is being accomplished, no one knows the private key, not even the owner of the coin, until the seal is broken.  That way you are assured of value in the piece and this is not dependent on the integrity of the individual who had the coin created.  Even they can not access the value without destroying the seal Caldwell created.....

Therefore, a few steps are necessary to make this happen, but it is not rocket science....

yes?