Bitcoin In IRS Crosshairs | Hacker News Reader

Bitcoin In IRS Crosshairs

forbes.com

38 pointsSealy51 comments

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IRS is entitled to have opinion about receiving taxes from bitcoin transaction.

A very astute statement that deserves more respect.

The IRS can and should claim what is theirs under the tax laws they operate.

However, I do not see a practical enforcement strategy.

Same strategy they use for everything else. Think about how they enforce taxes on cash.

It would be interesting to note that due to the fluctuation in pricing of BitCoins, you could probably get away with lower taxes by just doing a conversion of BitCoins to USD at the lowest price that year. Then claiming all of it in USD for the IRS because your BiCoin assets were assessed at that price when you calculated them for taxes. There by avoiding part (up to 20-50%) of the tax.

Or just say you don't have BitCoins, since it would be mighty hard to track that.

"Or just say you don't have BitCoins, since it would be mighty hard to track that."

Yeah, nobody would ever think to look at the public record of Bitcoin transactions.

How would they know which bitcoin address corresponds to me? I can make a brand new wallet, find someone on Local Bitcoins (https://localbitcoins.com/) and buy some nearly-untraceable bitcoins with cash in a matter of hours.

Look, this is no different from lying about your income in any other situation. People do it all the time. Yes, you can get away with it...until you are audited, at which point the auditor is going to start checking on things, and if you do not have a believable story you'll meet the same fate as Al Capone.

Could just not say you own BitCoins, unless you have a couple thousand I doubt you'll even be a blip on their radar. If you have that many, you could just spread them around wallets too... Really I can't see them picking up on it if you do it right.

OK, but this is not in any way Bitcoin-specific. You can do this with USD also. Again, as I noted elsewhere, the mafia has this exact problem: they have too much money to avoid being a blip (hence money laundering operations). What is the use of money that you cannot spend?

Like I said, people cheat on their taxes all the time, and they often get away with it. Bitcoin does not add anything to this. The IRS knows how to audit cash, which is vastly more anonymous than Bitcoin.

If you buy wood in Bitcoin, and then carve it into figurines and sell them for Bitcoin, your profit is entirely in Bitcoin. Does this mean that you can pay the IRS in Bitcoin? If so, do they have tax brackets defined in Bitcoin?

That's specious reasoning, there are many BTC->USD exchanges and the IRS could easily compel you to exchange your currency for USD.

Why? If you make profits in a foreign currency such as Swiss franc, you only pay tax once you convert those to U.S. dollars.

I'm not sure that's correct. I'm no tax expert, but from my limited knowledge of US income tax, it applies internationally and isn't based on currency. There are some tax treaties to protect people with multiple nationalities from double taxation, but I don't think it's related to currency. Do correct me if I'm wrong.

While I'm not a tax expert either, the fact that the US demands that people living and working indefinitely in a foreign country pay taxes (something that people have been outraged about on HN before) seems to indicate that they're perfectly willing to tax your Yen.

Citation needed, I'm not a tax expert but based on what advice I've previously been given and on http://www.irs.gov/Individuals/International-Taxpayers/U.S.-... I'm pretty sure that's not true.

You are supposed to pay profits earned in foreign currency on a quarterly basis, via self-reporting, much the same way that self-employment and investment income is suppoed to be reported. In practice, if you use a US financial exchange, they can pay the estimated taxes for you (but not all will do this), and you settle the taxes owed (or refund due) at the close of the tax year.

I thought you were supposed to pay profits on foreign currency only when you "cash out" to dollars. Guess I was wrong. Was I just confusing the tax rules for foreign currency, and commodities? Is that the rule for commodities?

I was under the impression that US tax authorities went after American citizens, even if those are dual-citizenship citizens who've never lived or worked in the US.

I believe this is the point which the IRS should (if at any point) tax. They can't tax bitcoin yet as they haven't even officially declared it as legal tender. They have to agree what it is first and declare it as a currency before they can tax it. This will take them a long time!

Edit: I stand corrected by the comments below.

Chickens aren't a recognized currency either, but if you conduct your business in them, you will be required to fill out the tax forms pertaining to barter.

Do you use the USD<->Chicken exchange rate at the time of barter, or do you use the USD<->Chicken exchange rate at the time that you actually perform that conversion?

I think the rules for commodities and currencies are likely different. Regardless, bitcoin is clearly one of those two and you don't get to avoid the IRS by only dealing in commodities.

Since there is no authority one way or the other, you generally get to pick. As long as you are consistent (i.e., you always treat it as a commodity/asset or always treat it as a currency), the IRS will generally accept your choice until they or the legislature issues affirmative guidance compelling a particular choice.

(Note: this is known as a "method of accounting" in tax parlance.)

Something doesn't have to be legal tender to be taxed. If I'm a home builder I don't avoid paying taxes by being payed in, say, a house rather than USD. I still have to report it as income.

I think the way it works is that you make a profit in dollars equal to the fair market value of your profit in bitcoin. Just like if you were bartering for anything else.

Right, but change bitcoin for a game currency. Such as gil in final fantasy. Surely the IRS isn't going to come knocking at your door for transactions man during a game.

Sure, because you're paying for blocks of wood in gil, carving them into figurines, and exchanging the figurines for gil at a profit? And there's a (reasonably) liquid market turning gil into dollars and back? Then they may well come knocking at your door, if the amounts are meaningful.

There's an admittedly fine line, with in-game "property" sold on ebay when most players are just wanting to play the game... but with bitcoin it's nowhere near that fine line, particularly when you're engaging in manifestly economic activity like the above with real-world things.

Actually, there is a pretty big market for gil. Search on ebay. Or at least there used to be when my brother played.

But nonetheless the vast majority of people using gil aren't intending to use it for anything but entertainment within the game. This is a dramatic qualitative difference between gil and bitcoin, and would expect it to be relevant to how it's treated for tax purposes (though IANAL and certainly don't know all the relevant tax law).

Replace bitcoin with euros or cows, it doesn't matter. Your taxes are due in equivalent USD value.

You're supposed to log in the BTC /USD exchange rate at the end of that day (?) and pay Uncle Sam in crisp USD

Just to show how insidious the IRS is in situations similar to this, it has a 'bartering tax center' to deal with taxing economic activity in which no dollars were exchanged.

I'm not completely familiar with how it functions, although you can look up more details [1]. I would not be surprised if in any case that rancher Joe decides to trade 2 head of cattle for farmer Bill's old tractor, there is a tax obligation that needs to be paid. Of course, this probably doesn't actually get paid very often.

1: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employ...

You are expected to pay taxes, in USD, to the IRS, on barter transactions. Yes, you can lie, but guess what? You can lie about your USD income also. You just have to hope that the auditors believe your story when they come to check you out (like where you got a Rolex and a $200k car when you only reported $20k in income).

I'd imagine most people do not use Bitcoin specifically to evade taxes. But much like Capone, that could ultimately be one of the bigger problems.

It was really only a matter of time before this happened, regulation of trade (and the taxation thereof) is one of the main tasks of a government.

I fail to see how trading one 25th of a representation of a solution to a math problem can be considered bartering.

Alas, laws are written by lawyers. :-)

I would love to know why real estate qualifies for a 1031 exchange but currency exchange does not.

Honestly, our laws haven't been based on any legal principles for a long time. It's a long list of special cases, just because.

Who thinks trading in Bitcoin makes them magically exempt from the tax laws of their country? Of course, pretty unsure of how they'd have any sort of accountability or venerability for self-reported Bitcoin income.

"On your 1099 please list all Bitcoin address you've sent or received money from". Right.

A lot of people operate on wishful thinking.

That's how you report much of your income right now (in the US). Tax collection in the US is generally based self-reporting, and that extends to gain from foreign currency exchanges. Information collection from multiple parties is used only to audit the self-reported data. If the IRS discovers discrepancies upon comencing an audit, if may (probably will) impose penalties, back taxes, and interest. Sufficiently large underreporting usually leads to criminal charges.

Thus, self-reporting of Bitcoin income is fundamentally no different than the existing tax regime.

The only scary thing is paying tax on something that has sometimes drastic changes in value.

Taking tax off you, and simultaneously making it impossible to convert bitcoin to dollar seems a bit tricky too. Unless they're happy to accept bitcoin as payment of taxes?

""On your 1099 please list all Bitcoin address you've sent or received money from". Right."

Yeah, here is what would happen if you were caught cheating:

"Hi Mr. Auditor. I have nothing to do with Bitcoin, honest!"

"Oh, well, what did you use 10kW of power every month for the past yeah?"

"Oh, see, I was actually trying to make a cold fusion reactor!"

"Show me."

"No, I blew it up by accident."

"Oh, well, funny how there is no crater..."

Seriously, do you think the IRS does not know how to catch people who cheat on their taxes?

There is no strong correlation between power consumption and the number of bitcoins you've mined. What's to stop me from hoarding hundreds of bitcoins but claiming I've only slush-mined 0.5 BTC?

Nothing, but then you face the same problem that the mafia has: how do you spend all that hidden money without getting caught? Yes, you can get away with small things -- groceries, bullets, etc. -- but once you buy something big (a car, a boat, a house, a fancy rifle) you're going to have a hard time hiding the transaction.

Unless of course you claim you made enough BitCoins to buy a house that year, but perhaps not so many as to furnish it (even though you did) Still avoided $20,000 in taxes and pretty much impossible to get caught unless you invite the IRS to your home.

...or if the IRS conducts an audit and just shows up, wondering why someone would buy a home, list it as their address, but not bother furnishing it.

They don't care so much about the Bitcoins themselves as they do getting their cut of the fiat money when you cash them out, I'd wager.

If you buy 300 bushels of apples for $1 and, for whatever reason, the price spikes to $300 overnight, when you sell them do you claim that "Well, I paid the tax on the $1 so I don't have to pay taxes on the $299"?

If you keep your money in apples the IRS doesn't want 20% of your apples. It's only if you sell them back out and claim it as income.

Purchases are taxed. Bitcoins can be purchased. It then follows that purchased bitcoins are taxed.

A transitive relation, no?

I don't think the IRS gets into sales tax; that's more of a state thing.

Well, I don't think sales tax should apply to Bitcoins. They're clearly much closer to a USD to EUR conversion than a USD to muffins conversion. Of course, this logic might not translate into law…

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