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Comment by qq66 | Hacker News Reader

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?

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

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).

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

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.

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.

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?

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.

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.

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.

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).

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

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