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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. The general tax questions and answers were shared by forum member bitcoinaccountant [1].

Anything that you receive as payment for goods or services is generally taxable income unless it is specifically exempted. In many jurisdictions, you are still legally required to report that as income. 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. 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. Consequently, if bitcoins are treated as a currency, you will be taxed the same as holding an account in any non-functional foreign currency. 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. 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. 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. 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.

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. Each jurisdiction will have varying requirements. The records kept might include the same information that appears on a stock or forex brokerage statement: Depending on how the revenue is to be treated, you may need to know when the Bitcoin proceeds were attained [2].

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. 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. The notice clarified the position that the IRS treats digital currencies as capital assets and are therefore subject to capital gains taxes.

Any disposition of these digital currencies, including trading and spending, is a tax event and capital gains must be calculated in USD. When spending, the fair value should be used as the proceeds value. The IRS also clarified that mining is treated as immediate income at the fair or market value of those mined coins on their date of receipt. While the IRS Notice does confirm that Bitcoin is taxed as property rather than a currency, there are still some unresolved issues.

For instance, how should a mined alt-coin income value be determined is there is no direct fiat market, and do alt-coins benefit from Like-Kind Exchanges [4].

While the value of Bitcoins themselves don't count towards the FBAR threshold [5] , there is the possibility that requirement applies to cash held in non-US bitcoin exchanges or wallet services [6]. BitcoinTaxes , launched in January , provides income and capital gains calculations for users of Bitcoin and other digital currencies in the US, UK, Canada, Australia, Germany and other similar tax jurisdictions. Trading records can be imported from all major trading exchanges, including Coinbase, Circle, Bitstamp, and BTC-e, to produce a complete annual trading history.

In addition, spending and income records can be imported from wallets and payment processors, such as the core wallets, Blockchain. Capital gains reports, income reports and balance reports can be downloaded as well as an attachment file and PDF of Form for US tax payers. LibraTax launched in and will automatically import your transactions from Coinbase, Blockchain and other exchanges.

The latter cost-basis method is a selective cost-basis method, where-in LibraTax will automatically and compliantly match your redemptions of bitcoin to minimize your reportable gains, or if none, maximize your reportable losses. Upon choosing a reporting method, an additional feature becomes available - automatic generation and completion of IRS Form that needs to be included on all tax returns with bitcoin activity.

It works by setting up percentage cuts of capital gain, sales and flat values on specific transaction types. So can therefore be configured to be used in almost any jurisdiction as a supplement to current tax arrangements. It can import transactions either from blockchain. For maximum privacy, transactions can be converted to QR codes to be scanned directly into the device without being broadcast.

PnL and tax contributions can then be exported and then used to prepare a tax return. BitPrices is an open-source command-line tool with a companion website mybitprices. It is useful for auditing wallet transactions and determining cost basis. The website is free to use and does not require any registration or login. The tool can generate highly customizable transaction reports as well as a schedule D report with realized gains.

This tool requires a list of all Bitcoin addresses in your wallet including change addresses. A companion tool, hd-wallet-addrs is available that discovers all wallets addresses in an HD wallet, including Copay multisig wallets. A Survey of U. Income Taxation and its Ramifications on Cryptocurrencies. Retrieved from " https: Navigation menu Personal tools Create account Log in. Views Read View source View history. Sister projects Essays Source. This page was last edited on 1 June , at Content is available under Creative Commons Attribution 3.

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