You can't omit Bitcoin transactions from your tax return just because they seem anonymous. Concealment is the very definition of tax evasion, "Evasion... involves deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events or to make things seem other than they are"
Quoting in full since its among the most misunderstood yet important distinctions in tax:
26 USC §7201 – Avoidance Distinguished from Evasion
1. Avoidance of taxes is not a criminal offense. Any attempt to reduce, avoid, minimize, or alleviate taxes by legitimate means is permissible. The distinction between avoidance and evasion is fine, yet definite. One who avoids tax does not conceal or misrepresent. He/she shapes events to reduce or eliminate tax liability and, upon the happening of the events, makes a complete disclosure. Evasion, on the other hand, involves deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events or to make things seem other than they are.
>You can't omit Bitcoin transactions from your tax return just because they seem anonymous
I agree if this is trading, where there are net gains (or losses) from fluctuations in value.
I assume, though, that a notable number of bitcoin transactions are just buying and/or selling merchandise. Buyers convert existing money that's already reported to the IRS (like their salary) into bitcoin, and buy something. Sellers get the money, convert it to dollars, and then deposit into their regular bank account, which then flows into their company books as revenue (again, reported to the IRS).
I'd be curious to know how much of the activity on coinbase was this sort of thing, versus buy/hold/trade speculation.
It would be hard to argue that Bitcoin transactions are concealment since they are completely public and very hard to transact, purchase or redeem without linking a great deal of personal information to your identity.
There are ways of buying and selling Bitcoins that do not require you give all your personal information (for instance localbitcoins) but you will likely pay a markup (33% was a number that someone quoted to me) far greater than your taxes and you will only be able to move small amounts of money.
So-- IRS seeks _all_ transaction records for all coinbase customers. Not just buying and selling Bitcoin but also people using their wallet services, which would mostly be users moving around their own funds (not a taxable event).
They're doing this on the basis that there might be evidence of tax evasion in there somewhere. Which is plausible, I suppose.
Thing is: All this same data was also emailed to the customers (as coinbase does email notification), likewise for their competitors.
Which means that the IRS could likely get the same data but more comprehensively by simply demanding Google turn over every single email for every user. I can guarantee this would include much more evidence of tax evasion.
So why is a coinbase dragnet a viable demand where a Gmail one-- which would include the same data plus even more tax evasion evidence-- not one? Or is it simply the case that the Gmail demand will show up after this one clears the courts? :)
I am not surprised that IRS needs to work with coinbase to find tax evaders but a `John Doe summons` ?
Again, I fail to see any legal rational in the court's verdict. This is a bad precedent and I seriously hope Coinbase gets support from other tech giants to take it to Supreme Court. This clearly seems like violation of 4th amendment.
Material transactions are already, for the most part, reported. This action isn't putting special attention on Bitcoin ceteris paribus. It is bringing it into alignment with U.S. dollar custom and law.
Oh good, another list I'm on. I'm going to have to start making a list of the lists.
Bitcoin seems obviously like money to me. But I wonder when the IRS is going to start cracking down on other electronic money you can earn. Think about computer games where you can buy credits, or earn them by playing. That sounds like income tax evasion to me; you're getting paid in Green Rupees instead of US Dollars, but you should still be paying income tax on that! And don't forget about frequent flyer miles. (Which are not counted as income because you "can't" sell them, but anyone who reads flyertalk knows that's not the case.)
It's all very interesting. People have been using alternative currencies outside of the IRS's radar for quite a while, and they've mostly ignored them.
In the linked article, the IRS is quoted as saying they are treating BitCoin like property. Essentially, they are looking to tax people who made a profit from selling Bitcoins using Coinbase.
They don't seem concerned with the currency aspect at all.
I get that taxes are one of the few certainties of life, but this article makes me think of yesterdays "how to hide $400m" article about tax sheltering and offshore incorporation.
I wish there were a way to ruin tax sheltering for the wealthy by finding out the exact formula for what they're doing (say register a business in the Cook Islands ), then commoditizing that via an online service (like Wordpress does for websites), and using bitcoin. Now the masses can pay $29.95 to have a VPS on the Cook Islands, set up their bitcoin wallet on it, and have their own little tax-exempt haven.
Try to structure the system the exact same way the rich people do it, so that authorities necessarily have to shut down the rich at the same time.
Say someone bought Bitcoins from Coinbase and transferred them to their own wallet outside of Coinbase. They haven't sold them, so there's no taxes to pay and nothing to report to the IRS, right?
How is the IRS going to know the difference between that situation, where they have done nothing wrong, and someone who sold them outside of Coinbase and didn't pay taxes on it?
Are they just going to audit everyone over some threshold, or are they going to use this information in existing investigations (or in conjunction with other red flags)
It's difficult to guess how the IRS would treat it.
How are they going to know the difference? For one, you can tell them. I don't know what the proper form for this would be, but I am sure an accountant can help out.
Scaremongering aside, I've found dealing with the IRS rather sane.
I would think that the IRS would treat a transfer of coins from a wallet you own to a wallet you do not own as a taxable event. They would take difference in value of the coins between when you acquired them and transferred them away, and if it is positive, would call it a profit.
On the other hand, if you declared that you owned both the source and destination wallet, I would imagine that the IRS would not treat this as a taxable event, in the same was as transferring USD between your checking and savings account is not a taxable event.
The IRS relies in a huge part on you self-reporting things. They do get a lot of info from the source (bank transaction records, 1099's, W2's). In many cases, the onus is on the taxpayer to tell the IRS the information that they need.
By default, the IRS takes self-reported information at face value and believes you. However, sometimes, they may decide to investigate. This is called an audit, and then the onus is on you to prove that what you provided is true.
Every transaction on the block chain is a taxable event. You need a program to calculate capital gains or losses for the tax year. That is my understanding. So you have a daily value, transaction fees, capital gain or loss.
Few people know that federal taxation is primarily a way to spy on people. There are numerous alternative places to apply taxation within the economy that are not remotely as intrusive, time consuming or costly. Tax preparation is a $10 billion dollar industry and the IRS has a $12 dollar budget.
On its face ("the more money you make, the more taxes you pay") it's a good system. However, like most things, it doesn't seem to work exactly the way it's described.
The short and useful answer is talk to an accountant.
The longer and less useful answer is that it depends heavily on circumstances. Two relevant ones are "What sort of income do you have here?" and "How much are we talking about?"
If we assume the answers are "You have capital gains because you happened to purchase some Bitcoin, they appreciated, and you sold them, but you weren't conceivably operating a business while doing this" and "Enough money to matter but not enough that your failure to get better advice was clearly negligent" then your resolution is going to be fairly simple. Your CPA will calculate how much money you owe, file a 1040-X (amended return) for the years at issue, and say "On routine review of a prior year tax filing we found that we inadvertently understated income. We're amending the return as appropriate, and have remitted additional tax. We request an abatement for penalties for tax underpayment on the grounds that IRS guidance at the time was unclear and we're coming in voluntarily before you asked us to." You'd possibly get the abatement of penalties; you're likely to pay very modestly more than you would have if you had been more diligent about your obligations, because they don't frequently waive interest.
This is the "middle class Americans screw up their taxes all the time; we like to encourage voluntary compliance" answer. If you're talking about mountains of money, on the other hand... expect rather less leniency. Other things that increase your risk: any hint of other-than-tax illegality around the business ("I underpaid on the capital gains I inadvertently generated in my drug smuggling business -- sorry about that, really didn't set up to be a currency speculator, I'm simply an honest drug smuggler") or the Bitcoins being used in a manner which was clearly straight-up tax fraud, like the prosecuted cases where someone's company paid a Bitcoin exchange $X00,000 for "technology services" and expensed it, took the Bitcoin over to Gox, cashed out, and then repatriated the money. (The Bitcoin here are just a red herring; this is a conspiracy to hide $X00,000 in income from the government. They take a dim view of that.)
I initially cringed when I saw this, so I went to go download my transactions from coinbase. I realized after looking through them that some of my BTC outbound transfers were to btc-e, and some of those were to cryptsy. So, considering cryptsy kicked the bucket with much of my coin, and I can't get their records...now what? Those outbound transfers are financial losses, and in the grand scheme I lost money due to Cryptsy; but will the IRS settle for that?
There is a huge flaw in this logic from the IRS. If it is a possession, then I can give it away. Like a fudgable dollar I gift away, you cannot tax me on every transaction that doller is engaged in.if I give away the wallet and the dollar, nothing changes. The USA is just trying to stop bit coin with taxes.
That's kinda close to "I'm not going to pay you for what I bought. But I am going to transfer ownership of my wallet here which just happens to have cash in it to cover what you were asking for. But be clear, I'm giving you the wallet. Not paying you."
What if I buy something with appreciated Bitcoin? Is this a taxable event? If the IRS considers Bitcoin property, am I just bartering with Dell when I buy a laptop with Bitcoin?
> Is [buy[ing] something with appreciated Bitcoin] a taxable event?
According to the IRS, yes.
> If the IRS considers Bitcoin property, am I just bartering with Dell when I buy a laptop with Bitcoin?
Yes, so if you buy 1 BTC for $750, the price increase dramatically and you buy a top-end gaming system from Dell (lol) then you're bartering and the excess value is taxable.
Why do we allow WSJ submissions here if they don't want us to read their content?
I mean sure, you can go the "click web, then the right Google result" route. But that's like submitting a link to Adobe's most recent Photoshop update and then tell people "you can download Photoshop for free by starting your Bittorent client".
WSJ wants to hide behind a paywall. That's fine for them. But HN shouldn't be sending them traffic and enable that behavior.
The solution to this is obvious: eliminate the IRS. And the income tax. And most of the federal government. Spin off the actually useful bits as private non-profit foundations (or possibly even for-profit companies depending on the scenario) and let them earn their own keep based on the value they provide.
A sufficiently small government can be funded without an income tax, as history shows us.
Of course. Taxes are the basis of state, which uses taxes to develop and maintain its capability to threaten you with violence if you dont't pay taxes.
It's a recursion which has plagued the world for centuries.
The whole system can in theory be replaced with non-profit investments funds, which crowdfund social projects.
You dont even have to elect 'leaders', because citizens will be involved full time in running things (by guarding their investments) similarily to how they now waste time on Facebook.
But good luck changing anything without a nuclear apocalypse :) There are a lot of people who like the system the way it is and they won't give it up because us idealists want a better world for their children..
[+] [-] paulsutter|9 years ago|reply
Quoting in full since its among the most misunderstood yet important distinctions in tax:
http://www.irs.gov/irm/part9/irm_09-001-003.html
9.1.3.3.2.1 (05-15-2008)
26 USC §7201 – Avoidance Distinguished from Evasion
1. Avoidance of taxes is not a criminal offense. Any attempt to reduce, avoid, minimize, or alleviate taxes by legitimate means is permissible. The distinction between avoidance and evasion is fine, yet definite. One who avoids tax does not conceal or misrepresent. He/she shapes events to reduce or eliminate tax liability and, upon the happening of the events, makes a complete disclosure. Evasion, on the other hand, involves deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events or to make things seem other than they are.
[+] [-] tyingq|9 years ago|reply
I agree if this is trading, where there are net gains (or losses) from fluctuations in value.
I assume, though, that a notable number of bitcoin transactions are just buying and/or selling merchandise. Buyers convert existing money that's already reported to the IRS (like their salary) into bitcoin, and buy something. Sellers get the money, convert it to dollars, and then deposit into their regular bank account, which then flows into their company books as revenue (again, reported to the IRS).
I'd be curious to know how much of the activity on coinbase was this sort of thing, versus buy/hold/trade speculation.
[+] [-] EthanHeilman|9 years ago|reply
There are ways of buying and selling Bitcoins that do not require you give all your personal information (for instance localbitcoins) but you will likely pay a markup (33% was a number that someone quoted to me) far greater than your taxes and you will only be able to move small amounts of money.
[+] [-] Fluxenein|9 years ago|reply
[+] [-] nullc|9 years ago|reply
They're doing this on the basis that there might be evidence of tax evasion in there somewhere. Which is plausible, I suppose.
Thing is: All this same data was also emailed to the customers (as coinbase does email notification), likewise for their competitors.
Which means that the IRS could likely get the same data but more comprehensively by simply demanding Google turn over every single email for every user. I can guarantee this would include much more evidence of tax evasion.
So why is a coinbase dragnet a viable demand where a Gmail one-- which would include the same data plus even more tax evasion evidence-- not one? Or is it simply the case that the Gmail demand will show up after this one clears the courts? :)
[+] [-] tn13|9 years ago|reply
Again, I fail to see any legal rational in the court's verdict. This is a bad precedent and I seriously hope Coinbase gets support from other tech giants to take it to Supreme Court. This clearly seems like violation of 4th amendment.
I have no doubt that Gmail will be next.
[+] [-] JumpCrisscross|9 years ago|reply
[+] [-] jrockway|9 years ago|reply
Bitcoin seems obviously like money to me. But I wonder when the IRS is going to start cracking down on other electronic money you can earn. Think about computer games where you can buy credits, or earn them by playing. That sounds like income tax evasion to me; you're getting paid in Green Rupees instead of US Dollars, but you should still be paying income tax on that! And don't forget about frequent flyer miles. (Which are not counted as income because you "can't" sell them, but anyone who reads flyertalk knows that's not the case.)
It's all very interesting. People have been using alternative currencies outside of the IRS's radar for quite a while, and they've mostly ignored them.
[+] [-] ryanackley|9 years ago|reply
They don't seem concerned with the currency aspect at all.
[+] [-] digler999|9 years ago|reply
I wish there were a way to ruin tax sheltering for the wealthy by finding out the exact formula for what they're doing (say register a business in the Cook Islands ), then commoditizing that via an online service (like Wordpress does for websites), and using bitcoin. Now the masses can pay $29.95 to have a VPS on the Cook Islands, set up their bitcoin wallet on it, and have their own little tax-exempt haven.
Try to structure the system the exact same way the rich people do it, so that authorities necessarily have to shut down the rich at the same time.
[+] [-] PKop|9 years ago|reply
Lower them to a point at which it isn't worth the cost to shield, and get more out of them than what we are losing to the sheltering.
[+] [-] soggypretzels|9 years ago|reply
[+] [-] throwawayqwer|9 years ago|reply
How is the IRS going to know the difference between that situation, where they have done nothing wrong, and someone who sold them outside of Coinbase and didn't pay taxes on it?
Are they just going to audit everyone over some threshold, or are they going to use this information in existing investigations (or in conjunction with other red flags)
[+] [-] koliber|9 years ago|reply
How are they going to know the difference? For one, you can tell them. I don't know what the proper form for this would be, but I am sure an accountant can help out.
Scaremongering aside, I've found dealing with the IRS rather sane.
I would think that the IRS would treat a transfer of coins from a wallet you own to a wallet you do not own as a taxable event. They would take difference in value of the coins between when you acquired them and transferred them away, and if it is positive, would call it a profit.
On the other hand, if you declared that you owned both the source and destination wallet, I would imagine that the IRS would not treat this as a taxable event, in the same was as transferring USD between your checking and savings account is not a taxable event.
The IRS relies in a huge part on you self-reporting things. They do get a lot of info from the source (bank transaction records, 1099's, W2's). In many cases, the onus is on the taxpayer to tell the IRS the information that they need.
By default, the IRS takes self-reported information at face value and believes you. However, sometimes, they may decide to investigate. This is called an audit, and then the onus is on you to prove that what you provided is true.
[+] [-] rebuilder|9 years ago|reply
As for your example, it seems to hinge on whether you're required to report holdings or just capital gains to the IRS.
[+] [-] normandoorman|9 years ago|reply
[+] [-] transfire|9 years ago|reply
[+] [-] pc86|9 years ago|reply
[+] [-] throwawaydfsgs|9 years ago|reply
[+] [-] patio11|9 years ago|reply
The longer and less useful answer is that it depends heavily on circumstances. Two relevant ones are "What sort of income do you have here?" and "How much are we talking about?"
If we assume the answers are "You have capital gains because you happened to purchase some Bitcoin, they appreciated, and you sold them, but you weren't conceivably operating a business while doing this" and "Enough money to matter but not enough that your failure to get better advice was clearly negligent" then your resolution is going to be fairly simple. Your CPA will calculate how much money you owe, file a 1040-X (amended return) for the years at issue, and say "On routine review of a prior year tax filing we found that we inadvertently understated income. We're amending the return as appropriate, and have remitted additional tax. We request an abatement for penalties for tax underpayment on the grounds that IRS guidance at the time was unclear and we're coming in voluntarily before you asked us to." You'd possibly get the abatement of penalties; you're likely to pay very modestly more than you would have if you had been more diligent about your obligations, because they don't frequently waive interest.
This is the "middle class Americans screw up their taxes all the time; we like to encourage voluntary compliance" answer. If you're talking about mountains of money, on the other hand... expect rather less leniency. Other things that increase your risk: any hint of other-than-tax illegality around the business ("I underpaid on the capital gains I inadvertently generated in my drug smuggling business -- sorry about that, really didn't set up to be a currency speculator, I'm simply an honest drug smuggler") or the Bitcoins being used in a manner which was clearly straight-up tax fraud, like the prosecuted cases where someone's company paid a Bitcoin exchange $X00,000 for "technology services" and expensed it, took the Bitcoin over to Gox, cashed out, and then repatriated the money. (The Bitcoin here are just a red herring; this is a conspiracy to hide $X00,000 in income from the government. They take a dim view of that.)
[+] [-] bitJericho|9 years ago|reply
[+] [-] god_bless_texas|9 years ago|reply
[+] [-] AtheistOfFail|9 years ago|reply
[+] [-] normandoorman|9 years ago|reply
[+] [-] FireBeyond|9 years ago|reply
[+] [-] hnburnsy|9 years ago|reply
[+] [-] pc86|9 years ago|reply
According to the IRS, yes.
> If the IRS considers Bitcoin property, am I just bartering with Dell when I buy a laptop with Bitcoin?
Yes, so if you buy 1 BTC for $750, the price increase dramatically and you buy a top-end gaming system from Dell (lol) then you're bartering and the excess value is taxable.
[+] [-] normandoorman|9 years ago|reply
[+] [-] bunburying|9 years ago|reply
To read the article in full, please click the "web" link above, between "past" and "[...] comments".
WSJ articles can be read in full, if you click through from Google search results.
Note: simply copying the Google link and pasting it here won't work. Presumably Google needs to be the referrer.
[+] [-] kybernetyk|9 years ago|reply
I mean sure, you can go the "click web, then the right Google result" route. But that's like submitting a link to Adobe's most recent Photoshop update and then tell people "you can download Photoshop for free by starting your Bittorent client".
WSJ wants to hide behind a paywall. That's fine for them. But HN shouldn't be sending them traffic and enable that behavior.
[+] [-] toephu2|9 years ago|reply
[+] [-] donatj|9 years ago|reply
[+] [-] deftnerd|9 years ago|reply
[+] [-] bunburying|9 years ago|reply
[+] [-] wheelerwj|9 years ago|reply
[+] [-] mindcrime|9 years ago|reply
A sufficiently small government can be funded without an income tax, as history shows us.
[+] [-] delegate|9 years ago|reply
It's a recursion which has plagued the world for centuries.
The whole system can in theory be replaced with non-profit investments funds, which crowdfund social projects.
You dont even have to elect 'leaders', because citizens will be involved full time in running things (by guarding their investments) similarily to how they now waste time on Facebook.
But good luck changing anything without a nuclear apocalypse :) There are a lot of people who like the system the way it is and they won't give it up because us idealists want a better world for their children..
[+] [-] unknown|9 years ago|reply
[deleted]
[+] [-] CPLX|9 years ago|reply
[+] [-] mullen|9 years ago|reply
Oh ya? Name one.
[+] [-] the_mitsuhiko|9 years ago|reply