The Taxman Cometh for Bitcoin

April 15 has come and gone, and now US Bitcoin users who want to stay on the right side of the law have some serious accounting to do.

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The Taxman Cometh for Bitcoin
April 15 has come and gone, and now US Bitcoin users who want to stay on the right side of the law have some serious accounting to do. 

But how is it possible to adapt to the new rules and what does that really involve? One Forbes journalist, Kashmir Hill, recounted her experience of the Bitcoin tax return in an article yesterday. “I let my accountant know it was going to make my taxes more ‘interesting’ this year,” she writes, “…The IRS guidance isn’t actually that complicated, but the record-keeping it makes necessary is”. 

A Headache 

The IRS now requires Bitcoin to be treated like property, meaning every transaction must be recorded and taxable gains determined and submitted at the end of the tax year. Finding your transaction history is not difficult (unless it was held on Mt. Gox, of course), but determining the percentage of profits due in tax is another matter. 

“Almost exactly a year prior [in March 2013], I had bought 7 Bitcoin for just under $900 and then spent a week living on them,” Hill explains. “I spent almost 5 Bitcoin on food, shelter, a bike rental and a surprise crash diet. Over the course of the week, I (awkwardly) received over $1,000 (or approximately 15 Bitcoin) from 86 strangers who were excited about my experiment.” 

As BTC was subject to wild fluctuation then as it is now, it is necessary to know the exact exchange rate at the time of transacting in order to calculate the tax. Fortunately, Hill had the sense to do this at the time, which she notes “made [her] accountant’s job much easier”, but a lack of record-keeping will make life very difficult for the potentially overwhelming majority of crypto-currency users. 

Hill cites an example of spending 0.59BTC (US$56) when BTC was worth US$96. Additionally, as she’d bought Bitcoin at US$125, this transaction netted her a US$17 capital loss; all this information is required for the tax return, likewise when she sold 0.19BTC for US$194 in December 2013, resulting in a profit of US$175. 



Safety nets? 

While the community waited with bated breath for the IRS ‘guidance’, services were being developed to assist with the future consumer accounting burden. Sites like Coinreporting.com and Bitcointaxes.info allow transaction records to be imported and tax computed, either from third-party exchanges or manually. Hill, however, deemed the operation of these sites “clunky” and not entirely reliable: “both say in their Terms of Service that their websites are for ‘informational purposes only’ and ‘do not constitute financial, tax or legal advice.’ In other words, use at your own risk.” 

It’s not just the lay Bitcoin consumer with a headache, however. Problems really start when taxing entities such as mining pools, whose users divide up BTC earned and have no central figure in authority to file a tax return on the pool’s behalf. Predictably, many such pools will want to remain below ground, and it remains to be seen to what lengths the IRS is prepared to go to in order to wring out the revenue from the network. Alternatively, as University of Florida tax professor Omri Marian notes on Taxprofblog, the legislation “would probably drive Bitcoin miners to mining pools operated by non-U.S. taxpayers.” 

The scope for evasion will most likely prompt IRS to fine tune the rules for years to come, especially if crypto-currencies’ client base were to grow exponentially. Couple that with the widespread lack of consensus as to what crypto-currency actually is, and scant consumer knowledge, and it would seem that the IRS legislation has added fuel to the fire rather than simplified the situation. 

You can read the Forbes article here.
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