Big news for US taxpayers. The IRS came out with some guidance today on how to treat bitcoins and other crypto-currencies with regard to taxation. That's nice of them, given there's only just over 2 weeks to go before you have to file!

http://www.irs.gov/pub/irs-drop/n-14-21.pdf

Bitcoin is Personal Property

Basically, it isn't a currency. It is classed as property and so subject to capital gains. Double-edged sword here. This is good for investment, because it means you can hold onto Bitcoins for long term and get lower tax rates (e.g. 15%) on any gains, even 0% if you are in a lower bracket. Short term gains are still considered income, and taxed according to your ordinary rate.

However, it being a currency means you need to account for gains whenever a coin is disposed. If you sold, traded for alt-coins, or even bought a cup of coffee. This is going to add a massive amount of accounting and we need a way to collect and report this data. Hint: we have a solution!

I don't think this was unexpected and was probably the likely scenario. That is until Bitcoin grows up and all of a sudden it is too complicated and people literally can't work out their taxes.

Bitcome Income Reported as Fair Value

If you are paid in Bitcoins for goods/services, you must calculate the equivalent in USD, based on the fair market value. This would normally be what your goods or services were worth in USD. So say you did a day's work, for which you have normally charged $200, but you were paid in Bitcoins, then the fair value and cost basis for your own records becomes $200.

Mined Coins are Income Based on the Fair Value on the Day of Receipt

This could have gone two ways, and the IRS went with getting the money immediately. So rather than hold coins like manufactured stock, and only being recognised as income the day they are sold, they are instead treated as immediately income of their fair value even if you don't sell them.

In a bubble market, this could mean you are due taxes on income that you never see. Not the best outcome for miners by any means. However, by keeping the coins as coins and not converting to USD, they are making that choice to hold onto them as an investment and so also take on the risk of their value falling.

In the end this is no different than mining a coin, selling it immediately, then buying back for investment purposes.

The fair value will be determined like traditional currencies, where it is done using a consistent and reasonable conversion source, for example, that published at oanda.com. For crypto-coins, this means you could choose your exchange of choice, e.g. Coinbase, Bitstamp or even an aggregator like BitcoinAverage. The IRS will accept this as long as you can show a reasonable rate that is used consistently, and not changed for your own profit.

New BitcoinTaxes Features

We are working on two features to help in this area:

Purchases

First, we are going to let you input addresses into your account that will become "watch" addresses for your spending. If we see an outgoing transaction on that address, we'll notify you (or you can come to the site) and you can add the reason (if you want) and USD amount. You can choose if we'll automatically treat all outgoings as purchases, so we'll just use the fair value at the time, or you can manually go through the transactions and ignore / mark each one appropriately.

There will also be an API allowing for software wallets to integrate into BitcoinTaxes in order to pass the exact USD amount for any purpose. The great thing about this is that it is still anonymous. A wallet will send us a notification that a payment was made, for example, 0.1 BTC for $60 on address 1JwSSubhmg6iPtRjtyqhUYYH7bZg3Lfy1T, and we'll record it. If that was one of your addresses (or you add it later) we can assign the proceeds and calculate any gains.

Mining

We have wanted to add in mining calculations for a while, but till now the way in which you might calculate it had varied. With today's guidance we now know how it should be treated. So, you will be able to register your receiving mining addresses and we will monitor them. Whenever any coins arrive at that address, we'll automatically assume it's mined (either solo or from a pool) and we'll assign it a cost basis. So when it is spent we already are able to calculate the gains.