BitCoin Mining, Other Virtual Activity Taxable Under US Law 239
chicksdaddy writes "Beware you barons of BitCoin – you World of Warcraft one-percenters: the long arm of the Internal Revenue Service may soon be reaching into your treasure hoard to extract Uncle Sam's fair share of your virtual wealth. A new Government Accountability Office (GAO) report on virtual economies finds that many types of transactions in virtual economies – including Bitcoin mining and virtual transactions that result in real-world profit – are likely taxable under current U.S. law, but that the IRS does a poor job of tracking such business activity and informing buyers and sellers of their duty to pay taxes on virtual earnings. The report, 'Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks' found that the growing use of virtual currencies like BitCoin and virtual game currencies warrants the U.S.'s tax collection agency to mitigate the risks. Those include efforts to educate taxpayers and the publication of basic tax reporting requirements for transactions using virtual currencies, The Security Ledger reports."
WoW tax (Score:5, Funny)
Re:WoW tax (Score:5, Insightful)
This is the IRS we're talking about. It's going to cost you SILVERS, my friend!
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WoW could even handle withholding so people aren't stuck having to do quarterly estimated taxes, etc.
And if the IRS objects that the withholded-copper isn't worth much, well.......
Uhm... (Score:2)
What's a 'barron'?
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What's a 'barron'?
A feudal lord when typed on a smart phone.
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It appears to be a business magazine. [barrons.com] Not sure what it has to do with the taxation of virtual profit...
Re:Uhm... (Score:5, Funny)
Does it make sense now?
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It's like a baron, but with more rolling of the arrrrrrrrrrs
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The City of Barron is located within the Town of Barron located in the County of Barron?
Yo dawg, I heard you like Barrons...
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barron Barron is a city in Barron County (of which it is the county seat), in the U.S. state of Wisconsin. The population was 3,248 at the 2000 census. The city is located within the Town of Barron.
Thanks, google definitions.
They are renowned for the fleet of airships.
tax on capital gains only (Score:5, Informative)
Bitcoin mining is not capital gains (Score:3, Insightful)
Re:Bitcoin mining is not capital gains (Score:4, Informative)
Re:Bitcoin mining is not capital gains (Score:5, Informative)
Mod parent up. It’s depreciation expense. Depreciation would either reduce your operating income if you sold the bitcoins the same year you mined them or would increase your cost basis of your bitcoin (thus decreasing your capital gains tax) it you held your bitcoins for more than a year.
Be warned, the IRS makes this stuff complicated fast.
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You don’t need to attribute to a specific bitcoin but you must be able to attribute to bitcoin mining.
I would guess the rules would be similar to how expenses are allocated for a home office or a pro rata basis. If you home office is 10% of your home, 10% of the your electricity, heating, depreciation, can be written off.
Note, the rules are a lot of subjective and complex rules, people abuse this all of the time, and the IRS loves auditing this type of stuff because it is abused so often. And this is
Possible - sort of (Score:3)
Honest question: can you actually count the cost of equipment and electricity toward the cost basis of your bitcoins?
There are ways to do it if you do it through a business. You could deduct some expenses and you could do the home office deduction. The computer would need to be owned by the business and used primarily for business purposes. There also could be depreciation and other fun involved. Frankly I doubt there would be much profit in it but that's a separate issue.
Note that claiming a home office deduction significantly increases your chance of being audited. It's one of the items the IRS looks for because it
Re:Bitcoin mining is not capital gains (Score:4, Interesting)
IANAA, but that's not how depreciation works. You spend a lot of capital on X to operate your business - it's a cash cost this year, and you want to deduct it from your taxes this year, but the IRS says "no, even though you spent all that money this year, you must spread out the cost of X over N years for tax purposes, so pay us a lot more this year". Depreciation is rarely a good thing, and it doesn't form a basis for capital gains.
I don't think gold miners selling the gold they mine treat that as a capital gain in the first place, AFAIK it's treated like any other manufactured product. The depreciation of the mining equipment is an overhead expense that reduces reported profit appropriately. (The cost of energy is often the primary expense in gold mining.)
Bitcoin "mining" would seem similar, but it's a mistake to assume tax law follows any sort of logic or reason.
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It's a little bit more involved than that. This is only a capital gain when you actually intend to hold and/or use the assets rather than turning around and immediately selling them again. When a grocery store buys items wholesale and then sells them to its retail customers, that's not a "capital gain", it's just a retail profit. US tax code requires you to hold an asset for at least a yea
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When a grocery store buys items wholesale and then sells them to its retail customers, that's not a "capital gain", it's just a retail profit. US tax code requires you to hold an asset for at least a year before selling it in order to claim the capital gains tax rate.
I'm certain that a lot of the stuff in my grocery store has been on the shelf for longer than a year.
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But it's not an asset until it's sold. Until then, it's a number with no intrinsic value. Now if you BOUGHT BitCoins instead of mine them, it would be capital gains when you sold them.
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You could say the same for buying/selling houses/cars/real estate/antiques/gold. Not a lawyer, but every conversation I've heard allows those things to be treated as investment items.
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Also not entirely true. Traditionally, an asset is kept on the books at what it cost to acquire it. If you bought it, that will of course be the price you paid. If you created it, or acquired it through other means, such as mining Bitcoins, the book value will the cost in labor and capital it took, and your profit (or capital gain--or loss if the price doesn't cover your costs) on sale wiill be the sale price minus that book value.
Bitcoins have a market value (Score:2)
Until then, it's a number with no intrinsic value.
There is no such thing as "intrinsic value". There is either a market for an asset or there is not. Bitcoins have a market value (there are exchanges after all) and that is what the IRS would consider when evaluating how much income you made from mining bitcoins. Items are valued (usually) at the lesser of either cost or market value. That doesn't necessarily make mining or using bitcoins a good idea but they clearly do have a (volatile) market value.
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Long versus short term capital gains (Score:2)
US tax code requires you to hold an asset for at least a year before selling it in order to claim the capital gains tax rate.
That's for the long term capital gains rate. There is a short term capital gain rate too.
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It's a little bit more involved than that. This is only a capital gain when you actually intend to hold and/or use the assets rather than turning around and immediately selling them again. When a grocery store buys items wholesale and then sells them to its retail customers, that's not a "capital gain", it's just a retail profit. US tax code requires you to hold an asset for at least a year before selling it in order to claim the capital gains tax rate.
Eh that is a bit backwards. First, "capital gains" is any profit made on a non-inventory item; meaning something you are NOT going to keep in a warehouse or grocery store. Stocks, real estate, commodities, etc are all items you would buy/resell that fall under capital gains. Second, the capital gains tax structure is often organized such that you are incentivized to hold your investment longer, i.e. if you keep your stock investment in place for a long time you will have a lower tax liability when you re
Re:Bitcoin mining is not capital gains (Score:5, Informative)
The key words here are: "financial assets" and "intangible assets". Bitcoin mining is both of these.
from Capital gain's Wikipedia article:
The gain is the difference between a higher selling price and a lower purchase price.
The gain is the difference between 1) the selling price of the financial asset after the mathematics (or after WoW achievement) and 2) the purchase price of the intangible asset before the mathematics (or before the WoW achievement).
Unrealized gain (Score:2)
The gain is the difference between 1) the selling price of the financial asset after the mathematics (or after WoW achievement) and 2) the purchase price of the intangible asset before the mathematics (or before the WoW achievement).
Precisely speaking that is an unrealized gain [wikipedia.org] because it has not been coverted into cash or some other asset.
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Buying some land and growing some vegetables on it does not attract capital gains tax either, but nor does it attract income tax until you SELL the vegetables. Also, it doesn't attract tax if you barter the vegetables for something else. From TFA:
GAO said that strict virtual (or “closed flow”) transactions in which virtual currency is used only within a game or virtual environment to purchase virtual goods and services were not taxable.
The IRS is saying the creation/accrual of bitcoins and other virtual currencies is taxable at the point of barter as well as sale. It's not even income, as you've earned no money from selling something. I don't know, this seems like a real over reach on the part of
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Also, it doesn't attract tax if you barter the vegetables for something else.
ho boy... just a second there, better be careful about what you think isn't taxable: "You must include in gross income in the year of receipt the fair market value of goods and services received in exchange for goods or services you provide or may provide under the bartering arrangement."
http://www.irs.gov/taxtopics/tc420.html [irs.gov]
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Keep track of expenses (e.g., equipment, floor space rental, electricity consumption) that serve as the investment for the BitCoin mining. This comes off the bottom-line profit. Otherwise, you would pay 'income' taxes on your 'outflow'.
In 99 cases out of 100 these days, you will be in the negative anyway. Bitcoin mining is dead to anyone not participating in the multi-thousand dollar ASIC race to the bottom. And to those that are, may god have pity on their souls. The IRS would only get any real returns by going after miners from 2010, and those guys have no doubt disposed of all of the records and the profits.
In other news.... (Score:4, Funny)
The IRS has ruled that all Monopoly(r) winnings will be taxed at the full capital gains rate
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People do pay it all the time. In my state it is very common to let the tax agency estimate it for you since you probably lack records. Pretty much everyone does that way in my state.
Is this news? (Score:5, Insightful)
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Yes there is! It's the same as the "copyright doesn't apply on the Internet" rule.
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Why wouldn't it be taxed? There is no "on a computer" exemption to rules that we pay taxes on profitable activities...
So if you never make a profit [techdirt.com] you should be good.
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That is just for screwing actors and writers. They still pay the IRS their cut.
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Why it might not be taxed .... (Score:2)
While it's not really "news" that the IRS is once again looking for a source of revenue? I'd argue that there's a strange paradox with the whole thing. If the U.S. govt. starts taxing alternative virtual currencies, that indicates by extension they recognize them as legitimate.
I thought a big part of the whole battle for acceptance of these new e-currencies was the idea that the govt. would never recognize them as legal tender, out of fear it undermines the official currency it has control over via the Fed
Re:Why it might not be taxed .... (Score:5, Insightful)
Take a deep breath.
They only count as real money when you trade them for real money. Bitcoins are still not money, just an item you can sell like any other thing. If you make a profit selling them, like any other thing, you owe taxes.
Was that simple enough for you?
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Technically, you owe taxes even if you don't convert bitcoin into 'real' money. Barter transactions are still taxed. For example if you get paid with goods (say bitcoin, or camels) for some work, you are getting taxed on the fair market value of those goods.
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They will not be able to lower their tax bills 1 cent.
You can only take that stuff up to the level of the profit you made. You can't take a loss on your bitcoin mining operation and apply that to your normal taxes. Well, maybe for a short while, but then the IRS will call it a hobby and you will be out of luck.
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How is mining gold dealt with?
Do you have to pay as you mine it or only when you sell it?
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You're way off base here. The US government taxes gains made on the sale of collectible Pokemon cards and Beanie Babies. Nothing to do with legal tender.
Further, the Fed doesn't really care what you use as money privately! Use Euros or Pokemon cards to your hearts content, the Fed doesn't care. The IRS expects payment in US$, and expects to collect profits made in trading anything - currency, corn, or Beanie Babies.
The Secret Service will be very annoyed with you if you create any confusion between any
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Why wouldn't it be taxed?
No paper trail. Duh.
I wonder if they'll be selective again? (Score:2)
I mean, only going after Bitcoin miners vs. WoW players? I mean BitCoin miners are conservative, they eat a lot of power and deal with suspicious real world countries, like Panama. They don't come out in the daylight and they spend a lot of time speaking in tongues like "petaflop." I can imagine that the IRS will not have the ability to distinguish the two or to classify properly and therefore they'll start jamming up the process with arbitrary rules and procedures, of which nobody will have a clue as t
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How are BitCoin miners "conservative"? As far as I can tell, most are some variety of techno-anarchist. That's about the opposite of conservatism, which is about stability, tradition, and respect for authority.
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I wouldn't put them in that class, definitely entrepreneurial more along the lines of libertarian business types perhaps? Anarchists wouldn't keep the infrastructure in place to keep mining.
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That is hilarious. Most "conservatives" I know have no respect for authority.
Often what they're in favor of is you being respectful of their authority ;-)
(of course this applies to politicians of more than one affiliation...)
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In what sense are they conservative, then?
Conservatism's roots pretty much lie in a skepticism of counterculture, social unrest, rapid changes, etc. Edmund Burke is usually considered the intellectual founder of modern conservatism, and his criticisms of the French Revolution set the tone. In more recent, American episode, conservatives' deep hostility towards the 1960s counterculture, and support of government crackdowns against protestors (e.g. Reagan's declaration of martial law in Berkeley) is represent
B.S (Score:2)
On top of that, how do they plan on dealing with things like what happened in D3 a few weeks ago where literally trillions of gold was duped which could have potentially been worth over $100,000? Is duping gold in a game going to become equivalent to
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Why would he not be paying taxes?
You have to report that income, and if it is of any real amount you should or you might get caught.
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Yes, of course.
You are required to pay taxes on that income.
That is how they caught Al Capone after all. I imagine lots of small time folks can get away with it, but they should be paying their taxes like everyone else.
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Paying taxes will not increase his odds of getting caught. The IRS cannot rat you out.
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This was really interesting and informative, thanks for bringing it up.
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I started thinking about this, and I think you are correct in the most hilarious of ways. You would need to have a business license, some sort of LLC or DBA, and then likely pay sales tax on that. As a small business, retained earnings would be the final profit, and that would be taxable. If this was a larger operation that is selling bulk to other dealers, then you may need to 1099 some of that money for proper records. No one ever asks what product was sold, only how many dollars worth were sold, and how
stock market rules and laws? (Score:2)
Bitcoins are like the market.
Battle.net Blizzard has to much control.
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Battle.net Blizzard has to much control.
I'm not going to get in a long protracted flame war over whether bitcoins are actual currency or not, so I'll just focus on this point.
The whole of Battle.net is owned and managed by Blizzard. In what sense does Blizzard have too much control? They have exclusive control as is their rights by creation and provision of the service.
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This is a lot easier than you think it is.
If you hold Bitcoins, they have no cash value, and thus are not taxable. If you cash them out into USD (or any other official currency), that is taxable income--or capital gains. That part is not clear, but you'd have to pay taxes on it either way.
If someone duped D3 gold and managed to cash it out to the tune of $100K, then yes, they would have to pay taxes on that. Income is income.
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Bitcoins mining is taxable income (Score:2)
If you hold Bitcoins, they have no cash value, and thus are not taxable.
Not remotely true. Bitcoins have a market value and can be exchanged for cash. The rules are no different than those for barter. If you mine bitcoins you are realizing taxable income in the form of an asset with value and I promise you that the IRS will consider it taxable [forbes.com]. You can be taxed on income in the form of assets other than cash. If you give someone (not family) a car they have to pay tax on the value they received. Happens all the time to winners of prizes.
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Then I suppose all the IRS would need to do is state what cash value they determine Bitcoins to have for a given tax year, so you can pay tax on them appropriately.
Again: not complicated.
Bitcoins are an asset (Score:3)
Until I can purchase gas, groceries, and beer with Bitcoins or Battle.net Gold, it's not a real currency.
Doesn't have to be a currency to be an asset. As long as it has a market value the IRS can consider it income. Bitcoins might be a bad idea (I think they are) but they can be exchanged for cash or other assets. The IRS will not remotely care whether you can buy beer with them directly or not.
I do know of one drug dealer in my area that accepts bitcoin, but he's not paying taxes on that income already anyway so fake money is fine for him.
Then he is in violation of the tax code. Specifically his income is supposed to be declared on Line 21 of the 1040 which exists specifically for cases like this. That is how they put Al Capone in jail - they nailed
Turnabout (Score:2)
So, if WoW gold is taxable revenue, that means depreciation of your gaming PC and MMO subscription fees become deductible business expenses, right? That should offset any added tax liability nicely.
only if you sell the gold?? and there are limmts (Score:2)
only if you sell the gold?? and there are limits to the deductible business expenses.
and if the IRS wants to be real dicks they can say in game stuff that you have costs $1M + usd so pay up now.
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I would look up the IRS’s “hobby” rules before I start deducting anything.
The example the IRS gives is dog breading. Real dog breeders can deduct subscriptions to dog magazines, cars, housing, dog food, travel to dog shows, etc. A sat-at-home spouse who takes the family dog to the occasional dog show and even sells a pup or two is not a real breeder and does not get to deduct the family’s SUV.
Re: Turnabout (Score:2)
How would that be much different than someone selling some of their game currency, unless it is filed as a part-time job, at which point it would no longer be a hobby.
Dog breading? (Score:2)
If you are into dog breading, I'd say that your particular tax situation is more comparable to that of a typical Chinese Restaurant.
Nobody seems to get this (Score:4, Informative)
It's taxes on transactions involving dollars only. If you buy WoW gold by selling in-game items, there's no expectation of taxation. If you buy WoW gold with dollars, there's a legit reason to tax that transaction.
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No, it has nothing to do with dollars.
There have been companies that paid with script, barter, coupons, barter coupons, etc.
If you trade one thing for another you have to pay taxes on the real economic value. You can’t avoid taxes by moving to an artificial currency.
The big difference is between “garage sale” transactions that fall into the hobby category,
Ebay Bucks? (Score:2)
Are ebay bucks taxable under income?
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eBay bucks? What?
so how would you pay? (Score:2)
If mining gold in MMORPG's becomes taxable then would you be able to pay in the currency of the game? Will you be able to pay in bitcoins for bitcoin mining?
Is there anything that the US Government won't try to tax?
Kill the Gold sellers... (Score:2)
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But there is a official in game store that you can use to sell for real cash.
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Seems like crossing a line (Score:2)
If I were to do business in Japan and moved money in and out of a Japanese account for my business in Japan, does the IRS have the right to tax my business in Japan?
The IRS taxes on US business activity... in US currency. Not sure I agree with the IRS getting involved with something like this especially since I think they really don't understand what they are getting involved in.
Because THIS is the root of the financial problem (Score:2)
Not that we spend more than we take in, or could possibly take in. No, it's people swapping WoW-bucks or Bitcoins or pesos or whatever that destabilize the bloated welfare states of the West.
Obviously (Score:2)
Hobby Income (Score:3)
Can I Pay? (Score:2)
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When your purchases don't line up they sure can see it.
How about instead of being a leech you pay your taxes?
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Sure. I just hope they have a World of Warcraft account, on the Alliance side, on the Earthen Ring server.
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including Bitcoin mining and virtual transactions that result in real-world profit
Only if you make real money do you have to pay. If you only spend your gold on your level 56 my little pony mount and underpants for your elfen paladin you are ok.
Bitcoin mining is income (Score:2)
Only if you make real money do you have to pay.
Not necessarily true. The IRS may consider it income if it has a market value which Bitcoins do. Whether the asset is tangible or intangible is not relevant. You could receive an intangible asset like a copyright and in some circumstances that could be considered income.
Right now the numbers are small enough that the IRS doesn't much care but technically speaking mining bitcoins IS income and has to be declared on your 1040. Line 21 [irs.gov] if nowhere else. In fact you have to declare income from any source, e
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Look at the other end of the line [talkingpointsmemo.com]. There should be an irony somewhere out there.
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Only in your world is trying to minimize your taxes a "leech". Leeches and moochers receive checks from the government for being part of a politically favored group. Taxes are mostly the consequence of being part of politically disfavored group.
Sure, some small percentage of tax money goes to build roads and other useful stuff, but mostly the government moves money from one group to another. Sadly more and more we're taking money from generations yet unborn, as our debt approaches $150,000 per taxpayer a
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I buy stocks and bonds and never see anything except the paperwork on the transaction, not the physical stock or bond but I still get taxed on those activities.
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not only that but a couple companies (eTrade, Ameritrade, and some others) released an MMO a while ago where you can play this game entirely online and you no longer need to worry about papercuts from looking at paperwork.
seriously trading stock is now just as virtual as bitcoin or selling gold in WoW
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Good point but yes, you can go 100% virtual even on stock trading with paper being an analog to the process. If there are records or a trace of information the IRS will go after it.
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I wonder if I can offset my income with the loss of my Neopoints when I closed the account?
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There are 4 things.
Death, taxes, bitcoin crash and gold crash.
Gold will crash and it's going to happen very unexpectedly for all you people foolish enough to invest in commodities.
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Eve's corporation tax isn't the tax the star system charges the corp, it's the tax the corp charges its members.
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Does this mean I can pay my income tax with virtual currency as well?
yes you can with the chase online virtual currency bank. Only $20 /mo + $1 per transaction (up to $1000) and then 00.8% of transaction after that. Income tax payments are billed as cash advance and come with our cash advance fees.
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US Income taxes must be paid with US currency. This is what gives US (or any other nations') currencies their value. If you can pay in any currency, you would use the most efficient one. But if you must pay in a certain currency, then you have to get hold of some of that.
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The solution was for the german government to demand that taxes be paid in Euro's... in one year the use of the Euro went from low percentages to high percentages.