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The Almighty Buck Bitcoin Government United States Your Rights Online

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."
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BitCoin Mining, Other Virtual Activity Taxable Under US Law

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  • WoW tax (Score:5, Funny)

    by WillgasM ( 1646719 ) on Tuesday June 18, 2013 @10:02AM (#44039455) Homepage
    How many coppers is this gonna cost me?
    • Re:WoW tax (Score:5, Insightful)

      by ArcadeMan ( 2766669 ) on Tuesday June 18, 2013 @10:25AM (#44039729)

      This is the IRS we're talking about. It's going to cost you SILVERS, my friend!

    • by ron_ivi ( 607351 )
      You might be kidding -- but it seems a great way to handle it in real life.

      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.......

  • What's a 'barron'?

  • by optikos ( 1187213 ) on Tuesday June 18, 2013 @10:04AM (#44039479)
    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'.
    • IANAA (I am not an accountant), but capital gains are only when you buy something and then sell it at a higher price. Buying a bunch of computer equipment and making money by selling it would be capital gains. Buying a bunch of computer equipment and making money by selling the bitcoins it mines is just regular income. You can (and should!), however, deduct the cost of the equipment, etc., as business expenses. The distinction is important because capital gains are taxed at a lower rate than regular inc
      • by houstonbofh ( 602064 ) on Tuesday June 18, 2013 @10:15AM (#44039631)
        It could be both, if you mine and hold the coins...
        • by alexander_686 ( 957440 ) on Tuesday June 18, 2013 @10:21AM (#44039673)

          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.

          • Honest question: can you actually count the cost of equipment and electricity toward the cost basis of your bitcoins? I thought that, in order to be part of the cost basis, you had to be able to attribute the cost to specific bitcoins, rather than have lump expenses for the month/year/whatever.
            • 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

            • 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

          • by lgw ( 121541 ) on Tuesday June 18, 2013 @11:01AM (#44040247) Journal

            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.

      • IANAA (I am not an accountant), but capital gains are only when you buy something and then sell it at a higher price.

        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

        • by PPH ( 736903 )

          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.

        • by pegr ( 46683 )

          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.

          • by cob666 ( 656740 )
            Unless your business was buying and selling BitCoins, then the sale would be classified as regular income.
            • 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.

          • 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.

          • 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.

          • Shouldn't you pay the tax in BitCoins? Give Uncle Sam his percentage and let him figure out the street value.
        • 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.

        • IANAA (I am not an accountant), but capital gains are only when you buy something and then sell it at a higher price.

          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

      • by optikos ( 1187213 ) on Tuesday June 18, 2013 @10:27AM (#44039761)
        http://en.wikipedia.org/wiki/Capital_gain [wikipedia.org]

        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).

        • 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.

      • The person you are replying to never said it was capital gains. When you have a business, there are expenses which can be deducted from any revenue that business generates. In the case of bitcoins. If I have buy a computer which I dedicate to mining bitcoins, I can deduct the cost of that computer from the money I earn selling bitcoins. There would be additional expenses which could be deducted as well, but since I am not an accountant I will not try to list more because I may be mistaken about which of the
      • 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

        • 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]

    • 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.

    • by sconeu ( 64226 ) on Tuesday June 18, 2013 @11:56AM (#44040885) Homepage Journal

      The IRS has ruled that all Monopoly(r) winnings will be taxed at the full capital gains rate

  • Is this news? (Score:5, Insightful)

    by Typical Slashdotter ( 2848579 ) on Tuesday June 18, 2013 @10:06AM (#44039495)
    Why wouldn't it be taxed? There is no "on a computer" exemption to rules that we pay taxes on profitable activities...
    • by rueger ( 210566 ) *
      There is no "on a computer" exemption

      Yes there is! It's the same as the "copyright doesn't apply on the Internet" rule.
    • 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.

      • by h4rr4r ( 612664 )

        That is just for screwing actors and writers. They still pay the IRS their cut.

      • Interestingly, Uncle Sam still gets his cut from Hollywood accounting. Hollywood accounting works by making the movie look like a loss by putting all the profits toward fees paid to various executives and agencies. By doing this, the movie gets out of paying royalties due to the wording of contracts. However, all the executives and agencies still need to pay taxes on those fees.
    • 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

      • by h4rr4r ( 612664 ) on Tuesday June 18, 2013 @10:35AM (#44039901)

        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?

        • 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.

      • by lgw ( 121541 )

        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

    • Why wouldn't it be taxed?

      No paper trail. Duh.

  • 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

    • by Trepidity ( 597 )

      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.

      • 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.

  • Until I can purchase gas, groceries, and beer with Bitcoins or Battle.net Gold, it's not a real currency. 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.

    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
    • by h4rr4r ( 612664 )

      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.

    • Bitcoins are like the market.

      Battle.net Blizzard has to much control.

      • 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.

    • by gorzek ( 647352 )

      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.

      • Of course exchanging fake money for real money makes it real money, that's kind of obvious. That doesn't answer how the IRS is going to directly tax virtual currencies without them being made into real money. How is Uncle Sam going to extract it's pound of flesh when the flesh only exists in specific limited realms of virtual reality? That is the point I'm trying to make.
      • 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.

        • by gorzek ( 647352 )

          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.

    • 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

  • 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 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.

    • 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.

      • That cuts both ways though right? Someone selling a couple pups isn't obligated to pay taxes on that hobby any more than someone having a yard sale, since, if it is just a hobby (not a source of income where deductions can be taken)?

        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.
      • If you are into dog breading, I'd say that your particular tax situation is more comparable to that of a typical Chinese Restaurant.

  • by sunami ( 751539 ) on Tuesday June 18, 2013 @10:15AM (#44039629)

    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.

    • 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,

  • Are ebay bucks taxable under income?

  • 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?

  • For the in-game currencies (WoW, EvE, etc), their value as far as the IRS is concerned is pegged to how much it sells for online. Thus if we end up paying taxes on in-game currencies it wil be because of the people who sell it out of game and thus associate a fiat currency value to it.
  • 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.

  • 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.

  • One should pay these new taxes in virtual currency. Otherwise the government must establish an official means of determining an exchange rate which in turn legitimizes the virtual currency.
  • by ilikenwf ( 1139495 ) on Tuesday June 18, 2013 @10:57AM (#44040187)
    Up to $12,000 or so you can consider it hobby income, as long as you can prove you're in it more for the curiosity/hobby of it.
  • Can I pay my tax liability with monopoly money?

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