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BitCoin Mining, Other Virtual Activity Taxable Under US Law
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."
How many coppers is this gonna cost me?
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'.
Why wouldn't it be taxed? There is no "on a computer" exemption to rules that we pay taxes on profitable activities...
When your purchases don't line up they sure can see it.
How about instead of being a leech you pay your taxes?
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 income.
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.
Does it make sense now?
Questions raise, answers kill. Raise questions to stay alive.
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.
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?
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.
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 is abused so often.
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 him for tax evasion. Income is supposed to be declared regardless or source or legality.
The IRS has ruled that all Monopoly(r) winnings will be taxed at the full capital gains rate
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