The IRS is about to find out who in the country is using Bitcoin.
Tax day is usually not very complicated for me. I’ve used an accountant for years and simply meet with him annually to make my financial confession. It typically takes an hour. This year, though, was a bit different. We had to talk Bitcoin.
On March 25, I sent my accountant a link to the new IRS guidance on Bitcoin. With the price of Bitcoin soaring from $13 to $1,100 in 2013, people who got in low and sold high made real money off of it, and the government wants in on the proceeds, with the IRS declaring just weeks before the dreaded April 15th deadline that virtual currencies be treated like stocks. I let my accountant know it was going to make my taxes more “interesting” this year. Almost exactly a year prior, I had bought 7 Bitcoin for just under $900 and then spent a week living on them. I made the address of my Bitcoin wallet public. 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. That was an ethical quandary for me, and I took care of it by blowing it on a dinner for a bunch of Bitcoin enthusiasts (a.k.a. randos rounded up from Reddit’s Bitcoin page) at a BTC-accepting sushi restaurant. That was the most “interesting” situation come tax-time.
The IRS guidance isn’t actually that complicated, but the record-keeping it makes necessary is. You have to keep track of how expensive your Bitcoin is when acquired — whether you bought it or “mined” it by making your computer a slave to the Bitcoin network — and then declare capital gains or losses based on the increase or decrease of its value when cashed in or spent. Luckily for me, I used Coinbase and Blockchain for my Bitcoin spending, not Mt. Gox. The Tokyo-based exchange MtGox imploded this year, “and no one has been able to access their trade history,” laments Bitcointaxes.info, advising people “to file an extension and hope that MtGox gives access to their historical records before October 2014.” Even if Coinbase and Blockchain went the way of Gox, I had made a detailed expense report that included what I spent on Bitcoin that week and its value when I spent it. And I’m glad I did, because Coinbase doesn’t track Bitcoin’s value at the time it’s transferred (though Blockchain does).
My record-keeping made my accountant’s job much easier, but there were multiple entries as we calculated my gains and losses on each day of spending. Like the day I spent .59 BTC or $56 on mini-cupcakes: Bitcoin was worth $96 that day; I’d bought it at $125, so I took a $17 capital loss. As I bombarded him with numbers (Bitcoin’s value when I bought it, the date I spent it, how much I spent, and the underlying value at the time), he muttered, “The government’s going to kill Bitcoin by taxing it to death.”
He declared the Bitcoin “tips” as income, and claimed the Bitcoin sushi blow-out as a business expense. Because the value of Bitcoin was pretty constant that week, shifting only from $90 to $135, and because I kept such good records, this was not as hard for me as it will be for other people. There were a few Bitcoin events not captured by my Forbes spreadsheet, though, which gave me a glimpse of the pain for others. After the experiment was over, I still had around 7 Bitcoin, that I held onto planning to repeat the week this year, with a few exceptions. At the end of May, I spent .5 Bitcoin for a ride to San Jose for the first big Bitcoin conference. When I was in Berlin in October, I dropped some Bitcoin for a beer and a hamburger at Room 77, a bar in the famous “Kreuzberg,” a hipster neighborhood with a handful of establishments taking Bitcoin thanks to the evangelistic efforts of the Bitcoinberg’s unofficial mayor, Room 77-owner Joerg Platzer. And when the price of Bitcoin soared to over $1000 in December, I sold .19 Bitcoin for $194 to see how fast it would take Coinbase to process the order, and to have an interesting taxable event; I had bought Bitcoin when it was worth $125 and sold when it was worth $1,021 for a $175 capital gain. Those were easily documented in the apps from Coinbase and Blockchain that I use to move Bitcoin. The nice thing about a digital currency come tax time is that it leaves lots of digital records.
Some services have sprung up to take advantage of that and to help people who don’t want to hire accountants. They include Coinreporting.com (which claims 11,238 new users over the last year) and Bitcointaxes.info which launched in February. Both allow you to import your transactions from third party Bitcoin exchanges — which is great unless your exchange was Mt. Gox — or to enter them manually. The latter was a little easier to navigate in my experience. But they are both still clunky and 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.
Unlike people who bought in when Bitcoin was in the teens at the beginning of the year, and who cashed it out for Grover Clevelands, I did not make Bitcoin bank last year — as I shouldn’t ethically since I write about it regularly. I had $134 in short term capital gains from Bitcoin in 2013, mainly because of the .19 Bitcoin I cashed in at Bitcoin’s peak.
Life may be more complicated for other Bitcoin types, such as high-frequency Bitcoin traders (whose list of Bitcoin transactions will be much longer than mine) and especially for any Americans running a mining pool; those are the guys that rope a bunch of people’s computers together for a Bitcoin botnet and split the Bitcoin pay-out between the “miners” (who should really be called “accountants”) for doing the tracking of transactions that makes the network work. According to University of Florida tax professor Omri Marian, the IRS requires the guys running those pools to report the money they’re handing out, as they’re essentially acting as an employer. They need to either “identify their participants by name (rather than by anonymous address), a result that the Bitcoin community is all but certain to dislike,” he writes on Taxprofblog, or do tax withholding on the Bitcoin mined, which “would probably drive Bitcoin miners to mining pools operated by non-U.S. taxpayers.”
Good luck, Bitcoiners. And say goodbye to your obscurity. The Internal Revenue System will now have a record of everyone interested in Bitcoin — or at least everyone interested in being above board about Bitcoin.