A Primer on Bitcoin Taxation

by Tyler S. Robbins, Esq. i

Introduction
The cryptocurrency Bitcoin has garnered significant attention from media outlets in the past few months, following the destruction of Silk Road, the influx of new Chinese buyers, and an unprecedented spike in both value (defined by reference to fiat currencies) and trading volume. Although its primary user base over the last few years was staunch libertarians and computer whizzes, the influx of new and accessible Bitcoin brokers has allowed laypersons in most developed nations to acquire and spend the cryptocurrency. Following massive volatility and gains in recent weeks, many have considered liquidating some or all of their position. Throngs of U.S. taxpayers have taken to the Internet to learn about their tax obligation, only to be steered towards perilous advice. While most taxpayers have an inkling that they will owe taxes to the government as a result of their Bitcoin investments, not many are aware of the potential bogeyman that lurk. Even fewer are aware of the requirement to disclose their accounts with foreign Bitcoin brokerages and the extremely severe penalties (beginning at $10,000) that follow a failure to disclose. This white paper has been prepared as a practical tax guide for individual U.S. taxpayers speculating in Bitcoin, and as such, is not intended to be a comprehensive guide on taxation. It is intended to assist taxpayers so that they are not misguided by advice based in fiction or anecdote received in an online forum. Lengthy discussions covering every conceivable scenario and theoretical or policy issues are omitted for the sake of brevity and ease-of-use (the author would be happy to wax poetic in a private forum). Please submit any feedback using the contact information found at the bottom of the first page. Miners of Bitcoin face a host of unique tax issues that are outside the scope of this discussion. This white paper does not address any issues of state or local tax law. You are advised to seek advice from a competent attorney or CPA before engaging in any Bitcoin related transactions or preparing your tax returns. Please bookmark this document, as updated versions will appear at the same URL when new information becomes available. In accordance with Treasury Regulations, you are hereby advised that any U.S. federal tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax-related penalties under the Internal Revenue Code, or (2) promoting, marketing, or recommending to another party any tax-related matters addressed herein. No attorney-client relationship has been established. Taxpayers should not rely on anything contained within this document and should consult a competent CPA or tax attorney before preparing tax returns.
i

Tyler S. Robbins, Esq. is an attorney licensed to practice in New York and New Jersey, whose area of interest is cross-border taxation and compliance. Tyler can be reached at: btctaxinfo@gmail.com or by Bitmessage at: BM-2cWGqH2nzrV9DuTePPtieY1N8i4XeF19JG.

Contents
Introduction Summary Discussion Taxable Events: Realization vs. Withdrawal Characterization of Income from Bitcoin Sales Speculators Brokers Day Traders Calculating the Gain Partial Sales Multiple Purchase Dates Tax Rates Bitcoins Are Not Collectibles Bitcoin Traders Are Not Entitled To Forex 40/60 Rules Foreign Nationals Trading on U.S. Brokerages Losses and Deductions Casualty Losses Wash Sale Rules Disclosure of Foreign Bank Accounts and Financial Assets Foreign Account Tax Compliance Act (FATCA) Bank Secrecy Act (BSA) Penalties for Failure to Disclose under FATCA and BSA Closing Comments

Summary
This document has been prepared as a guide for the average Bitcoin speculator or trader, and is not comprehensive. Please keep this in mind and always consult a competent CPA or tax attorney before using any of this advice. This summary provides generalized information. If youd like a better explanation, please read the discussion. When tax is due & calculating gains First and foremost, any gains from the change in the value of Bitcoin are taxable at the moment the Bitcoin is exchanged for a fiat currency, property, or services. The tax is due with tax returns for the year that includes the date of sale. It does not matter that you didnt withdraw the funds or used a foreign brokerage. Commission costs and bank wire fees from a sale are subtracted from the proceeds in calculating gains. Commission costs and bank wire fees from a purchase are added into the -2Share freely, but please give appropriate credit and only distribute this document in its original format. Revision 11/20/13 Copyright 2013, Tyler S. Robbins http://www.bitcointax.info

cost of the Bitcoin. This means that transaction fees are taken into account in order to reduce taxable gain. What Bitcoin is At the current point in time, speculators and traders of Bitcoin hold it as a capital asset. Accordingly, these taxpayers are entitled to preferential rates (maximum of 20%) if they hold a position over one year. Brokers and market makers hold Bitcoin as inventory, which is outside the scope of this paper. Bitcoin gains are subject to the new 3.8% surtax on investment income for certain taxpayers making over $200,000 per year. What Bitcoin is not Bitcoin is not a foreign currency, and therefore, gains are not necessarily taxed at ordinary rates. Bitcoin is not a collectible subject to the 28% tax rate. Bitcoin traders are not entitled to use the day trader mark-to-market rules at the current time. Bitcoin traders similarly not entitled to use the Forex 40/60 rules. Other important rules If Bitcoin is stolen, or private keys are lost, the standard rules of deducting casualty losses apply. Taxpayers must be aware of the accounting required to figure out the appropriate gains in the case of partial sales and lots bought and sold on multiple dates. Foreign nationals are most likely exempt from U.S. taxes on any gains they earn while trading on a U.S.-based Bitcoin brokerage. Mandatory disclosure of foreign accounts The most important issue for Bitcoin traders to discuss with their advisors is the disclosure of foreign assets under FATCA and BSA. Bitcoin held in a wallet is not subject to disclosure. But, Bitcoin or cash held in a foreign brokerages custodial account is likely subject to disclosure if the value exceeds $10,000 at any point during the year. A custodial account is an account established set up for the benefit of the taxpayer, but held and maintained by the brokerage. This type of account arises when the taxpayer does not hold the private keys and must submit a request to the brokerage release coin. This type of account also exists if the taxpayer converts Bitcoin into fiat currency and holds it in the brokerages account. If you think this might apply, you are encouraged to read the discussion and consult an attorney. Taxpayers are urged to be conservative and err on the side of disclosure. Penalties for failure to disclose foreign assets start at $10,000 per account, per year, and grow rapidly. -3Please consider a donation if you found this useful. Bitcoin:1DXovSXEmkk7yaCcFxZ8Lqqvw3NgkyUpic Copyright 2013, Tyler S. Robbins

Discussion
Taxable Events: Realization vs. Withdrawal
The first and perhaps most important question to the Bitcoin trader is not how much tax is due, but when the tax is due. The federal income tax relies on the theory of "realization" in order to determine in what time period income is taxable. An amount is "realized" when money (or property) is exchanged for another property. 1 An amount is also realized in a barter transaction, when the holder exchanges Bitcoin for services or other property. 2 In short, this means that any gains or losses generated by Bitcoin transactions trigger a tax at the time of the sale (or barter), rather than when the proceeds are withdrawn from the brokerage. 3 Of course, the tax is not due and payable until the appropriate deadline for tax returns, although you may owe estimated tax payments. Using a foreign brokerage or bank account does not affect the timing of gains, because U.S. citizens and resident aliens are subject to tax on all their income worldwide regardless when it is received. 4 Example 1: Ben Bernanke purchases 1 BTC (one of the several currency codes for Bitcoin) for $300 on January 1, 2013 from MtGox, funded by his Japanese bank account. On December 15, 2013, Ben sells 1 BTC for $350, but does not withdraw the funds from his brokerage account. On December 20, 2013, Ben purchases 1 BTC for $350. Ben does not sell his remaining Bitcoin before the end of the year. When the ball drops, 1 BTC is valued at $300. Conclusion: Ben has realized proceeds of $350 and gains of $50 that must be reported on his tax return for 2013, even though he never withdraw the funds, conducted the transaction abroad, and has received no economic benefit. Example 2: Satoshi Nakamoto purchases 1 BTC for $100 on April 1, 2013. A day later, 1 BTC is valued at $200. Later that day, when the value of 1 BTC has not increased, Satoshi exchanges his 1 BTC for a detailing job on his car which has a fair market value of $300. Conclusion: Satoshi has realized $300 of proceeds and $200 of gains that must be reported on his tax return for 2013. In the case of sales resulting in the realization of a loss, this rule is be modified by the wash sale provisions, described below.

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Characterization of Income from Bitcoin Sales

Perhaps the most contentious argument surrounding the taxation of Bitcoin is its character. The character of an asset is what dictates its tax treatment. Bitcoin can have one of three potential characters: inventory, capital assets, or currency. Inventory is specific to brokers and market makers, and outside the scope of this article. Capital asset treatment is more favorable to if it is held over one year, because the taxpayer is entitled to preferential tax rates. If the taxpayer holds Bitcoin under one year, the character may not be important. At the current point in time, it is most likely that Bitcoin is seen as a capital asset, not a currency. Currency status requires that any gain or loss is taxed at ordinary (the highest) income rates. 5 Although enthusiasts insist Bitcoin is a currency, the IRS has not opined on how they wish to treat such transactions. It is important to note that different definitions apply for different purposes of Federal law. For example, despite both offices being established under the Department of Treasury, FinCEN might consider Bitcoin a currency in order to properly regulate it under the Bank Secrecy Act, but the IRS may not. Therefore, it is important not to assume that Bitcoin is taxed one way or the other because of something in the news. A capital asset is defined by what it is not. A capital asset is not inventory or property used in a trade or business. 6 Most investments are traditionally considered to be capital assets. In the authors opinion, Bitcoin should not be treated as a currency for tax purposes until the IRS exercises its regulatory authority and declares to be such. 7 It is likely within the IRSs regulatory authority to consider Bitcoin a foreign currency for purposes of characterization (but not for other purposes, discussed within). It is notable that there is no authority to indicate any treatment to the contrary. At the current point in time, taxpayers should be able maintain the position that Bitcoin is a capital asset and that transactions between USD and BTC are not subject to the foreign currency exchange rules. Taxpayers should consider disclosing their questionable position on tax returns. If the IRS audits a taxpayer and determines that Bitcoin transactions were treated incorrectly, no penalties should be incurred, provided the taxpayer discloses his position to the IRS. 8 If no disclosure is made, it is more difficult to tell whether there will be penalties because of the lack of any guidance in either direction. If the taxpayer loses an audit, the tax return will be adjusted to reflect the correct treatment, and any additional tax will be due, plus interest and penalties, where appropriate.

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Speculators Speculators hold Bitcoin hoping to profit from an increase in price, and may engage in casual trades. Speculators hold Bitcoin as a capital asset (an investment) as described above. If you are reading this paper, you are most likely a speculator. Brokers Brokers and market makers hold Bitcoin as inventory. As such, they may not treat Bitcoin a capital asset by definition. 9 Instead, it is an ordinary asset. Inventory is subject to uniform capitalization rules and certain accounting rules, all of which are not discussed within. Day Traders The mark-to-market accounting regime is not available to day traders of Bitcoins, because the Code specifically outlines certain securities that qualify. 10 It very well could be within IRSs regulatory authority to extend this treatment to Bitcoin, but this could take years or even decades to come to fruition. As a result of Bitcoin not qualifying as a security, the presumption of ordinary income is ineffective. 11 This means that in the off chance a day trader holds a position over a year, he will not be subject to heightened documentation rules in order to claim preferential tax rates. Day traders can quietly celebrate, because the rules for deductions apply to all assets the same as they do for stocks. If the trading is tantamount to a business, ordinary and necessary deductions may be directly allowed with no limitation, such as the itemized deduction floor or AMT. But, these individuals should be aware that the documentation requirements and courts are heavily weighted against allowing trading to constitute a business. Most taxpayers take their investment expenses as itemized deductions (discussed later). Calculating the Gain This is among the easiest concepts discussed. Taxable gain is equal to the amount realized (that is, the net cash received or fair market value of the barter exchange), less the basis of the Bitcoin. 12 Basis is equal original cost and any acquisition costs. Acquisition costs include bank wire fees and Bitcoin broker commissions. 13 Example 3: Barack Obama purchases 1 BTC for $300, plus $1 in wire transfer fees, and $10 in commission. Barack sells 1 BTC for $400 one week later, and pays $1 in wire transfer fees and $15 in commission. Conclusion: Baracks amount realized is $384 ($400 - $15 - $1), and his adjusted basis is $311 ($300 + $10 + $1). Baracks taxable gain is $73.

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Partial Sales Partial sales complicate the determination of gains. The basis must be proportionally allocated among the lot that is being divided up. Example 4: Edward Snowden purchases 1 BTC for $100 on January 1, 2013. On March 1, 2013, Edward sells 0.5 BTC for $75. Edwards basis in the sold lot is $50 ($100 x 0.5). At the end of the year, Edward still holds 0.5 BTC. Conclusion: For the year 2013, Edward must report $25 of gain ($75 - $50). When Edward sells the remaining 0.5 BTC, his basis will be equal to $50. Multiple Purchase Dates Buying and selling without completely closing out a position can also complicate matters, especially if a position is held past the end of the year. The default rule is that the oldest Bitcoin is considered sold first (first in, first out, or FIFO). Special rules exist for trades in securities, but not for other assets. Experts agree that the same principles should apply for other types of assets, although no legislation actually exists. 14 Taxpayers are advised to follow the same rules as stocks and to ensure they keep accurate records. A taxpayer can also choose to sell his newest assets first (last in, first out, or LIFO), or average the cost of his holdings. Taxpayers may be able to use these rules to strategically plan to recognize the smallest amount of gain before the year ends. For more information, see IRS Publication 550 (page 46). Note that in order to take advantage of LIFO, taxpayers must be able to specifically identify which Bitcoin is oldest. This may be impossible because there is no actual coin, and Bitcoins are held as a register tied to an address. Taxpayers planning on specifically identifying Bitcoin should keep each and every purchase in a separate address, and maintain records indicating when the address was funded. Once the funds are commingled into a single address or brokerage account, specific identification is impossible.

Tax Rates
As most readers are aware, capital gains are taxed at favorable rates if the property is longterm, or, held over one year. Note that requirement is more than one year, not equal to one year. 15 Capital gains and losses, both short term and long term, are netted against each other when tax returns are prepared. If this results in a long-term capital gain, the taxpayer is entitled to preferential rates.

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In 2013, those rates are 0%, 15%, and 20%, and depend on the taxpayers ordinary income bracket. In addition, certain taxpayers earning over $200,000 must pay an additional 3.8% surtax on net investment income under the Affordable Care Act, in order to fund Obamacare. 16 All other income from the sale or barter of Bitcoin, such as short-term capital gains, is taxed at ordinary tax rates, plus the 3.8% surtax, if applicable. Should IRS declare Bitcoin to be a currency, gains would be taxed at ordinary rates. 17 If Bitcoin is held for less than one year and one day, it may not be material whether the transaction is treated as currency or capital gain, unless the taxpayer has other losses or gains that can be netted out. Bitcoin is Not a Collectible It is also possible that Bitcoin may eventually be subject to tax as a collectible. Collectibles are subject to a capital gain tax rate of 28%. At the current time, collectibles include works of art, rugs or antiques, metals or gems, stamps or coins, alcoholic beverages, and any other item of tangible property the IRS declares to be such. 18 It follows that Bitcoin is simply not a collectible under the current law for at least two reasons. First, Bitcoin has not been declared a collectible by Congress. Second, the IRS does not have the regulatory authority to declare Bitcoin a collectible, because Congress only granted authority to specify tangible items to be collectibles. Although the IRS taken the position that precious metal backed ETFs are collectibles, it would be nearly impossible to make the case that Bitcoin should be treated similarly. 19 The argument only works for ETFs because they hold physical assets and may be treated as trusts. There is a strong argument that Casacius coins should be considered collectibles and taxed accordingly. Bitcoin Traders Are Not Entitled To Forex 40/60 Rules Foreign exchange traders may be entitled to preferential treatment of their gains under the 40/60 rules. These rules basically state that gain or loss from certain contracts is considered to be 40% short term capital (loss) and 60% long-term capital gain (loss). 20 In addition, their holdings are market-to-market at the end of the year (that is, they are excepted from the general rule that requires realization of income or loss in order to take it on their tax return). These rules do not benefit day traders in Bitcoin at the current point in time. Foreign exchange contracts are entitled to these rules if several requirements are met, including as a prerequisite, that they are: 1. foreign currency contracts, which 2. require delivery of, or the settlement of which depends on the value of, a foreign currency which is a currency in which positions are also traded through regulated futures markets, -8Share freely, but please give appropriate credit and only distribute this document in its original format. Revision 11/20/13 Copyright 2013, Tyler S. Robbins http://www.bitcointax.info

3. which is traded in the interbank market. 21 Based on these prerequisites, it is very clear that Bitcoin does not fit the bill. It may be arguable that traders are engaging in foreign currency contracts, depending on the structure of the particular arrangement. But, Bitcoin is not a currency traded on a regulated futures market, and an interbank market simply does not exist for the currency. Thus, Bitcoin traders will not qualify without comprehensive regulation by Congress or an act of joint administrative action by the Treasury and Securities and Exchange Commission. Foreign Nationals Trading on U.S. Brokerages Foreign nationals are almost entirely exempt from capital gains taxes in the U.S. A foreign national will only be subject to capital gains from the sale of Bitcoin if he is physically present in the U.S. for more than 183 days, or is a tax resident for the year of the sale. 22 If the foreign national is partner in a U.S. business that exchanges Bitcoin as inventory, he is most likely subject to tax. Foreign nationals who are casual Bitcoin speculators should not avoid using a U.S. based exchange for fear of paying taxes. But, the individual may be required to prepare certain forms to demonstrate their foreign exempt status. Foreign nationals are encouraged to seek competent counsel with respect to their U.S. tax obligations. Many foreign persons are unaware of benefits offered under a treaty between their home country and the U.S.

Losses and Deductions

Taxpayers who finish the year with net losses may not be surprised to learn they cannot utilize the full benefit of their losses. Capital losses generally only offset capital gains. A small concession from Congress allows $3,000 of capital loss to offset ordinary income (for example, from your salary). 23 Unused losses are carried forward to the next year. Most taxpayers will consider their Bitcoin an investment and a capital asset. Those taxpayers are entitled to deduct expenses for the production of income as itemized deductions. 24 These deductions are hard to come by, but do include attorney and CPA fees paid for the specific purpose of counseling on Bitcoin transactions. 25 They should also include costs of cold storage, such as USB keys and safety deposit boxes. Talk to your CPA about allowable deductions. Taxpayers can rejoice in that the wash sale rules do not apply. The code prescribes that the wash sale rules only apply to stock and securities. 26 The IRS would have to affirmatively declare that Bitcoin is to be considered a security in order for these rules to apply.

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Casualty Losses Recent news had shed light on many Bitcoin holders who have experienced total loss of their Bitcoin. Some of these investors held their Bitcoins in an online wallet that was hacked. Others lost their private keys or have been robbed making an in-person sale. These investors are entitled to at least some relief under the tax code. If a loss was sustained in a trade or business (inventory) or transaction entered into for profit, but not part of a business (investment), the taxpayer is entitled to take a loss on his tax return in the same character. 27 For brokers, the loss of inventory is an ordinary loss. For investors, the loss is capital. It is important to note that if the taxpayer suddenly recovers his previously claimed loss, he must recognize income equal to the loss previously taken. Losses may be limited, especially in the case of the loss of a private key or theft. 28 Casualty losses from theft or other casualty are only allowed to the extent each incident exceeds $500. In addition, such losses are also subject to a floor of 10% of the taxpayers adjusted gross income. Talk to your CPA if this happens to you.

Disclosure of Foreign Bank Accounts and Financial Assets

Among the largest problems Bitcoin traders may face is the disclosure of foreign assets. The compliance itself is relatively minor, but most tax preparers are wholly unaware of the requirements. Even fewer will realize that Bitcoin transactions might trigger a duty to file. Because the penalties involved are tremendous, it is imperative that taxpayers take a conservative position and file even in a borderline situation. Foreign Account Tax Compliance Act (FATCA) FATCA requires U.S. citizens and taxpayers who hold any interest in specified foreign financial assets valued in aggregate over $50,000 on the last day of the year, or over $75,000 at any time during the year, to disclose that asset. These figures increase to $100,000 and $150,000 for married taxpayers filing joint returns. The value of one specific asset or account does not matter. FATCA disclosure is made annually on Form 8938 (Statement of Specified Foreign Financial Assets). Specified foreign financial assets include: certain foreign financial assets held for investment purposes, and financial accounts maintained by a foreign financial institution. 29

The definition of a foreign financial assets does not encompass direct holdings of Bitcoin at the current point in time. It would be a stretch to argue that Bitcoin is foreign, given the distributed nature of the network that includes U.S. operators. Given enough time, the Congress will likely create specific rules regarding stateless digital currency. Therefore, it is unlikely that FATCA requires disclosure of Bitcoin itself, held in a wallet. - 10 Share freely, but please give appropriate credit and only distribute this document in its original format. Revision 11/20/13 Copyright 2013, Tyler S. Robbins http://www.bitcointax.info

But, there is a strong argument that using foreign brokerages could trigger a disclosure requirement. During Senate hearings on November 18 and 19, 2013, the director of FinCEN testified that the official position of Treasury was that current regulatory authority encompassed Bitcoin transactions. Although the director specifically addressed its authority under the Bank Secrecy Act, it is not a far stretch that the agency would similarly believe that regulatory authority under FATCA encompasses such transactions. Financial Account... Depositing Bitcoin into an online wallet service is arguably a custodial account, but probably not within the regulation if the taxpayer maintains possession of his own private and public keys. In such a case, the taxpayer has not entrusted anything to the third party custodian. Depositing Bitcoin into a brokerage where the user does not know the specific address of his coin is clearly a custodial account: the brokerage is taking control over the Bitcoin, and the taxpayer must submit a request to release any Bitcoin. A specific example of this type of account is Coinbase, although they are domestic and outside the scope of the regulation. Depositing Bitcoin in an online casino such as Satoshidice is also the establishment of a custodial account, although Satoshidice is probably not a financial institution (described below). When a taxpayer sells his Bitcoin and leaves fiat currency in the brokerages account for safekeeping, a custodial account has been established (for example, consider BTC-e or MtGox). Compare this to a non-custodial system such as Coinbase, where a fiat balance is never held, and wire transfers are initiated instantly upon a sale. Maintained by a Foreign Financial Institution A foreign financial institution is a financial institution that is not a U.S. entity (meaning that foreign branches of U.S. entities are not considered foreign), which: 30 accepts deposits in the ordinary course of a banking or similar business; holds financial assets for the account of others as a substantial part of its business; or is engaged (or holds itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.

A strong argument could be made that most Bitcoin brokerages meet the first requirement. The day-to-day business of a Bitcoin brokerage consists of two main elements: accepting deposits of fiat currency, and transacting in Bitcoin. As such, it is not farfetched that the IRS would

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prevail if it challenged a taxpayers failure to disclose fiat accounts held in foreign Bitcoin brokerages. It is strongly urged that taxpayers disclose any accounts that qualify. Bank Secrecy Act (BSA) Similar to FATCA, the BSA requires U.S. citizens and tax residents disclose certain foreign bank accounts when the aggregate value of all qualifying accounts exceeds $10,000 at any point during the year. This filing is still required even if it is duplicative. The taxpayers disclosure obligation arises when the account is maintained in the name of, or for the benefit of the taxpayer. If the account is held in the name of a company or trust, disclosure is also required. The BSA technically requires disclosure of foreign financial accounts, which includes accounts held on foreign branches of U.S. banks. 31 Financial accounts include, but are not limited to the following types of accounts: securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). 32 Given the broad nature of that definition and FinCENs stated position (discussed above), it is hard to argue that the BSA does not apply when Bitcoin is converted into fiat currency and held at a foreign brokerage. There is more room to debate whether the deposit of Bitcoin into a custodial account would apply, but caution and conservatism is always urged when filing under the BSA. Disclosure under BSA is made annually (not on the same date as tax returns) on Treasury Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as FBAR). Penalties for Failure to Disclose under FATCA and BSA If you believe you have failed to file under FATCA or BSA for a prior year, you should immediately contact a tax attorney to assess the situation. FATCA requires the annual filing of Form 8938. Failure to file Form 8938 carries a baseline civil penalty of $10,000 for failure to file by the due date. If the IRS sends a notice of failure to file, and the taxpayer does not correct the failure within 90 days, an additional $10,000 penalty is assessed for each 30 day period the failure continues. The maximum total penalty is $60,000. These penalties may be reduced if the taxpayer has reasonable cause. Criminal penalties also exist. BSA requires the annual filing of Form TD F 90-22.1. Failure to file an FBAR carries a baseline civil penalty of up to $10,000. 33 If the IRS finds the taxpayer had reasonable cause for the failure and the taxpayer corrects the filing, no penalties are imposed. Any person who willfully fails to report an account is subject to a civil penalty equal to the greater of $100,000 or 50% of the balance in the account at the time of the violation. Criminal penalties also exist. Please note that these penalties may be assessed separately for each account. 34 - 12 Share freely, but please give appropriate credit and only distribute this document in its original format. Revision 11/20/13 Copyright 2013, Tyler S. Robbins http://www.bitcointax.info

Failure to file Form TD F 90-22.1 also preserves the statute of limitations for the taxpayers entire return indefinitely, until three years after the form is eventually filed. 35 If the form is never filed, the IRS can audit the return and assess penalties on the entire tax return at any time (even 100 years from now). This is a sharp contrast to the general rule which limits the IRS from assessing penalties or interest after three years from the date the tax return was filed or due. 36 This could prove to be detrimental if a taxpayer destroys his records after several years, assuming he was in the clear.

Closing Comments
The taxation of Bitcoin related transaction poses many unique problems that will require a significant body of legislation and administrative guidance. For the time being, taxpayers will have to rely on analogy and technical readings of the law to determine their obligations. This white paper aims to present a sensible and broad overview of some of the many tax and compliance issues associated with Bitcoin. It is far from comprehensive, and does not seek to address every plausible situation or policy matters. The author strongly encourages taxpayers to come clean to their CPAs or tax attorneys, and to err on the side of caution with respect to disclosing foreign assets.
All citations to IRC are to the Internal Revenue Code of 1986, as amended.
1 2

3 4 5 6 7

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

See IRC 1001. Gross income includes all income from whatever source derived, including income received in the form of property or services. See Treasury Regulations 1.61-1(a). See also, Bittker & Lokken: Federal Taxation of Income, Estates, and Gifts (WG&L) (hereinafter Bittker), 5.1.2. This fact is beyond debate and is a central part of U.S. tax theory. See Bittker at 40.2. There are always exceptions, beyond the scope of this discussion. IRC 988. IRC 1221(a). For a more comprehensive discussion of why Bitcoin is not a currency, see Abraham & Lowy, Taxation of Virtual currency, Tax Practice Tax Notes (Nov. 11, 2013). See IRC 6662(d). IRC 1221(a)(1). IRC 475(c)(2). See IRC 1236(c). IRC 1001. See IRS Publication 551. See Bittker, 41.7.4. See IRC 1(h); IRC 1222(3). IRC 1411. IRC 988. IRC 408(m). See PMTA 2008-01809 (5/2/2008). IRC 1256. IRC 1256(g). See IRC 871(a)(2). IRC 1211(b).

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24 25 26 27 28 29 30 31 32 33 34 35 36

IRC 212. Treasury Regulations 1.212-1(g). IRC 1091. IRC 165(c). See IRC 165(h). See IRC 6038D; Instructions for Form 8938. Id. See 31 U.S.C. 5314; Instructions for Form TD F 90-22.1. Id.; 31 C.F.R. 1010.350(c). 31 U.S.C. 5321. Internal Revenue Manual 4.26.16.4 (07-01-2008). IRC 6501(c)(8). IRC 6501(a).

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