Should earnings in Bitcoin converter to a traditional currency be treated as trading-income or non-trading income for tax purposes?

Question

Should earnings in Bitcoin converter to a traditional currency be treated as trading income or non-trading income for tax purposes (for example, in Ireland)? Reason for them being considered trading income is that the Bitcoins need to be sold at an exchange like a commodity. On the other hand, a business gains Bitcoin not necessarily through trading them for goods (say, SatoshiDice), so the other option appears viable.

Which approach should be taken into consideration when figuring out taxes?

Answer 1

You might not like this answer but the correct approach for figuring out taxes related to Bitcoin earnings is to ask the question to your local tax authority, in written form and get an answer that your local tax administration legally commits to.

I can speak only for France, but I assume the same kind of thing is possible anywhere. In France you can ask for a "rescrit" it is a written answer from the FISC (our tax authority). Once they gave you an answer they are legally obliged to stand by it.

There is no other correct way to account for your Bitcoin taxes than asking the people that actually can give you a definitive and legally binding answer.

Answer 2

In the USA, Bitcoin earnings are treated like property. The full announcement is here:

Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply IR-2014-36,

March. 25, 2014 WASHINGTON —

The Internal Revenue Service today issued a notice providing answers to frequently asked questions (FAQs) on virtual currency, such as bitcoin. These FAQs provide basic information on the U.S. federal tax implications of transactions in, or transactions that use, virtual currency.

In some environments, virtual currency operates like “real” currency -- i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction.

The notice provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:

• Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.

• Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.

• The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

• A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

  Further details, including a set of 16 questions and answers, are in Notice 2014-21, posted today on IRS.gov.