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The TurboTax Blog > Tax Planning > Bitcoins: The Taxless Currency

Bitcoins: The Taxless Currency

Tax Planning

In today’s economy, the value of the dollar is weaker than ever and the thought of a digital currency is becoming more of a reality with the recent introduction of bitcoins. Bitcoins can be compared to cash, but cash is limited to physical exchange, where as bitcoins can be sent throughout the Internet. Today there are more than 6.3 million bitcoins in existence and this number continues to grow. So, how are bitcoins used and how have they become a currency that can be used like dollars, but is tax avoidable? Let’s explore.

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Comments (31) Leave your comment

  1. How can bitcoin be taxable?It is akin to gambling and no government regulation or protection is given by government so how exactly does government earn this tax?

  2. Bitcoin may be taxable, but in reality not feasible. If one claims loss of a bitcoin wallet, will the IRS allow a tax deduction as one ends up losing money in bitcoin investment? Who knows whether you really lose a wallet or not? One can always make up a tax report showing a loss in bitcoin investment by claiming loss of wallet.

  3. A lot of this seems wrong or misleading.

    Transaction logs are shared publicly online, but the transaction log is entirely anonymous. You can see that someone sent 2 BTC to someone else, but you can’t see who those people are.

    “Because of the scripts contained inside transactions” this makes absolutely no sense. Scripts inside a transaction…what?

    Executing an exchange is incredibly simple. When running the bitcoin client, at the top in a big box is “Your bitcoin address”. You give it to someone, they then click the “Send coins” button, enter your address, and the amount, then click send. It requires no registration or configuration. You just download and install the client. If this is complicated, I don’t know what is simple.

    Bitcoins are no or less refundable, replacable or insurable than any other form of currency. Remember that bitcoin is a form of cash, and that the security you find while spending money online isn’t provided by the US dollar, it is provided by credit companies and insurers. These types of company can (and do) exist in the bitcoin world.

  4. I do not agree at all that bitcoin is a taxable currency. If you sell bitcoin for USD, then I guess the IRS can count that as a gain and tax you for it. At least until FairTax totally replaces the massive and destructive tax code, and shuts down the IRS for the most part. They can not, I repeat, Can NOT tax other currencies. If you have a Swiss bank account full of Swiss Francs, none of which is traded for, or from, USD, then the IRS has absolutely no jurisdiction over it. Ever heard that word before? Jurisdiction? If you buy something in Switzerland, like say a House over there, and you go visit that house once in a while, and pay people to keep it clean, etc., you will be paying entirely in Swiss Francs. Any taxes you owe would be owed to Switzerland! Just because you’re a US Citizen that does not mean you Also must pay the IRS whatever they decide you owe them. Even if there is a law that supposedly says you have a liability, there is still no law requiring you to REPORT anything to those socialist frakers!

    I suggest you learn the truth about taxes, and ignore the lies coming from the socialists in our government. Go to Tax Honesty Patriot’s page

  5. Converting Bitcoins to Federal Reserve Notes is undoubtedly a taxable event.

    If you really want to avoid paying taxes , endorse your Federal Reserve Notes. It will then become a liability as opposed to an asset. You will be on the hook to redeem it for lawful money. Don’t fret though. No one redeems their Federal Reseve Notes at the Fed so i doubt they will redeem them with you?

  6. For those arguing against the article’s point that bitcoin is not inherently taxable, some points:

    – The article does not say that a purchase of bitcoin with USD and subsequent sale for profit in USD would not be taxable. This is a gain in USD and may be taxable.

    – However, the act of buying an item in bitcoin is not taxable. It is a barter of one good for another, and is akin to trading one red shirt for your neighbor’s purple shirt. There was no gain or loss to tax here. There was no sale involving USD.

    Now let’s replace bitcoins for one of those shirts. As the government can’t tell you the inherent value of a bitcoin, it cannot show that your trade of 5 bitcoins for a T-shirt was either a gain or a loss. By definition, in fact, it is neither – the “value” of those bitcoins at that moment is exactly one T-shirt. No gain, no loss, no tax.

    How exactly is barter taxable?

  7. Its curious that this infographic is listed under ‘Tax Tips’. There is some good information here but its misleading hype to suggest bitcoins can be used for tax evasion. Replace ‘bitcoin’ with ‘pet rock’ and you’ll get the same result – not generated by the government, but buying and selling them are still taxable. The exchanges demonstrate a fair market value which helps determine how they can be taxed. Many people using bitcoin are looking for convenience and no overhead cost to transfer money electronically.

    The ‘expected future supply’ chart is actually the ‘exact future supply’ chart as its built into bitcoin to generate coins every 10 minutes, starting with 50 and cutting that in half every two years.

  8. The “taxless currency”? Are you serious?

    Bitcoins are interesting for a lot of reasons, but avoiding tax liability is not one of them. Barter is taxable. If you sell goods or services for bitcoins, you have taxable income. If you buy bitcoins and sell them at a gain, you have taxable income. Bitcoins are not magically tax free.

    Granted, transacting in bitcoins can make tax evasion easier, just as transacting in cash can, but that is hardly something I would expect Intuit to advocate.

  9. You really need to fact check you article. Passwords were not leaked , hashes of the passwords were leaked. Only weak passwords where cracked. Mine wasn’t. Mtgox hack never resulted in the loss of a single bitcoin. Fake bitcoins where created within the exchange database NOT BITCOIN and sold artificially driving the price on the exchange down.

    It was 10K bitcoin that was allegedly stolen. this individual has shown a shread of proof. Even the transaction hash this individual said was proof actually proved it didn’t happen. He was another individual that didn’t comprehend how bitcoin worked so he spewed garbage.

    Now that we have covered that … how many credit card infos have been stolen since January 1st? How many millions in paper money have been stolen?

    Bitcoin isn’t even a blip in comparison.

  10. As for the theft of bitcoins, your bitcoin wallet is like a physical wallet, if someone steals your physical wallet, they get your money, and you don’t get it back. Not like an FDIC insured checking account where you get your money back if someone hacks into the bank account somehow and takes everything in it. So, yes, you have to be vigilant and Protect your digital wallet as if it were a physical wallet containing physical coins. Those bitcoins are not refundable, replaceable, or insured in any way. If someone steals your wallet file, that’s it, that money is gone.

    I use TrueCrypt and stuff for my wallet, but if you don’t want to mess around with a local bitcoin wallet on your computer, you could decide to trust an online eWallet provider, like But, just like your graphic said, online websites can be vulnerable to hackers, and thieves. Just be careful.

  11. I agree with bitbutter, the downside listed in the above graphic is misleading. Transactions are easy to do. As soon as you run your own installed copy of Bitcoin (the program), you have your own wallet with it’s own addresses, and sending and receiving bitcoins is intuitive and easy.

    And scripting is how lots of difficult things are made a LOT easier. Like on linux, when I want to download and install a program, a lot of them come as Source files, which are not immediately executable, and a script for compiling and installing the application into the linux system, called a Make file. Generally you usually just type the word Make, and the scripting takes over and does all the hard work For you.

    As for criminals using Bitcoin, so what? Criminals have been anonymously, more or less, using any and all world currencies for, like, forever! Of Course they will use this currency in a pretty anonymous way. That doesn’t matter. What matters is that we, the people of the world, can now be free from the slave masters who think they can control us with fake fiat garbage they call Money, and the taxes to pay the evil banksters their Interest fees for borrowing the monopoly money they print out of thin air!

  12. I like some of the inforgraphis too, but fail to understand why Bitcoin would be the “taxless currency.”

    An accountant I know pointed me to IT-95R

    when I asked about the tax implications of holding a currency experiencing hyper-deflation (not guaranteed to continue).

    Note that bitcoin is not actually a “foreign currency” because it is not actually back by any government. They are backed by proof-of-work and the anonymized public transaction history.

  13. Since *every* form of money in existence has been used by criminals, it is unfair to single out Bitcoins in that regard. Dollars in their cash form are probably the currency of choice for criminals worldwide.

  14. “Bitcoins are the currency for many criminals online.”

    Yea, and criminals in real life use dollars… your point?

    This is a nice graphic, as bitbutter pointed out, but it is very misleading.

  15. Isnt using Bitcoins very similar to Barter? I was hopping to get some great tax advise on how to calculate the taxes owed, but you made it sound like Bitcoins make it impossible to pay taxes. Just because you can avoid getting caught doesnt mean there is no tax liability.

  16. They didn’t mention where to buy Bitcoins. Tradehill seems to be the safest and easiest way but there are other options. I don’t trust Mt Gox after they were hacked and I haven’t been impressed with their response. Still Bitcoin has a long way to come.

  17. Bitcoins may be produced without the involvement of the U.S. government, but if a U.S. citizen makes a significant income via bitcoins, aren’t they still responsible for declaring that income, and paying taxes on it?

    The government can’t track cash transactions very easily either, but one is still supposed to pay taxes on that, correct?

  18. Bitcoin transactions are taxable just like any other in which one or both parties experience a financial gain. Of course, tax laws may be harder to enforce if you don’t have intermediaries like banks and credit card companies aiding and abetting the government’s spying activities.

  19. Yes! bitcoins are not taxable, nor is their receipt “income” under the Revenue Acts of Congress. But you may want to dig a little deeper as to why.

    Many professionals will tell you bitcoin is includible as income on a return. That’s a disguised way of saying “optional.” Our Federal Income Tax is an excise on federal privilege and there are several ways to become entrapped. Bitcoin is one way out. Another is to redeem your paycheck in LAWFUL MONEY. A good intro is this 28-min video:

  20. I agree with bitbutter, there is no privacy concerns, it’s one of the advantage of bitcoin, that transactions and holdings are completely private, it can not be used to identify a person.

    Also security concerns are blown out of proportion, as long as you use some common sense, there is no security problem(the mtgox hack was a problem of mtgox, not bitcoin). I was one of the users of mtgox whose account was exposed, but nothing was lost because my mtgox password was unique to mtgox, and at the time I already abandoned mtgox due to their unprofessional way of handling things and was keeping my money at tradehill, so there was zero loss for me.

  21. I don’t see how the exchanges use the honour system. They are just as bound by the law as other on line stores. I also don’t see how bitcoins are any more taxless than buying gold and burying it somewhere, though they are a lot more practical.

    You could also include “The work provided by the miners is used to prevent spending the same coin twice.” And that bitcoins are dividable to 8 decimal places, as this seems to be a common confusion.

  22. “bitcoins are the currency of many criminals online”

    First of all, even if that were true, how would that be a disadvantage for an honest user?

    USD and EUR are the currencies of many criminals both online and offline. In fact, 500 EUR notes are used almost exclusively by criminals in some places:

    Does mean I become a criminal when I use a 500 EUR note? Of course not!

    Secondly, how do you know that “many” criminals use Bitcoin? Can you back this up with empirical evidence? Show us the numbers. Or have you simply echoed the FUD propagated by tabloid newspapers?

  23. Misleading (and bad TAX advice, especially coming from a TAX software site) to tell people that Bitcoins avoid tax.

    There is nothing about Bitcoins that says you can avoid taxes. Furthermore, I believe the US Tax code is VERY clear on the tax implications.

    If you buy an asset (such as a stock, commodity, currency, house, jewelry), and then sell it for a gain, you have a taxable gain. There’s nothing different about Bitcoins from that perspective.

    And if you use Bitcoins to conduct transactions, they are not tax free. It’s the same as barter transactions, which are taxable.

    Better go do your homework, Intuit. You, supposedly, know something about the tax law, but you aren’t demonstrating it here!

  24. Bitcoin is a revolutionary new form of currency. What makes bitcoin so revolutionary is that it is completely Decentralized and P2P. This means that there is no Bank or central authority that secures the economy from double spending (Over Draft) or counterfeiting money. Instead thoughts tasks are completed by the use of Cryptography. Bitcoin uses a SHA256 Hash Tree, known as the Block Chain, to protect against double spending and counterfeiting. Then uses Elliptic Curve Digital Signature Algorithm (ECDSA) Public key pairs to hold and transfer the value of the bitcoins. The Block Chain is public, but the ECDSA Private Key is stored on the users computer.

    So, lets say I have 10 bitcoins. They will be linked to a ECDSA Private key I have in my wallet.dat file. The way I send the bitcoins to you simply telling me one of your ECDSA Public key, i.e. just cut/past into an email (it is just a string of letters and numbers). Then I just click the “Send” button in my Bitcoin client and cut/past in the Public Key. That’s it 🙂 you don’t have to mess with setting up an account and spending days verifying your bank account like with PayPal. Also, unlike paypal the transactoins are basically free, and there are no limits on anything, And the IRS can never Audit nor Freeze your account.

    Because one can make a new ESDSA key pair for each transaction, the use of bitcoin is as anonymous as your internet connection. Also, because this system dose not require ether party to know any identifiable information, such as, name or address, costumers do not have to worry about an attacker cracking the merchants database and stealing that info i.e. Sony.

  25. bitcoins are exactly as taxless as cash. every business with a brain should pay taxes for every invoice, no matter if you get paid in credit card, cash, bitcoins etc. so to call it taxless is nonesense.

  26. Surprising that a tax software company would put their name on a publication with this statement: “Bitcoins are produced without the involvement of governments or banks, thus avoiding taxes.”

    While true that governments might have a harder time enforcing tax laws because of bitcoin’s anonymity, use of the currency does not mean taxes are avoided.

    When bitcoin is used for purchases, the merchant is still responsible for sales taxes, for instance. When an investor sells bitcoins at a profit, those profits are subject to capital gains taxes, most likely.

    Here is an article describing some of the tax issues:

  27. Nice graphic! A couple of concerns:

    “bitcoins are shared publicly online”

    This sounds misleading to me. The transaction log is publicly shared online.

    As I understand it, a person’s bitcoin wallet contains the private keys associated with bitcoin addresses he owns. These private keys are what allow a user to transfer ownership of his bitcoins to someone else (ie. to spend them). These transfers are recorded in the public log. The private keys that enable these transactions are not shared online.

    “Transactions are difficult and based on scripts contained inside them; they are executed to access the money”

    In what sense are transactions difficult? For humans using a bitcoin client, transactions are easy to execute.

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