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Comment by RobAley | Hacker News Reader

If you're using sites like this, and you're in the UK, you will need to pay tax (in real money) on the market value (in real money) of the work you undertake. If you're a sole trader, the bitcoins become yours, so if you are planning to keep them and "spend" them later when their value increases, you may be liable to capital gains tax on any appreciation in value (over a certain amount) as with any other asset. If you are a limited company, the bitcoins will become an asset of the company, and tax implications for disposal are as with any other asset.

I am not an accountant, always check with yours first!

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I wonder if you can hold bitcoins in an ISA.

How about if you held shares in a company that existed only to own Bitcoins?

Isn't the point of bitcoins that you don't have to pay tax on them?

In the United States, you are required to pay taxes even if you trade your services as a dentist for the services of a doctor (barter transactions are fully taxable, although some obviously fly under the IRS radar).

Every sale you make with bitcoins should in theory be subject to sales tax, and any work you do should be subject to income tax. I suppose you might even be subject to capital gains tax if the value of your bitcoins goes up (although I'm not sure if capital gains has even been tested for digital currency, gains in foreign currency values are taxed).

The only way bitcoins can enable you to not pay tax is through lying to the IRS (i.e. tax evasion, which is illegal). And, given that anonymity with bitcoins is harder than it seems, there's a good chance that you will eventually be caught if bitcoins become popular, even if the IRS is not aggressively looking at bitcoin transactions currently.

If you suddenly start making all of your income in bitcoins and don't report it to the IRS, the IRS may very well audit you, wondering how you are supporting your lifestyle without any income.

It may be the intention of the creators and users. However, in the UK at least, tax law is quite clear that you have to pay tax if you perform work in return for a "consideration", be that cash, bitcoins, donkeys, sex or music (for example).

Although the creators of laws don't always have in mind what happens online (often because they were created before the internet), most laws are broad enough that they cover new creations like bitcoins.

People & businesses have often tried to avoid paying tax by "swapping services" (e.g. accountant does developers accounts in return for a web site, and vice-versa), so the tax laws are deliberately broad to cover all "novel" non-monetary forms of payment.

Of course, you can only be found guilty of tax evasion if you are caught...

Laws may theoretically cover those things, but that doesn't mean they are effective. I'd like to see them try to tax a sex and music based economy.

It might be interesting to see what value the taxman puts on my bedroom antics (I'd like to think my services appreciate rather than depreciate over time...)

However the taxman has a useful trick, in that she can tax based on the (monetary) market value of the thing being "bought". So if you have sex with me in return for me developing your (£xxxx worth) iOS app, and the taxman finds out (during audit : "who developed that app, and how much did you pay?") she'll WILL come knocking on my door for payment (in cash, unfortunately, the Queen doesn't accept nookie). In the UK the taxman has a long history of investigating and taxing non-monetary transactions.

Casual transactions between the public will probably slip under the radar, but try earning any significant "sex and music" as a business or self employed, and you run a reasonable risk of getting caught out.

A sex and music based economy sounds great.

Though thinking about it, as a non-musical nerd I'd probably starve pretty quickly.

It is also worth noting that if said music-based economy was a one in which the music was digital, most likely there would be rampant inflation due to counterfeiting.

Define "intent of bitcoins".

Some people may intend to use them for that, but it seems to me the primary purpose of the creators of bitcoin was to create a currency that was not under the control of a government and subject to arbitrary currency manipulation as a result.

Creating a currency to merely avoid taxes would be a lot simpler, really. Step one is just not to not pay taxes, after all...

Also, consult your accountant/tax attorney, but AFAIK the US has very similar provisions to what RobAley is describing. Transactions not conducted in dollars occur all the time and the IRS is not left stymied by them. In that sense there's nothing particularly special about bitcoins.

No, the point is to have a decentralized currency. Just like the internet, it provides great freedom and stability.

I don't know any of tax code that stipulates that you only have to pay tax on earned income paid in a certain currency.

how will the tax man know you have earned them?

if you sell/exchange them for cash on localbitcoins.com there is no record and no tax to be paid.

Presuming that you've got them in return for doing some dev work (the subject of this article), when the tax man audits the company that you did the work for, and asks them to explain where they got the website/app/software developed when they don't have inhouse developers one of two things will happen. Either they won't give the tax man your details and invite the rath of the tax man, or more likely they will give them your details and how much was paid. You see, even if your customer keeps the transactions completely off the books, there is usually something to show for it, particularly if we are talking any kind of volume, and the tax man is very very used to looking for those kinds of signs.

> and no tax to be paid

There is tax to be paid, legally speaking, its just a question of whether or not you get caught for not paying it. Just like the tax man investigates people selling stuff on ebay, when sites like localbitcoins become more popular they will start investigating them as well. You may just find that the person you're meeting to sell your bitcoins to turns out to be a tax investigator.

AS with all criminal enterprises (a harsh label, but that's what tax avoidance is), you may get away with it. Or you may not.

however looking at it from an international perspective, if i am paid in BTC by someone operating out of the US (for example) and they tell the US taxman that they paid someone in the EU for the work then the US taxman is not coming looking for me.

as for meeting someone who turns out to be a tax investigator so what, localbitcoins.com and sites like it require no registration or even adding any personal details, unless I give the taxman my details he will not know who I am. Plus localbitcoins.com is not even necessary any forum could be used to arrange to meet and trade/sell BTC.

I guess what i am saying i that BTC allows people to avoid the taxman entirely. In your example of a company buying services, they are unlikely to use a BTC site to hire a feelancer, preferring to stay within the remit of fiat currencies and the taxman, however for individuals it is much more appropriate and much less interesting to the taxman,.

Indeed, for private individual - individual transactions, particularly low value transactions, you are most unlikely to be caught as there is much less interest to the taxman. To which end, you can just use cash.

This article however is about business/freelance type work. And at least here in the UK, the taxman is just as interested in individuals doing business deals as it is with corps. If you think that you don't run the risk of getting caught, bear in mind that anonymous off-the-books cash transactions, including international deals, have been happening since time immemorial, and the taxman regularly collars offenders.

With regards to localbitcoin, the moment you hand over your btc in return for their cash, (here in the UK at least) a taxable transaction has occurred and they can compel (via arrest if necessary) you to provide your identity.

If you avoid public forums and launder your btc with only trusted friends/contacts, you may get away with it. But you're limiting your market and reducing the exchange rate you'll get.

And if you start pulling in larger amounts and converting that to cash successfully anonymously, you start having the same problems drug dealers do when laundering their money that came from untaxed sources. Here in the UK, you won't be able to use bank accounts as money laundering regs mean larger deposits have to be explained and notified, and of course bank records are just that, records. Likewise if you go to purchase that shiny new car in cash, money laundering regs kick in again.

So for small amounts you will probably get away with it, but the taxman doesn't care too much about those, and such transactions already exist as "cash-in-hand" work without btc. Bigger transactions are just as problematic as cash, unless everything you want to buy is available from sellers who accept btc and delete their shipping records (or provide the product digitally).

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