If I receive X amount of bitcoin to my... let's say blockchain wallet, deposit into sites like ACR or Ignition (Bovada), play on there for a while, manage to break even after a couple of months, request a withdrawal to my account, sell the coins for cash, do I have to pay income taxes on this sale or not (since technically I didn't make any income in the process) Should I report this whole process to the IRS anyways? (since it nets to zero, I report the whole thing but there won't be any taxable income) Would I have to show where the bitcoin came from as well (as in, it is indeed me who purchased these coins in the first place) in case of money laundering?

Is there a sum amount in this case that automatically raises a flag to the IRS even if all the sale are done legitimately? What if I sell the BTC for cash? Would that require a money service license?

Does everything change in this case if the bitcoin is purchased outside of US using not USD?

I know the question seems sketchy but I'm just trying to make sure how can I stay 100% legal while not paying excess amount of taxes or create unnecessary complication with the IRS and Law Enforcements. Thanks for any input

The IRS ruled that Bitcoins (and other cryptocurrencies) are treated like stocks and bonds. This means each time you sell Bitcoins you have a capital transaction that's reported on Schedule D of your tax return. Even if you immediately buy and sell Bitcoins and there is no net income, each sale must be individually reported.

The IRS is aware of abuse of cryptocurrencies; they recently issued a summons against Coinbase. While Coinbase states they will be fighting the summons, the law appears (to me) to be on the side of the IRS.

It doesn't matter if you buy Bitcoins in any currency if you're a US citizen or permanent resident (or have a US tax filing requirement): The US taxes you on your worldwide income.

-- Russ Fox

Thanks for the input.

So bottom line, do I owe income taxes if I already own the bitcoins prior and then sell it for no profit in USD (given that I report the sale accordingly).

You won't owe taxes on the bitcoin transactions because you didn't earn any income (bought and sold for the same value). However, you may owe taxes on your poker play even if you came out even. See the US Taxes Sticky to see how you are supposed to report your poker play.

Anyone know if bitcoin wallets need to be reported on an FBAR? What about a site like Betcoin where the balance of the account is held in bitcoins?

A Bitcoin wallet that is based outside of the United States would be a foreign financial account that must be reported on an FBAR. Some Bitcoin wallets are based in the US (e.g. Coinbase) while others are not (e.g. Blockchain).

Betcoin is an online gambling site that is based outside the United States.

-- Russ Fox

Thanks as always, Russ!

Trying to get a grasp of BTC and the tax implications (particularly on a site like SWC where you're not just depositing using the digital currency.

Hypothetical situation: Buy 1 BTC and deposit @ value of $500. Cash out 4 bitcoins and convert to USD for $2400 ($600 value).

I understand there would be a capital gain generated on the original 1 BTC for $100. The 3 BTCs won would be poker winnings and taxable. Is the value of these winnings determined at the time of withdrawal? At the exact time of winning?

This seems to be the complex part. If it's at the time of winning (which is how normal poker winnings are taxed). That would imply the poker player is responsible for tracking the value of the BTC at the end of every session.

Anyone have some experience with this? Just looking to further my understanding of the tax implications.

There are four Bitcoin transactions. Additionally, whatever you win on a poker site is income regardless of whether or not you cash out. The $2,400 you withdraw does not mean you have $2,400 of income. You have to separately determine what you won or lost on the site. (In your hypothetical, it appears you won $1,800.)

Your first Bitcoin transaction is the purchase of one Bitcoin for $600. The second is the effective sale of one Bitcoin for $600 (when you deposit the Bitcoin, you have "sold" it). That transaction must be reported on your Schedule D (capital gains and losses).

When you cash out you at that moment have purchased four Bitcoins for $2,400. When you sell those Bitcoins, you have another Schedule D transaction that must be reported. Yes, your two Bitcoin sales in your hypothetical net $0, but they still both must be reported.

Note that you only report realized capital gains and losses on Schedule D. So assume you cash out on December 30 to Bitcoins but don't convert the Bitcoins to USD until January. That sale would be reported on the following year's tax return.

-- Russ Fox

Russ, thanks for the reply. Your commentary on the purchase/sale of BTCs at time of deposit and withdrawal make sense. What I'm most interested in is the calculation of poker income/winnings. What BTC market value do you apply to winnings and at what point? In my hypothetical above, are my winnings $1800 if I win the 3 BTC on the day of deposit, but only $1500 if I win on the day of withdrawal, and some indeterminate number if I win on some day in between? Is accepted practice to just apply the closing market value of BTC on the day of the winnings?

The fair market value at the time you withdraw; that's assumed to be the closing price for the day in question.

-- Russ Fox

Good info, thanks Russ. Do you know anything about needing a money service license, if that is necessary? I saw this story last week and now am wondering if this is some sort of requirement for transferring bitcoin into USD, or if they only went after this guy because he was charging a vig to buy BTC.

I am not an attorney, so don't take what I'm writing as legal advice.

If you are regularly selling Bitcoins to other individuals, my suspicion is that FINCEN and the alphabet soup of government agencies would consider you in the business of selling Bitcoins; you might need a money transmittal license. If you buy and sell Bitcoins back and forth with an Exchange (e.g. Coinbase), it's hard for me to see a need for that license.

Thus, anyone regularly selling Bitcoins to other individuals who is a US resident should speak with an attorney in his or her home state who is familiar with the Bank Secrecy Act and the other laws on money transmittal businesses.

Betcoin is one of the many bitcoin gambling sites that is not based in USA.

It is a riddle alright and what the hell do I do if I use a crypto card like Coinsbank / TenX or whatever. Imagine you load the card with BTC. Then you start using this card for purchases, paying for burgers, paying the rent, paying the gas, whatever. Do you have to pay additional capital gains tax every time you pay for coffee with your Bitcoin? It wouldn't make any sense. Bitcoin should not be taxed as capital gains!