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...
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.
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.
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.
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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.