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I'm considering doing a trial run with my tenants and let them pay some or all of their rent in BTC.

My motivations:

  • BTC isn't considered a currency so it's taxed as an asset under capital gains tax.

  • I can afford to keep some, if not most, of the rent in BTC and only cash out a small portion to pay the mortgage.

The plan:

  • Each month, the tenant would visit a portal I have set up to pay their rent via BTC. They would pay the USD equivalent in BTC.

  • I would offer a discount to tenants if they pay in BTC to motivate them.

  • I would only turn what I need back into fiat to defer paying taxes on it immediately.

Things I'm not concerned about:

  • The volatility of the BTC market

My questions:

  1. What are the tax implications of accepting an asset as rent?

  2. When are you taxed on that asset?

Rodrigo de Azevedo
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DotNetRussell
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    The IRS is smarter than you are... – RonJohn Nov 02 '17 at 18:56
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    @RonJohn There is a hole somewhere. You just have to poke long enough to find it. – DotNetRussell Nov 02 '17 at 18:57
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    @AnthonyRussell You are absolutely right - but for anyone reading this who thinks they have found a new tax loophole... please assume that the IRS thought of it first, and will punish you for trying to evade taxes... – Grade 'Eh' Bacon Nov 02 '17 at 19:21
  • You are in the same position if you accept cash from the tenants and use however much you want to buy BTC. Then they don't have to deal in BTC. – Ross Millikan Nov 02 '17 at 21:39
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    I don't see what's BTC-specific to this? Wouldn't it work the same way if you traded stocks? (And don't you think people would do that if it was of benefit?) – user541686 Nov 03 '17 at 04:49
  • @Mehrdad - trading stocks for rent would be a serious pain, as you'd have trouble with getting the right amount of stock and with doing the transfers, so the benefit would have to be pretty high to be worth the trouble. With BTC it's not particularly hard to make the transfers, so a small benefit would make it worthwhile. – Michael Kohne Nov 03 '17 at 11:33
  • Yeah honestly it's easier to just buy BTC with left over rent. – DotNetRussell Nov 03 '17 at 11:34
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    FWIW the tax you own on rent is on net, not gross. If you do a good job of documenting your expenses (mortgage interest, taxes, depreciation, any utilities that are included, any repair costs you incur, etc.) you probably won't be paying a lot of tax anyway (and with depreciation, you can effectively defer a lot of it until you sell the property). – R.. GitHub STOP HELPING ICE Nov 04 '17 at 20:47

3 Answers3

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Barter is a taxable event. You would owe taxes on the full fair market value of the Bitcoin the moment that you trade housing for it. Things would work the same way if you bartered baseball cards or a car for rent.

Later, if it appreciated, the appreciation would be taxed as capital gains. But the original receipt is regular income.

Shawaron
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    Out of curiosity, when bartering, both sides are equal, am I correct? So he would have to estimate bitcoin value and tax that, and tenants would have to estimate housing value and tax this? – quetzalcoatl Nov 03 '17 at 08:37
  • @quetzalcoatl: I am guessing that you’re allowed to deduct your costs—so the tenant would deduct the cost of purchasing their bitcoins, which means they’re taxed on no overall profit; whereas the OP deducts his property costs and is taxed only on the profit achieved from renting the property out? – eggyal Nov 03 '17 at 13:23
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    @eggyal is correct - the tenant would receive $6000 of taxable housing, but would incur costs of $6000 to acquire it and thus pay no taxes. At the same time, the landlord would receive $6000 of taxable Bitcoin, but incur costs of (interest+taxes+depreciation+whatever) to acquire it, leaving (hopefully) some profit to be taxed. On a side note, these discussions of $6000 rent make me glad to live in flyover country. – Shawaron Nov 03 '17 at 13:40
  • Well if we went off of BTC -> USD value today 1 BTC would be > $7300 :-D – DotNetRussell Nov 03 '17 at 15:49
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    @Shawaron He would not necessarily incur costs of $6,000. The tenant would have a tax gain of the difference between his tax basis in the bitcoins (typically what he paid for them) and the $6,000 value he got for them. For example, if the tenant bought the bitcoins at $5,000 and then used them to pay $6,000 worth of rent, he has a taxable gain of $1,000. – David Schwartz Nov 03 '17 at 19:41
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    Yikes, good point. I assumed the tenant would buy BTC and immediately hand them over to the landlord. – Shawaron Nov 03 '17 at 23:17
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BTC isn't considered a currency so it's taxed as an asset under capital gains tax

This statement is wrong. Let's say you charge 1 BTC rent on Nov 1st. From the IRS standpoint your earnings are the dollar value of 1 BTC on Nov 1st, so that's approx $6k. You will be charged income taxes on $6k. Now, if you keep your Bitcoin until the end of the year and Bitcoin goes up to $10k of value and you sell your Bitcoin at the end of the year, you will owe income taxes on $6k and will have to pay capital gains on your $4k profit when selling your Bitcoin.

brt
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    http://www.bitcointaxsolutions.com/learn/bitcoin-tax-101/# – DotNetRussell Nov 02 '17 at 20:24
  • This article clears it all up – DotNetRussell Nov 02 '17 at 20:24
  • The hard part is, what source are you going to use to determine the dollar value of Bitcoin on Nov 1st. You should find some sort of source which calculates the average value of 1 BTC on Nov 1st. – brt Nov 02 '17 at 20:26
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    @AnthonyRussell I think you meant to post this link, with the self-explanatory conclusion in the URL itself: https://www.irs.gov/newsroom/bartering-produces-taxable-income-and-reporting-requirements – Grade 'Eh' Bacon Nov 02 '17 at 20:27
  • @Grade'Eh'Bacon awesome link! Thanks for the quality input. – DotNetRussell Nov 02 '17 at 20:38
  • If you realize your gain 'at the end of the year' it's short term and taxed at the same rates as ordinary income anyway -- but you have the option of holding the BTC until the gain becomes long term at lower rates. – dave_thompson_085 Nov 02 '17 at 21:44
  • @brt It's not like Bitcoin is an illiquid or infungible asset with a poorly defined value. – user253751 Nov 02 '17 at 22:16
  • @brt I don't think you have to. You can treat your basis as the fair market value of what you gave in exchange for it, which would be the agreed rent amount less any real discount you gave. (Since you didn't buy the bitcoin and it's not a gift, your basis should be the value of what you gave up to get it.) – David Schwartz Nov 02 '17 at 23:44
  • @DavidSchwartz Not following... – brt Nov 03 '17 at 00:01
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    @brt. Rent is $6100. Landlord agrees to discount that to $6000 if tenant pays in BTC. Tenant pays 1 BTC on Nov 1st. That 1 BTC = $6000 because that's what the 1 BTC was worth to the landlord for that transaction. – JBentley Nov 03 '17 at 00:27
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    @JBentley Exactly. So it represents $6,000 in income when it's received, and the landlord's tax basis will be $6,000 when he sells it. What other people might have paid for that bitcoin is irrelevant unless the transaction is a sham. (Which the IRS would strongly suspect if you claimed you accepted something for very much more or less than its fair market value where such a value could be readily established.) – David Schwartz Nov 03 '17 at 01:21
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BTC isn't considered a currency so it's taxed as an asset under capital gains tax

You have a fundamental misstatement of federal tax concepts. Income tax is on ... income. Neither currency nor assets are taxed by the IRS. The IRS only taxes transactions. Those transactions may involve currency and/or assets, but it's not the currency or assets that are being taxed. If you receive $6000 worth of bitcoin as rent in 2017, then you have a $6000 transaction, and you owe income tax on that transaction. If you later sell that BTC for $10000 in 2020, then you owe capital gains tax on the $4000 profit. From 2017 to 2020, if the BTC isn't involved in any transactions, then there will be no tax on it.

Acccumulation
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