Well, part of the issue is that the damn bank charges us a fee every time I get paid by direct deposit. I could circumvent that with bitcoins.

I think the idea of employers paying salaries and wages solely in Bitcoins would run employers afoul of the law.  It would probably be just as difficult as paying employees in gold.  Gold isn't accepted for the purpose of paying taxes, must be exchanged first, and (e.g. in the US) an employer must withhold and remit taxes in USD, and report salary and wages on form W-2 denominated in USD.

If I had to guess, the closest I think you could get would be to 1) denominate your wages or salary in BTC, in other words, you agree to work for X BTC/year rather than X USD/year, and 2) each payday, the company pays the equivalent value in USD, and withholds taxes in USD, but delivers your net pay (or a portion thereof) to you in BTC.  It books you as having been compensated, along with the equivalent USD value of the BTC you received, no different than had the company given you a vacation or usage of an automobile in the same amount.  Finally, it issues form W-2 for the USD equivalent of all you were paid.  Disclaimer, I'm not an accountant.

As for whether your bank or credit card company would flip out over the purchase of bitcoins, I would ask, if you're going to buy so many bitcoins, and everything is above board, why not just use a wire transfer.  The overhead (3%-4%) of using credit cards would be a silly unnecessary cost for large amount of bitcoin purchases.  If your bank or credit card company were to ask questions, it probably would be of the "is crime/gambling/etc going on here that we might get burned with later?" nature.  Wires, by their nature, are easier for the fed to track, and it's more of a non-recourse kind of transaction that should worry others less.

As for whether you can get by on bitcoins, does your landlord or mortgage company accept bitcoins?

I do think you raise a legitimate broader question, and that is, how should legitimate businesses who want to accept Bitcoin as payment for goods and services, and who want to treat them as legitimate income, account for them?

The retards in the tax office would charge you fringe benefits tax for such a thing I believe.

Similar to providing a company car or laptop for employees personal use.

I dont know how the tax office would assess bitcoins at all. I guess like most things you have to incriminate yourself.

What if you were paid at the start of the year and the value changed significantly at tax time? These douchebags would assess the higher value wouldnt they?

Or would it be the value at the time you received it? How would they assess the increase in  value and how would they even know the value unless you tell them yourself?

What is needed is software like Quicken http://home.quicken.com.au/Pages/HomePage.aspx that interfaces with bitcoinwatch and keeps records of the value at the time you got paid. It should be an easy matter of working out what you owe in dollars.

Because we don't want to end up in prison?

Technically, Bitcoin is not money or property. Bitcoin is just valuable information so my guess is that in theory it's not taxable.
 
Perhaps it helps to think of other situations where an employee gets "paid" in valuable information.

Example: Software company A hires a developer, and pays him a fixed salary. After a few months a competitor tries to hire him by offering a bigger salary. Company A cannot afford to raise his salary, but to avoid losing him they make a deal. He is allowed to study the entire source code of their closed-source product.  Previously he was just given access to the module he was working on.  This will give him valuable insider information about industry practices that will potentially increase his net worth.  

The question is: Will such a "raise" be taxable? If yes, how would the value of the be "raise" be calculated in USD? Would the taxman need to hire an external auditor who signs a non-disclosure agreement? What if it is a prototype that isn't on the market yet? Can the value even be estimated? How would the taxman even know about this, given that the software is secret? And so on...

Bitcoin is such a fundamentally new technology that not even a lawyer will be able to tell you what the precise legal status is.

Certainly, Bitcoin behaves like money, and I'm sure that some judges will also see it that way.  Judges have a tendency to be awfully computer illiterate anyhow, and the risk of a mistrial is high even if technically you are not breaking the law.

The only way to find out for certain is to step forward and be the first of us test it in court. You are entering pioneer territory.

If the company had to buy the Bitcoin in order to transfer it, its nature changes greatly.

Taxing authorities may not understand Bitcoin, but they do understand the idea of "widgets" that are worth something to somebody when people pay or work for them, whether tangible or not.  They also understand hours of labor.

Instead of bitcoins, I'll refer to Webkins credits.  (Webkins are childrens plush toys sold at retail, each one has a code that allows for online play of games at the Webkins web site... something whose value is equally as nebulous as Bitcoins.)

Suppose I had 10 software developers working for me, whom I compensated purely with Webkins virtual pet codes, and then I were audited by the IRS.  Those pet codes would probably be deemed to have the same value as what they cost me, or what they might have cost somebody else to acquire on the open market.  Presumably, if software developers will work for them, they are worth something beyond the mere ability to play preschool games online.

Similarly, if I had software developers working for me in exchange for dirt, the IRS would just as quickly assume that the dirt had a market value similar to the market value of software development, and assess accordingly.  They rightfully assume that if the dirt were worthless, people wouldn't work for it.

Companies have to keep records on how they spent their money, so they can differentiate between "profits" (which are taxed), versus the costs of doing business (which are not).  When a company gives something to its employees, that's "cost of doing business" (the tax burden is shifted to the employee), but the company must keep records to substantiate that's how it really spent the money.

The moment a company pays a large sum of money for something to compensate the employee, the company has to be able to account for where that money went.  That's where it would become detectable by a taxing authority.  The nature of what it was doesn't matter, it would be the same as if the employee accepted his salary in dirt or chicken feathers. 

If the company made payments entirely with Bitcoins it generated itself, and kept no record of it, the "valuable information" idea would probably be more tenable, possibly because the IRS wouldn't have a place to start asking questions.  Of course, possibly no different than an employee paid entirely in cash in a cash business, where the inflow of cash cannot be measured.


"Valuable information" isn't quite the same, especially if the company didn't have to incur a directly connected expense somewhere else in order to give it up.  If "valuable information" were personal advice from a lawyer, who had to be paid, then this would very well be taxable compensation.  If the valuable information were the first 1000 digits of pi, possibly not so much.

The "value" of valuable information matters.  Can employees use it to pay their rent or mortgage?  Can it be resold?  If "valuable information" is a list of serial numbers off of dollar bills and the serial numbers can't be redeemed for value, then probably not.  If it's hundreds of thousands of Webkins codes that the employee can resell (and is doing so), then probably yes.

Not every perk is necessarily compensation.  If Software company A decides to give the developer a faster computer or a bigger office, these are perks that would be valuable to an employee but these aren't compensation and wouldn't be taxed like a "raise".  The taxing authorities understand that buying computers and office space and furniture is a necessary part of employing software developers and would routinely accept that as a tax deduction.

If the larger office space started included kitchens and beds and living quarters for the developer and his/her family, then it would start to be treated as compensation.

If the company were Webkins themselves, and were generating their own Webkins pet codes, and giving them freely to the employees to resell on the open market, probably nothing would happen at first.  But if later, employees were discovered generating loads of unreported income (maybe one gets audited for having a huge house while his W-2 shows minimal income that couldn't possibly afford it, and he snitches), and the IRS was able to determine that the pet codes were really how they were getting paid, you can bet the IRS would be looking to slap a value on those codes.

Nice! I'd run the letter by my attorney for a quick look over. How much would they charge for 15 minutes of time, though? Hmmmm.....

I've got a couple thoughts, although I am of course not a tax or legal professional. And my thoughts are very US-centric, as that's where I live and what I'm familiar with.

I sometimes officiate Magic: the Gathering card game tournaments for local game stores as a hobby. I often have the option of being paid in cash or in product (more packs of shiny cards). I claim the income as "Hobby Income" under the "Other Income" line of my 1040. If I'm paid in product, I value it as the cash that I would have otherwise been paid, since the store and I have essentially agreed that it's a fair price for my work, and that the product is of equivalent value.

I suspect that the IRS would either treat bitcoins like a product, with it being valued at the Fair Market Value at the time of the transaction, or possibly as some sort of barter club.

The way it works in the US is that you declare on your tax return your guess based on your reading of the tax law, and if the IRS disagrees, then you either pay what they say, argue with them, or eventually bring it to tax court. I suspect that as long as you treat bitcoins in a reasonable way for tax purposes, that they'd probably be okay with it. How do users of other alternative currencies like Ithica Hours handle it? I suspect that it's similar.

They have big guns ?