I don't think (solo) mining itself would be considered taxable income. You are not receiving the bitcoins from someone else, you are creating them yourself. Income is something you receive from another person/business/entity in return for something. If you make furniture, the creation of the furniture is not a taxable event, the sale of it is. So I would argue that mining bitcoins doesn't generate income or any taxable event, until you sell the bitcoins, or use them to buy something (in which case the transaction would be treated as a barter).
Now if you are in a pool, that is potentially a different story. It probably could be interpreted that you are offering your services to the pool and they are paying you in bitcoins, in which case any payment you receive from the pool would be taxable income based on the FMV of the bitcoins you receive.
Topic: Bitcoin accounting and taxes - page 3. (Read 20359 times)
On the other hand, while shares are totally fungible, bitcoins are not, at least when it comes to LIFO/FIFO.
For each spend transaction, it should be possible, at least in principle, to figure out which of your receive transactions it/they came from. Whether the IRS would care to enforce this, or deem the LIFO/FIFO question a matter of local policy, is unknown.
For each spend transaction, it should be possible, at least in principle, to figure out which of your receive transactions it/they came from. Whether the IRS would care to enforce this, or deem the LIFO/FIFO question a matter of local policy, is unknown.
"When selling mined bitcoins, however, you would also be taxed on the increase between the value you recorded them at when you first received them, and the value you sold them for. "
It should be noted, likewise, that this can be a capital loss as well.
Example: If you mined some at $32 a couple of days ago, the taxable event is that you earned $32 worth of bitcoins, and that is taxed at ordinary income. This also establishes the "basis" of those coins at $32.
If you sold them today for $26, that is a capital loss of $6, which earns you a tax break.
If you are buying and selling stock, you are supposed to track whether you are selling LIFO or FIFO. I believe your broker is supposed to ask you this question when you buy the stock. Not sure if buying currencies is the same, but I would suggest that people keep track of a) the date and price that you paid (or the fair market value of any mined coins at the date they were earned), b) any expenses that you incurred in the mining or purchasing process (purchasing fees are probably deductable), c) the date and price received for any coins sold. In other words, treat Bitcoins as you would any other asset. (This also implies tracking whether your gains are "short term" (under a year), or "long term" (over a year). Long term capital gains typically receive favorable tax treatment.
I think it's best to choose a method (LIFO specific identification or FIFO), and stick with it until I am out of Bitcoins (at which time I can choose to switch methods). Generally on an asset that rises in value, specific identification using LIFO is the better choice in my opinion, because then the taxpayer is selling the ones that he/she bought for the most money (generally), as this will generate the smallest taxable event. On the other hand, LIFO may cause more short-term gains, which get less favorable tax treatment.
On the other hand, if the taxpayer's income is small today (and so a low tax bracket) and he/she expects it to be higher in the future, he/she might want to choose FIFO just to incur the tax burden while the other income is small. Since Bitcoins are fungible, I suspect the IRS would frown on the "I sold the ones with the highest basis" method, although someone might be able to pull it off.
EDIT: According to another user (bitcoinaccountant) "Also the cost basis of financial instruments is either determined through FIFO or specific identification. LIFO is not an option." Read his advice below!
I believe that if the US Government wants to stomp out Bitcoins, they will go after a few tax cheats, and make a big deal out of the cases (in the same way that the Recording industry goes after a few file sharers, to try to scare everyone else). So don't think your transactions won't be monitored by the IRS! I plan to list them as "BTC" on the tax return just as if they were any other capital good.
Disclaimer: Everybody's tax situation is different, and I am not a licensed professional - I'm just a guy on the internet... so don't believe me without checking with a professional, and really, don't take this post as any sort of financial, legal, or tax advice. I am stating it purely as an opinion for others to give feedback to.
It should be noted, likewise, that this can be a capital loss as well.
Example: If you mined some at $32 a couple of days ago, the taxable event is that you earned $32 worth of bitcoins, and that is taxed at ordinary income. This also establishes the "basis" of those coins at $32.
If you sold them today for $26, that is a capital loss of $6, which earns you a tax break.
If you are buying and selling stock, you are supposed to track whether you are selling LIFO or FIFO. I believe your broker is supposed to ask you this question when you buy the stock. Not sure if buying currencies is the same, but I would suggest that people keep track of a) the date and price that you paid (or the fair market value of any mined coins at the date they were earned), b) any expenses that you incurred in the mining or purchasing process (purchasing fees are probably deductable), c) the date and price received for any coins sold. In other words, treat Bitcoins as you would any other asset. (This also implies tracking whether your gains are "short term" (under a year), or "long term" (over a year). Long term capital gains typically receive favorable tax treatment.
I think it's best to choose a method (
On the other hand, if the taxpayer's income is small today (and so a low tax bracket) and he/she expects it to be higher in the future, he/she might want to choose FIFO just to incur the tax burden while the other income is small. Since Bitcoins are fungible, I suspect the IRS would frown on the "I sold the ones with the highest basis" method, although someone might be able to pull it off.
EDIT: According to another user (bitcoinaccountant) "Also the cost basis of financial instruments is either determined through FIFO or specific identification. LIFO is not an option." Read his advice below!
I believe that if the US Government wants to stomp out Bitcoins, they will go after a few tax cheats, and make a big deal out of the cases (in the same way that the Recording industry goes after a few file sharers, to try to scare everyone else). So don't think your transactions won't be monitored by the IRS! I plan to list them as "BTC" on the tax return just as if they were any other capital good.
Disclaimer: Everybody's tax situation is different, and I am not a licensed professional - I'm just a guy on the internet... so don't believe me without checking with a professional, and really, don't take this post as any sort of financial, legal, or tax advice. I am stating it purely as an opinion for others to give feedback to.
SgtSpike is correct. Inventory cannot be intangible.
I believe inventory only applies to tangible goods. Don't take my word for it though.
Thanks, this list generally tallies with my expectations and understanding of US tax treatments.
Question for you; is it possible a miner would consider BTC to be 'inventory?' I ask out of curiosity, some states have an inventory tax.
Question for you; is it possible a miner would consider BTC to be 'inventory?' I ask out of curiosity, some states have an inventory tax.
This is my personal attempt to give my best opinions on accounting/tax questions related to bitcoins. Whether or not you pay any taxes is between you and your own government, this is simply a way to share some information with people who are interested in the bitcoin market and potential US tax implications. Keep in mind, bitcoins are so new that the IRS has not really released any answers as to how bitcoins are going to be treated in the future, so these answers are my best reasonable assumptions as to their treatment under current tax law.
As for my qualifications, I am an accountant in the US, and am (hopefully, waiting on a test score) just about finished completing the requirements for my CPA license. I am in the early stages of building my own accounting and bookkeeping business, and am working on setting up a website, developing it, etc.
Are bitcoins taxable if I earned them by doing a service for someone else, or received them in exchange for something?
Anything that you receive as payment for goods or services is generally taxable income unless it is specifically exempted.
That means, if you mow your neighbor’s lawn, it doesn’t matter if he pays you $20 in cash, or $20 worth of bitcoins. (Or $20 worth of tomatoes for that matter)
You are still legally required to report it to the IRS as income. Now, if you don’t, the IRS will probably never know, but try to mow 10,000 neighbor’s lawns and not report the income,and you will be much more likely to get caught.
Are my bitcoins taxed as income, or as capital gains?
Income that is earned through the exchange of services with another person, whether in the form of bitcoins, dollars, or barter; is included in gross income, and would be subject to income tax at applicable rates. Also these bitcoins would be subject to self employment tax.
Income earned through the process of buying and selling bitcoins would also be included in gross income, but would be treated as capital gains.
How are bitcoins that I have mined treated for tax purposes?
This is a tricky question, in that bitcoins are really the first digital currency that was created in this manner and actually have a significant value in USD. Essentially it is somewhat uncharted territory. Literally bitcoins, and even digital currencies are so new, that there is little to no precedent for some aspects of bitcoin mining, from a tax perspective.
Since bitcoins are currently traded in various online marketplaces, when someone receives a bitcoin, they can reasonably calculate it’s value in USD. Because of this, it is possible that the IRS will treat the receipt of a bitcoin through a mining pool, or from an individual mining operation, as a taxable event. At that time, the taxpayer would be required to estimate the value of the bitcoins in dollars and record that amount. This would have to be done either daily or weekly depending on the value of the bitcoins if their value keeps fluctuating as much as it has the past few weeks. These amounts would be recorded as revenue from bitcoin mining operations and would be taxable less allowed expenses.
When selling mined bitcoins, however, you would also be taxed on the increase between the value you recorded them at when you first received them, and the value you sold them for.
Another possibility is that the government will consider mined bitcoins ‘intangible personal property’. As a rule, however, financial instruments are excluded from this particular category. The question is, are bitcoins a financial instrument, or rather, will the IRS consider them a financial instrument? We will have to wait and see if bitcoins become popular enough for them to take a position on that.
What expenses can i deduct/expense/itemize if I set up a bitcoin mining operation?
That depends on your situation. Generally speaking, though, you can deduct business expenses that are ordinary and necessary. Buying video cards would be both of these, buying a big screen TV to watch while mining would be neither.
Do I need to register as a business/LLC/corporation to mine bitcoins and deduct expenses?
No, regardless of whether you decide to form a corporation, register as an LLC, or simply operate as a private individual, the basic concept of tax treatment for bitcoins is going to remain the same. For example, you will report gross income, deduct expenses, and have a net taxable income on which you will be required to pay income tax, as well as possibly self employment tax depending on how your mining business is set up.
Here are a few links that contain some basic information from the IRS on tax rules for starting a small business, as well as treatment of income and expenses.
Pub 4591 Small Business Tax Responsibilities
http://www.irs.gov/pub/irs-pdf/p4591.pdf
Pub 525 Taxable and Nontaxable income
http://www.irs.gov/publications/p525/ar02.html#en_US_2010_publink1000229086
Pub 535 Business Expenses
http://www.irs.gov/publications/p535/index.html
Please feel free to ask me any questions about bitcoins (or anything else accounting/tax related) in this thread, and I will do my best to answer.
As for my qualifications, I am an accountant in the US, and am (hopefully, waiting on a test score) just about finished completing the requirements for my CPA license. I am in the early stages of building my own accounting and bookkeeping business, and am working on setting up a website, developing it, etc.
Are bitcoins taxable if I earned them by doing a service for someone else, or received them in exchange for something?
Anything that you receive as payment for goods or services is generally taxable income unless it is specifically exempted.
That means, if you mow your neighbor’s lawn, it doesn’t matter if he pays you $20 in cash, or $20 worth of bitcoins. (Or $20 worth of tomatoes for that matter)
You are still legally required to report it to the IRS as income. Now, if you don’t, the IRS will probably never know, but try to mow 10,000 neighbor’s lawns and not report the income,and you will be much more likely to get caught.
Are my bitcoins taxed as income, or as capital gains?
Income that is earned through the exchange of services with another person, whether in the form of bitcoins, dollars, or barter; is included in gross income, and would be subject to income tax at applicable rates. Also these bitcoins would be subject to self employment tax.
Income earned through the process of buying and selling bitcoins would also be included in gross income, but would be treated as capital gains.
How are bitcoins that I have mined treated for tax purposes?
This is a tricky question, in that bitcoins are really the first digital currency that was created in this manner and actually have a significant value in USD. Essentially it is somewhat uncharted territory. Literally bitcoins, and even digital currencies are so new, that there is little to no precedent for some aspects of bitcoin mining, from a tax perspective.
Since bitcoins are currently traded in various online marketplaces, when someone receives a bitcoin, they can reasonably calculate it’s value in USD. Because of this, it is possible that the IRS will treat the receipt of a bitcoin through a mining pool, or from an individual mining operation, as a taxable event. At that time, the taxpayer would be required to estimate the value of the bitcoins in dollars and record that amount. This would have to be done either daily or weekly depending on the value of the bitcoins if their value keeps fluctuating as much as it has the past few weeks. These amounts would be recorded as revenue from bitcoin mining operations and would be taxable less allowed expenses.
When selling mined bitcoins, however, you would also be taxed on the increase between the value you recorded them at when you first received them, and the value you sold them for.
Another possibility is that the government will consider mined bitcoins ‘intangible personal property’. As a rule, however, financial instruments are excluded from this particular category. The question is, are bitcoins a financial instrument, or rather, will the IRS consider them a financial instrument? We will have to wait and see if bitcoins become popular enough for them to take a position on that.
What expenses can i deduct/expense/itemize if I set up a bitcoin mining operation?
That depends on your situation. Generally speaking, though, you can deduct business expenses that are ordinary and necessary. Buying video cards would be both of these, buying a big screen TV to watch while mining would be neither.
Do I need to register as a business/LLC/corporation to mine bitcoins and deduct expenses?
No, regardless of whether you decide to form a corporation, register as an LLC, or simply operate as a private individual, the basic concept of tax treatment for bitcoins is going to remain the same. For example, you will report gross income, deduct expenses, and have a net taxable income on which you will be required to pay income tax, as well as possibly self employment tax depending on how your mining business is set up.
Here are a few links that contain some basic information from the IRS on tax rules for starting a small business, as well as treatment of income and expenses.
Pub 4591 Small Business Tax Responsibilities
http://www.irs.gov/pub/irs-pdf/p4591.pdf
Pub 525 Taxable and Nontaxable income
http://www.irs.gov/publications/p525/ar02.html#en_US_2010_publink1000229086
Pub 535 Business Expenses
http://www.irs.gov/publications/p535/index.html
Please feel free to ask me any questions about bitcoins (or anything else accounting/tax related) in this thread, and I will do my best to answer.
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