Topic: How to treat Bitcoin mining income for tax purposes? (Read 18460 times)

I did invest in a mining company in the USA. The miners are my property. For the operation i do no work, nor i have influence on max mining profit as i prefer. Therefore i see myself as an abroard private investor.

For the upcoming year i want to registrate myself by the IRS with a ITIN number and use that to declare longterm gaining (form 1099) over my investment. So no daily mining income, no shortterm gainging, no LLC, no self imployment, just a invester.

Does somebody know if this is the legal way for longterm mining investment?

Ps. Dont awnser to quickly like mining is ordanry income, so not possible. I like professional experencied awnser on declarance as any other raw material investment.

You have to treat it like trading earning but you can take off the cost of your hardware and electricity as business expenses

I have a lot to learn about taxation of all this. Thanks for the thread.

Lottery winnings are not taxed only if the lottery owned by the state. It's a way to make the state lottery more profitable. I'm not from Canada but I guess in your country the state monopoly on lottery business. Bitcoin has nothing to do with the lottery. This is a separate type of business and so it will be taxed like other businesses. Perhaps it will be at the maximum scale of taxes because the state is not interested in bitcoin.

 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 the local currency. Because of this, it is possible that the taxing authority will treat the receipt of a Bitcoin through a mining pool, or from an individual mining operation, as a taxable event.

We do not have a definitive answer in the US and we won't have one for a while. The catalyst that is causing all of the confusion around taxation is that we do not have a definitive answer on how to classify the cryptocurrency or how to regulate it. The reality is that we are almost running on an honor system at the moment. In order to regulate the coins, every transaction would need to be reported to the government. Similar to PayPal reporting all the income that goes through your PayPal account. However, the basis for the currency is decentralization. The only way the government would be aware of any income generated is when you sell or convert the coin, unless they target you specifically for some reason. IE you buy a large home all cash and reported that you made minimum wage last year.

I own a few other business's and would recommend that you pay something and report something. The IRS is forgiving in this situation if any issues were to arise. What they are not willing to forgive is when you try to not pay any taxes.

I do not pay taxes on any coins that I hold because the coins are traded on markets and the US government does not consider it to be a currency. I am holding on to it for an investment like any other commodity and it is not generating US dollars until it is sold. At that point a loss or gain can be calculated. Coins are valued in comparison to currency. We recognize the value of the coin based on it's value in our perspective currency the same as we recognize 1 share of GE stock to be valued at $33.

Regarding income that I pay taxes on: I pay myself a set amount each month as a salary for compensation and to cover my business expenses. The coins I sell to cover my salary and expenses generates US dollars that I deposit into my bank account. This is the gross income for the year. The taxable amount used is the gross minus the deductions. The US has generous deductions for business owners. A home office is a deduction, a cell phone is a deduction, internet access, electricity, car payments, the computer I am using right now, and the list goes on. Anything that is needed to run the business is an expense and a deduction.

Many of the questions regarding deductions and how to get the best tax rate or the most beneficial deductions would not apply to any of us. We are running a business. You do set up a corporation, LLC, sole propritorship, ect.  However, we are not considered a "true company" in  the eyes of the IRS until we have three employees. If you have less than 3 employees you are simply considered self employed under the IRS. The good news is that you still receive the benefit of tax deductions associated with operating a company.

In the Notice from March 25, 2015, the IRS issued some pretty specific answers to FAQ on mining virtual currency:

Q-8: Does a taxpayer who “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?

A-8: Yes, when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. See Publication 525, Taxable and Nontaxable Income, for more information on taxable income.

Q-9: Is an individual who “mines” virtual currency as a trade or business subject to self-employment tax on the income derived from those activities?

A-9: If a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self- employment income and are subject to the self-employment tax. See Chapter 10 of Publication 334, Tax Guide for Small Business, for more information on self- employment tax and Publication 535, Business Expenses, for more information on determining whether expenses are from a business activity carried on to make a profit.

You can read additional answers here:
IRS Notice 2014-21

$50k  !!!   WOW  Every business I have I would consider a hobby if  were in Australia.

for me bitcoin is a hobby. in Australia you can earn $50000. from a hobby before you need to declare it on your tax return. hobby's are non taxable earning.
  

I am not from US, but wouldn't you need some kind agreement or a contract with the pool operator? If you use a US pool and he is willing to spend some time to sign such an agreement (it would be preferable if were a big miner maybe?) then perhaps someone it should work? The pool pays you in BTC (not sure about the block transaction fees in your pool) for processing shares and securing the Bitcoin network (contributing to the security of the network?) - but retains a fee for to cover operational costs (if applicable).
alternatively, you can find someone who would like to rent equipment from you for mining (remember how GPUMAX worked?)

If you do manage to solve this problem let us know so others (in US) may use the info.

I talked to my CPA today. He doesn't really know what to think. He is leaning towards business income/self employment income. (USA)

I don't like that at all. I was hoping for either rental income (The pools pay to rent my equipment) or short term capital gains (I'd prefer long term of course but I sell way too soon for that).

He said that if I could come up with a good way of describing using a pool as them renting my equipment then I could at least get away with rental equipment income and therefore not have to pay Social Security and Medicaid on top of income tax)

Thought? Comments?

Haven't heard a thing.

the joint, any news from your accountant? I am curious about her having talked to the IRS about Bitcoin.

There are actually a multiple legally defenseable positions that can be taken. Perhaps you should consider picking up a copy of A Lawyer's Take On BitCoins and Taxes; a 34 page report with about 60 legal footnotes by a CA attorney. It will at least give you a good overview of the legal landscape in this area.

I posted in this thread which is more general (not focusing only on mining income): https://bitcointalk.org/index.php?topic=54645.20
It seems that in Europe, bitcoins earned thru mining coud be subject to an 8% tax on the amount sold (if and when they are sold for euros or dollars).
That's assuming bitcoins are treated as a digital commodity (like say prime numbers) similar to gold because of their limited supply (unlike prime numbers).
Bitcoins cannot be treated as securities imho because there is no identifiable issuer.

She actually said it was "fascinating" and asked me how quickly I made my profits.

and after seeing your gains will probably be talking about it at the next cocktail party?

I went to H&R Block today to start working on my taxes.

My tax agent and I had to sit an discuss Bitcoin for about an hour.

End result:  She can see how Bitcoin mining/trading/selling is a business, how it is an investment, how it is both, and how it is neither.

She said she needs to do additional research, call the IRS, and get back to me in a week.

She did say, though, that she thinks it will likely be categorized as an investment.

Yup, Canada has silly rules for that. Deductions in Canada for computer equipment (55%) would look like this (taking an example of 2 5970's, or $800):
2011 -- $800 x 0.55 x 0.50 – the half-year rule
2012 -- $580 x 0.55
2013 -- $261 x 0.55
2014 -- $117 x 0.55
2015 -- $ 53 x 0.55
2016 -- $ 24 x 0.55
2017 -- $ 11 x 0.55
2018 -- $ 5 x 0.55
2019 -- $ 2 x 0.55
2020 -- $ 1 x 0.55

In the year you purchase the equipment (2011 in the above example) there is the so-called 'half-year rule', where you can only deduct half of the normal deduction. The 'reasoning' is that the government doesn't distinguish between items bought at the beginning of the year or the end ... so they average it and say that you've owned it for 1/2 year. Thus you can only deduct half of the 55% deduction.

Eventually (10 years later) you have deducted the full amount ($800). But 10 years is a long time! It is a stupid rule, but that's what Canadians have to deal with.

interesting.  I was undecided whether to do it all at once or over 3 years, us gives you a choice.

btw,  55% of remaining value? for how many years?  asymptotically