Topic: How to treat Bitcoin mining income for tax purposes? - page 2. (Read 18460 times)

I ask because in Canada you can only write off 55% of the remaining value of computer equipment per year (termed 'depreciation'), not the full amount.

I am in the US

@jjiimm_64, are you in the US or Canada?

we dont know that for sure. (They would prefer to diminish its credibility)

I plan on filing by april 15th, and I have mined probably a ~1k btc's since June. I will be declaring the selling of the bitcoins as 'something'.I am  not sure how I am going to do it, but I am definetely writing off the hardware and many kilowatts of power, and declaring the income as income.

Meh.  I don't think the government really knows about or cares about bitcoin, at least not in any official way.  And the IRS doesn't care if you slice up babies for lunch meat as long as you pay taxes on the income, so quite likely the IRS is actually the part of the government most likely to embrace bitcoins, or at least taxes paid in dollars for bitcoin-based income.

KPMG LLP gave some guidance for virtual currencies generally in this Nov 2011 study;

"Virtual Currency in Virtual Economies: Implications for Income Tax"
http://themonetaryfuture.blogspot.com/2012/01/virtual-currency-in-virtual-economies.html

I wouldn't hold my breath too long waiting for this. A specific decision on bitcoin would give greater legitimacy to bitcoin and the US govt does not want to do that. They would prefer to diminish its credibility.

I assume that we'll all know about it when it happens.  I don't expect the IRS to do anything until either they audit someone that happens to be a trader or a miner, or a trader or a miner specifically asks them for a written ruling.  Either way, it will very likely be a member of the community, and they'd let us know.

That would certainly be nice; I'm not sure the IRS has published anything specifically on bitcoin yet. Perhaps @lonelyminer can dig up something specific.

I am aware of a few articles published by US lawyers, however. While not law, they can help set precendent. I have read a few over the past year, though only with mild interest. At the moment I can track down one, an article by John Nelson, a lawyer practicing in Georgia, who in June 2011 wrote this:

http://www.lextechnologiae.com/2011/06/26/why-bitcoin-isnt-a-security-under-federal-securities-law/

The article explains why bitcoin cannot be considered a security or currency under Federal (US) law. It is an interesting read, as are the public comments (and Nelson's responses). It stops short of saying what bitcoin actually is; it is a different article I have read (I'll do some more digging for an actual source) that made a clear legal case for bitcoin as a commodity in the US.

The block will be created regardless of whether the network accepts it, it is just valued differently. Say you produce a sweater than noone wants, and compare it to producing a sweater that you'd be able to sell. Why should they be taxed differently?

I guess you could argue either way, since Bitcoin is completely virtual and distributed, there's no single point for a decisive argument.

I keep waiting for someone to post an actual official decision letter from the IRS.

You have obviously thought about this and have reached a defendable position. I do not disagree with your decision; in fact, it is refreshing to see people who have put serious thought into the issues and reached their own conclusions, whatever they may be!

If there is one thing this discussion makes clear, is that there are many ways of interpreting the same bitcoin concepts.

Yes.  That value would become the cost basis, and any price change from then until you sell would be a capital gain or loss.  Bitcoins held for over a year would be eligible for the more favorable long term capital gains tax rates (in the US).

It is risky to generate bitcoins and incur a tax liability without selling, because if the price later collapses you may owe more tax than the value of the bitcoins.  You can sell and take a capital loss, but capital losses can only offset $3000 of ordinary income per year (in the US), so a large mining operation may take many years to recover the funds.  It would be safer to sell at least enough to cover expenses and taxes.

So you would book as revenue the bitcoins valued at the current exchange rate at the time they were received (earned) but not actually sell them then?

You are right -- these issues are far from clear.

For my personal tax situation I have come to the conclusion that the 50 BTC awards for solo mining are not in fact created by the miner.  (Consider that you may create a perfectly valid block but another miner wins the race and your block becomes orphaned.  You have created the block, but the reward only exists if the network accepts the block.)  Granted it is a counterintuitive and controversial position.

I don't view my business as creating and selling bitcoins, but rather performing computations in exchange for bitcoins.  The bitcoins are taxable as business income and expenses are deductible as business expenses.  Anything I do with the bitcoins after that, say holding them for 20 years and then selling them, is a personal investment activity, not a business activity.  It's one perspective to consider anyway.

I think these are some of the questions to which we all would like definitive answers to. Unfortunately, at least for now, there is no clear (or any) legal/official answer yet. None that I am currently aware of, at least. The whole ecosystem surrounding bitcoin is very much still a grey area. Bitcoin is a virtual construct; it is created out of 'thin air'. It has no intrinsic value other than that which people decide to give it.

The only concrete guidance is that a 'bitcoin' has been classified as a commodity by US and EU regulatory bodies. Other countries/regions have not published anything yet. So, at least in the US and EU, obtaining bitcoin by way of trade constitutes barter. Whether that is taxable depends on the situation (i.e. business/regular transaction, or occasional transaction).

How bitcoin mining itself is classified is still nebulous, because there are several different aspects of it. But I think we're splitting hairs here. In solo mining, your own miner actually generates the 50BTC block itself; it is not 'granted' by the network participants. I would not consider this as a barter situation; you are clearly generating the BTC commodity yourself.

In pooled mining you occasionally [a] generate 50BTC yourself and 'gift' it to the pool (this could be argued as being a barter); and more often you are rewarded by the pool with BTC in exchange for submitting shares (again, possibly argued as being a barter). But taking a macroscopic view of the situation, one can argue that their miner is generating (i.e. helping to create) xyz amount of BTC per day. It is not a barter; it is the creation of a commodity.

Until a jurisdiction rules definitively on the subject of bitcoin mining, it is reasonable to use whatever definition works best for your personal situation. Clearly there are logical arguments to be made for more than one point of view. The taxation departments of Canada, or the US, or the UK, should be happy that you are at least not trying to hide income. Whether you want to report your mined BTC earning at time of mining, or at the time of selling, is up to you.

I think most people would opt for 'report at time of selling', if for no other reason than it being simpler to deal with. Non-casual miners may want to report it at time of mining so that they can claim deductions.

Suppose I offer the service of password cracking using a cluster of GPUs in exchange for bitcoins (and I am in the business of doing so).  Would you now consider that to be a taxable barter transaction?

If so, how is it different if I offer the service of block generation and transaction processing in exchange for bitcoins?  Does it not come down to the question of whether I am creating the mined bitcoins or receiving them in exchange for a service?

I still think there is a significant chance that mining bitcoins amounts to barter -- certainly in the case of solo mined transaction fees, likely in the case of payments received from pool operators, and quite possibly even in the case of solo mined 50 BTC block rewards granted by the other network participants in exchange for helping to secure the network.

It's VAT, from what I remember. That of course only affects parties that are registered for VAT purposes: if you're a private person paying for, say, services of a plumber, you do not need to charge him VAT. The plumber, however, does have to if he would have to charge in pounds as well.

However, when you receive Bitcoins as an employee, from their employer, other rules may apply and it still might be taxable as personal income, just like, say, fringe benefits.

Correct; the creation of bitcoins as a commodity is not subject to tax; only when you sell them for cash. It would not be considered bartering.

FYI: On the topic of 'barter', I've researched this with the Canada Revenue Agency; my initial explanation of 'bartering commodities' is wrong. According to CRA's Interpretation Bulletin IT-490, there is going to be a tax implication when you barter. According to the CRA, a barter transaction should be treated as though you have received a payment for whatever good/service you have traded. The value of this payment is the fair market value of the good/service you have provided to the other party.

One caveat is that barter transactions are only taxable when the goods or services you're giving up are of the kind generally provided by you in the course of earning income from a business or a profession carried on by you. As a 'hobbyist', as long as you barter only occasionally, you won't face tax.

Again, bartering does not apply to bitcoin miners exchanging bitcoin for $. It does, however, apply to our ficticious plumber providing a service in exchange for a bag of salt (he is exchanging his plumbing services for a good), or @paraipan providing 100 magic coins for a phone (if this was only occassional, and @paraipan is not in the business of selling phones, this transaction would not be taxed).

I thought so, until I saw some UK regulations where, if I understood correctly, this would be considered a barter, and subject to  tax. Can't remember how exactly this tax was categorized (sales? VAT?).

Either way, currently my understanding is that "creation" (mining) of bitcoins as a commodity is not subject to tax per se.