Topic: [IRS] If Bitcoin is property, then the IRS may have a BIG problem! - page 2. (Read 5484 times)

I would think this is the way you want it.  When you mine bitcoin there are significant expenses.  You want to be able to deduct those.  If mining expenses exceed revenue, that sounds more like a business loss, not a capital loss, and the business loss seems more valuable at tax time.  As I understand it, there are more restrictions to getting benefit from capital losses.

I'm not an accountant, but I would fully expect to be able to deduct electricity and hardware depreciation, seems like a no-brainer to me.  In ordinary (non-bitcoin) business, this is pretty routine.  Would be deducting some internet costs as well.

Here are a few thoughts of mine, though I'm not well versed on tax code laws:

1)  The ruling seems to imply that fair market value should be calculated for *every* BTC transaction, including rewards distributed per share at PPS pools.  Can you imagine calculating FMV and tracking gains for, literally, tens of millions of transactions?  Or, do you only track the FMV of withdrawals made from your pool account to a personal wallet at the date and time they were received (since changes in account balances don't correspond with actual transactions)?

2)  Think of multipool miners who would also need to calculate the FMV of all reward transactions received for each of the bazillion coins that they mine per day.  Sounds fun.

3)  What happens when you buy BTC with BTC at a different price, such as when purchasing a physical bitcoin?

4)  What is FMV anyway?  Which exchange represents FMV in a decentralized market?  Can't I just say my buddy offered me $2 for a bitcoin and call that FMV?  Or is FMV simply whatever you paid at the time that you paid it?  If it is, then how do you calculate the FMV of mined coins at the time they're received?  Am I correct in assuming that it's likely best to just choose a reasonable method and consistently apply that method in tracking all transactions, and claim a good faith effort in case something goes wrong?

5)  The difficulty in tracking everything definitively applies as much to the IRS as it does to us, and it seems impossible that, given a good faith effort in reporting gains or losses, the IRS would be able to prove you owe otherwise.

The ruling is favorable to bitcoin miners, because you pay regular income rates (typically 30%) on bitcoin at the time it is mined, then capital gains tax (18%) on gains made while holding it.  A gold miner has to pay regular rates on net income made by when it is sold. I agree with you it seems very similar, but the IRS is treating bitcoin miners better than gold miners, assuming an overall rising rate in btc and gold prices.

I can guess it has something to do with determining the point at which the gold is a refined product ready for trade.  With bitcoin, it is ready after 100 confirmations on the block chain after being mined.

I'm not entirely certain, but I believe it's mainly used for business, you can deduct the percentage that's used for business.  So if you know you spent 95% of the time mining BTC, and 5% of the time was your kids looking up homework, just deduct 95% of the cost of the computer.

I would highly recommend getting someone else to double check this though if it's going to be a major deduction.

I think that's good advice IrishFootball.

You may be able to claim part of your computer as an expense, but it could be way more trouble than it's worth. I used to do some consulting work from home and counted one room as an office. I stopped trying to calculate the percent of my mortgage and the cost to heat to that room.  It came out to such a small amount that it was not worth my time. It may also make an audit more likely.  

Thanks this helps.  MOST hardware is mining-specific, but I do have some hardware I will have to think about.  Do you know if there is any kind of % test of time that can be applied to determine if it's deductible, or even partially so, or is it basically that ANY personal use would exclude it?  My kids logging in for a few minutes to check on homework a couple times a week on a machine that continues to mine basically 100% of the time is one example.

Not trying to split hairs, so hopefully it doesn't come across that way.  I appreciate your feedback.

Depends on what you're using as hardware.

If you have a mining machine that is solely used for mining and absolutely nothing else, then you can easily deduct the depreciation of the machine and the electricity the machine uses (a reasonable recalculation should work for cost of electricity).  However, if you have a personal computer that you sometimes use to mine, and sometimes use to go online / watch movies / etc., you're not going to be able to deduct anything for this.

The IRS has been making a big push recently targeting business items that have personal use, which is why I'd advise against anyone trying to deduct the cost of their main computer as a bitcoin expense.

My rationale is the network of all users paid the coins to you in exchange for you providing a mining service.

Besides I wouldn't risk it on some flimsy interpretation you prefer, because fees and late penalties could be tacked on later. The IRS will always rule for the interpretation that nets them the most tax soonest. Good luck trying to defeat them in tax court.

Btw, I had this interpretation immediately upon learning of Bitcoin. It was obvious to me, well maybe that is because my sister and grandfather were both CPAs, my father is an attorney, and I self-taught myself double-entry cash and accrual accounting and tax accounting (when my sister and grandfather died).

Would you mind elaborating on this further, or maybe Mike or someone else with this experience could?  I would think hardware costs and/or depreciation of that hardware as well as electrical would all be reasonable?  I have a follow-up with my accountant soon and would like to have as much information in this regard as possible.

Thanks in advance.

Can you explain to me the logic behind the taxable event of block creation by miners? AFAIK, entities that mine physical gold don't have a taxable event when they pull it from the ground, do they? Isn't the taxable event when they sell the gold?

I don't see it this way.  I see it as adding certainty.  I saw my accountant long ago and discussed Bitcoin at length, and our assumptions based on existing law were pretty much exactly in line with this IRS guidance.  And I am someone who has used Bitcoin in every role imaginable: I've mined it, bought it, had capital gains and losses on it, paid bills with it, accepted payment with it, embedded it in a product for sale i.e. "cost of goods sold", held it as inventory, etc.

Now with this guidance, the way I understand it, the risk of running a mining operation is now less, as if you have losses in a mining operation, deducting them should be pretty straightforward.  And just about every mining operation is going to start out with a big probability of incurring losses.  Beforehand, one would be inclined to worry that an auditor or examiner would have to be persuaded that mining was even a legitimate business endeavor that could result in a deductible loss in the first place (as opposed to a hobby where losses are not deductible because you're paying for your own enjoyment).

Based on my limited understanding, Bitcoin is being treated better than silver and gold under the law.

http://www.coindesk.com/irs-bitcoin-tax-guidelines-mean/

No, you're thinking is not way off.  This is the exact question, or pretty close, that I'm taking to my accountant next week as part of my annual visit.

I'll likely incorporate, but am going to my accountant, who is a good one, first.  This obviously entails other costs, such as incorporation, an annual report, annual fees, and filing a corporate return in addition to your private return, all of which increases your accounting costs, but it's likely a solid plan to consult an accountant first.

Oh, and as to kind of just holding them.  From that standpoint they're inventory.  Pretty sure that the value of the inventory is taxable.   Now if that value is when they're created or at the end of the year is a question I don't have the answer to.

It's a normal ruling that should have been expected a mile away.  Any other treatment and there'd be speculation that someone involved is also significantly involved in BTC.

It likely won't affect anything regardless though, at least in the short term.  The IRS is understaffed, and has bigger fish to fry.  They might target a few major players, but short of a targetted vendetta (think Tea Party v2.0), they will ignore 99.99% of BTC users.

And ignoring the IRS...you speak as someone who has nothing to lose.  Try telling someone with a few assets or a family to ignore the IRS...

No.  The IRS stated in their ruling that as soon as the BitCoin is mined, the miner owes taxes on: USD Value of BTC Received - Expenses to Mine.  And I'd advise people to be very very very careful about what they claim are expenses.

I'd also avoid the corporation set-up.  Not only would you pay taxes on the coins when they're mined, but now you're paying payroll taxes (SS & FICA) as well.

You would probably get challenged in an audit, and end up paying the difference between the regular income tax rate and the capital gains tax rate.  You wouldn't be able to deduct your hardware and electricity as an investment for the purpose of capital gains.

I don't know about our taxes being used to fund the vatican, but I do know they fund war and the death of innocent people. For that reason, I consider it to be HIGHLY immoral to pay most taxes.

BTW, I have no problem with property taxes. The money is generally used locally and I consider them to be more like user or rental fees for the land. Cryptocurrencies will have no effect on them anyway.

The reason they make this rule for miners because they're afraid US miners sold btc abroad and thus.... no tax grab for them.

I guess they figure that btc can be moved easily (not like other tangible goods or products).

I bet my ass this would make mining corps like KNC become stronger and future of BTC mining would be outside of US.

IRS's Ruling is an attack on Bitcoin

this is to the benefit of the bankers at the expense of bitcoin

Bitcoiners/Cryptocoiners will  get used to not reporting and they will subvert IRS like torrents have decimated the digital media industries, most in the tech generation feel its normal to copy copyright digital media because they grew up with it
IRS ruling burdens will normalize bitcoiners into ignoring the IRS, IRS have made a huge mistake. we may find ourselves with a new generation of IRS avoiders

you will see a big shift of people keeping all their money into crypto and rarely converting to fiat to avoid the IRS... accelerating bitcoin adoption

IRS is unconstitutional anyways, the money goes to fund the vatican!