Topic: Taxes (United States) on Bitcoin mined two years ago (income vs capital gain) (Read 2232 times)

Let me start by stating that I am not a lawyer or an accountant so nothing I state in this post should be construed as financial or legal advice.  Let me also state that your record of my indication of something an accountant told me likely wouldn't provide you any sort of financial or legal protection.

That having been said, I asked an accountant a similar question a couple years ago.  The scenario wasn't quite the same because my bitcoin with no cost basis records came from multiple sources while bitcoin was at much lower prices (after dropping from its first peak in the $30s), and I actually asked the question before the IRS guidance was even released.  However, the accountant told me I should be OK to report the entire amount of a future sale as a capital gain with a $0 cost basis.

Now, if I were in your situation (selling bitcoin mined less than three years ago), and if I were concerned about audit risk from posting a $20K long term capital gain with a $0 cost basis (in less than three years), here is what I would do:
1) Look at my wallet to find my mining payouts and treat those as lots
2) Find a historical daily bitcoin price source and treat those prices as costs basis for my lots
3) Amend my returns where mining income should have been reported, paying the income taxes and penalties on those mining payouts
4) Report my capital gains using the information from (1) and (2)

It should be obvious that doing steps (1),(2), and (4) above while skipping step (3) would likely be fraud, so I personally definitely would not do that.

Obviously the steps I might take if I had audit concerns are more painstaking and expensive than simply reporting a $0 cost basis, and they could also have other repercussions, so I would likely talk to an accountant before taking them.  For instance, if amending my returns increased my audit window and using a $0 cost basis had case law to support it, then taking those steps instead of using a $0 cost basis might be potentially more expensive than using the $0 cost basis and going to tax court if necessary.

First, you should understand the responsibility to keep records is on you. And in taxes, you are "guilty" until proven innocent. You do this by showing records.

Next, it doesn't matter when the IRS published guidelines. They are retrospective. Any coins you ever mined follow the same rules, which is, they are income at their fair value at the time of receipt. There has been well-documented historic prices for Bitcoin since they started, so you are able to find prices. Or, enter your mining volumes into https://bitcoin.tax and we'll look it up.

For capital gains, you take the amount you receive for the coins less their cost. The problem here is that if you can't adequately show (in an audit) when you received those coins, the IRS could treat them as 100% short-term capital gains. This effectively means they are being taxed at income rates rather than discounted long-term rates. However, this is really no different than mining a coin and then spending/selling it. You will pay income tax on the mined portion and capital gains tax on the gains portion. The only difference is if you can show it was long-term.

If you can't find records of when you acquired these coins, well, first, look harder. The blockchain exists for a reason. If you can track your mined coins to a payout address you can show when you received them. Otherwise you could estimate it, the date that is, and then look up the fair value. Or, lastly, treat it all as short-term gains. If you are paying the maximum amount of tax, the IRS won't care, they are getting what they are owed.

Holy fark that's terrible. How can satoshi slime his way out of that scenario?

I remember there being a couple c.p.a.s on here a couple years ago who were trying to find out and answer some of these types of questions. If I can find any of their contact info, I'll post it or P.M. them with your bitcointalk i.d. if they have gone private.


See if this member has any insight?

https://bitcointalksearch.org/user/2dogs-22778


Good luck :-)

From what I understand, Bitcoin miners are charged income tax on the price Bitcoin is at the time the coin is mined, and capital gain on the loss or increase of that coin. For example, I mine one Bitcoin at $200, sell it at $600 – I get taxed self-employment income tax on the $200 and capital gains for the $400 increase.

However, I stopped mining Bitcoins a while before the guidelines were officially created by the IRS, back when Bitcoin was <$50 each. That said, I have no recollection or records of the pools I used to mine Bitcoin and I’m pretty sure the majority of them are out of commission by this point. I've also had to recreate my Bitcoin wallet several times along the way do to re-installing the OS/wallet getting corrupt. On top of that, the majority of Bitcoin now in my possession came from investing a few Bitcoins into other coins such as NXT that grew in price such that I was able to convert it back into several times the amount of Bitcoin I had put in.

My problem is, I’ve converted and withdrawn ~$20,000 worth of Bitcoin into my bank account. From my comments above, and now that Bitcoin is over $400 apiece, you can see most of my gains are capital gains from investing rather than mining. However, I have no record of my mining history, nor my gains history (the new coins I mainly invested in were newly created coins, aka I invested in it before it was officially offered on an exchange). When I file my taxes this year, would it be safe for me to file the $20,000 as $20,000 worth of capital gains (i.e. file everything I convert/withdraw for the full amount as capital gains) as opposed to worrying about the income tax portion?

I tried explaining it to the person I do tax with, but she couldn't understand that Bitcoin wasn't a third party and kept thinking there was a capital gains/loss form that I was supposed to get from some Bitcoin corporation (which there isn't).

I appreciate the help.