Topic: US Mining Hardware Deduction/Depreciation (Read 14065 times)

i was told as a miner with the IRS guidelines...that state that bitcoin is "property" ie land...(my CPA laughed said i was a farmer) that i had to keep track of when/how much btc was when it hit my address *used the little chart on coinbase for my 16 transactions*...and thus that was my 'gross income" taxed at 25%

IF>>>> I sold any bitcoin before 1 year and 1 day (like land) I would have an additional 46% capital gains tax...if i just bought coin (did not mine it) and or sold my mined coin that i already paid taxes on to IRS after 1year and 1 day then the capital gains tax on the increase is 20 %

yeah sucks

on the other hand being a *farmer" equip/home business..etc etc ...did the short form of home business checked the box on form version etc* ....CPA went to town and on 16k of 'gross income" mining...i straight out owed 4K i paid 550 usd

so know I know how farmers do this stuff..borrow like hell ..hope next years crop comes in 'great' or in my case BTC is high next nov/dec when i can cash out some coin IRS target free

so it goes (should link a farming song here)

http://www.youtube.com/watch?v=umS3XM3xAPk


seems appropriate I'm about that clueless

Searing

Not a lawyer or accountant, but here's how I'd figure it.

You mined the bitcoin for a value of $400, it's the same as if your boss (for a typical job) paid you $400 that day.  So you add the $400 to your regular income.

You can then deduct the $490 (as a business expense expense if you're running your bitcoin mining as a business, or as a hobby expense if you're not a business but itemize your deductions).  Either way, you'd net out with zero income, so no extra tax there.  That said, consult with an accountant on whether you can deduct the extra $90 loss from your other income. Also, you can't deduct at all if you mine as a hobby, and you take the standard (non-itemized) deduction.

Next, you sold your bitcoin for $500. This means a capital gain of $500 - $400 = $100. So you pay capital gains on $100.

yep pretty much what I did (prev posts) and got a bunch of stuff for being a "new business" on startup costs .....not sure what the hell was going on actually but the above
sounds right sole proprietor home business...deductions of miner equipment etc

anyway the CPA seemed like she was having a hell of a lot of fun...tossing money back at me....so whatever...main thing I got form this is "mining' is taxed at 25% gross income...and I made 16k i should have paid 4k in taxes..because the only way I can "make* that gross income as a miner income is to have equip to do so...well...in the end I paid only 550 bucks out of that 4K on my amended tax return

er on a side note...she had me "make a profit" on last years taxes....so I'm not in the hole yet...as to the above comment you have to show a profit in 3 years...

anyway imho worth the 550 extra to amend my taxes just not to have IRS off my back if/when I may sell some coin (as per their property classification) 1 year and 1 day from when I mined it...ie this coming nov/dec

the game will likely change this year again...it is all in flux...so 2014 it likely will be completely different yet again

anyway the CPA seemed to have a good time...was much grinning and chuckling to herself

Searing
 

Guys in the US.

Just go and incorporate yourself as a company.  LLC, small corp, sole proprietor, doesn't matter.  Spend the  roughly $120 with the state and become a company.  You can afford it since you can afford the miners.  It gives you all sorts of tax breaks.

Miners can be computer or manufacturing equipment.  Classify it as computer, great, then you can use Section 179 accelerated depreciation schedule.  Section 179 lets you deduct a great percentage of  the miner market value.   This depreciation offsets your BTC income.  If you don't have enough BTC income in fiat terms, then it offsets your regular work income. 

With a corporate like structure, you can deduct or subtract the electricity cost, internet access cost, network and router switch cost, home cooling cost, trips to BTC convention, gas cost to meetup with your mining buddies, etc.  Basically all these cost deductions will more than offset what you made in fiat when your BTC is mined.

Only thing to watch out for is the 3 year guideline.  If you don't show a positive book profit after 3 years, then IRS can classify your mining operation as a hobby, and reduce your past deductions.  May result in back taxes.  One smart person told me, if that happens, then just close up shop (shut down the company) and stop mining.  It's not profitable anyway.  3 years is a long time in BTC land...

** Not legal advise.  Consult with your CPA or tax lawyer. Keep invoices and receipts when going the corporate route.

that is what my CPA did wrote it all off..if they want to tax me at 25% for mining bitcoin then the equip to do so is depreciated as such

anyway went in thinking i had to pay 4k on my 16k gross profit according to coin desk paid 550 (750 with cpa fee) usd

only thing is if i get a refund on bfl equip (seeming more likely) then that will have to count as revenue this year on taxes in that i wrote it off

also got breaks for home office and being a 'new' business etc etc..was a grab bag of deductions last year

so anyway ...key point here is 1 yr and 1 day say next fall i can go nuts with my btc and purchase what i want and wave my 'legit' tax return in IRS face

for 550 bucks its worth that imho! the whole 46% tax capital gains tax if less then 1 year property thing and 20% on gains if more then 1 year and 1 day.

anyway how i did it with CPA advice..they wanted me to be a business i bloody well jumped in the pool as a business..er also got a Titan 10k unit

last year was paid for (was neptune switched it)....CPA lady said she wanted to take it off 2013 taxes in that i paid for it then i was like 'why' she

was like well it is 2.5k for taxes w/o it or 550usd taxes with it..so hell sure....take it off..so in real $$$ its like getting the titan for 8k vs 10k from knc

stuff like that it was all quite the 'republican' tax dance hoopla kinda times at the old cpa office

anyway the way it went down for me on IRS usa taxes

Searing

There are 2 ways to approach this that I see. One is claim it's a hobby and use that route. For me since I just started and am looking at equipment investment.... Not sure if it would work with the IRS but it's likely they're looking at the big miners.

The other is treat it like the OP and go the safe route and use a CPA (also gives you some legal cushion I would think). Another thing that's likely going to happen is some major player will contest the guidance of the IRS. But that'll take some deep pockets, I'm sure!!

One more thing as a side note...I used to play a lot of online poker. I actually got to the point where I was able to hold my own and occasionally score some big wins (that being a couple hundred bucks at a time  ). The feeling in the poker community it wasn't worth reporting until you started having net wins for the year over $10K. Anything less, then it wasn't worth the IRS' time to look into it.

That said in the way BTC is traded and such...and that the way poker is played could be compared...

Anyways, hows that for my first post on this forum?? 

Sure it does, in your model (which is correct in my opinion), you are being paid in BTC to provide a service. This ends up having the same effect as applying the original guidance to solo mining (income at the time of mining, then capital gain/loss if and when sold).


This is likely true to a large extent, but what you posted above does not demonstrate it.

In any case, to answer the OP, you should talk to an accountant. If the equipment has a useful life of less than a year, you do not put it on a depreciation schedule (publication 946, page 6). Even if for some reason you put it on a depreciation schedule, when you dispose of the property you can deduct the unappreciated value as a further loss. This ends up being about the same.

Finally you may be able to take a section 179 deduction for the equipment and expense it that way instead of depreciation (but again, not if it doesn't have a useful life of more than a year).

The tax laws are arbitrary and often dumb, but in this case it isn't that bad.

Yes because your cost was already deducted against revenue in the first place. You're trying to double-deduct costs. Leaving out the income component of this situation gives a distorted picture exactly like what you described.

So your mining business nets $10 but you pay taxes on $100

Capital gains is on the $100, because the fair market value establishes the basis.

a story problem


mine 1 BTC at $400   - logged as income
Cost to mine that same 1 BTC - $490 logged as expense

net loss - $90

sold same 1 BTC at $500


do you pay capital gains on $100 or $10?

So you're deducting it over 2013-2014?

I agree with some of your thinking, BUT you are ignoring the IRS guidance. They said when it's mined it's to be treated as income, regardless of your decision to actually exchange it or not. Is it kinda bullshit? Sure, but that's the rules now. I think it works a lot similar if you are paid in a foreign currency for a service. Say instead of Bitcoins we were mining Euros with our ASIC chips. So you provide the service of mining with your equipment, and the pool pays you Euros. The moment you receive the payment is when you record the income in USD for accounting purposes. If you decide to hold onto the Euro it doesn't matter, the IRS still wants you to calculate income in terms of dollars and pay the taxes with dollars as well.

Totally agree it's BS and nothing more than an attempt to regulate btc out of existence but I also think it's a stretch to say they are asking for comments.  They allow people to submit comments, kind of a different thing.  And if I had a nickel for every random Senator who was drafting a bill I wouldn't need any bitcoin...lol

The IRS asked for your comments, so it does matter how you interpret it, otherwise they wouldn't be asking for your feedback!

I have no idea what the price was when a coin was mined, do you? And which market price are we using? MtGox price was pretty low recently, the prices can differ by a wide margin depending which market you look at!

So you see it's bull, the only price you know, is the price you sold it at! That's because it's the only price that provided you with income!

Digital currency miners—the people using their computers to solve complex math problems in order to release new money into the economy—have to track the value of their coins when first mined as well as when they use or sell them. If a miner mined one Bitcoin on January 1, 2013, when it was worth $13, then they must report $13 in direct income. Then, if they sold the Bitcoin on December 31, 2013, when it was worth roughly $1,000, they would be subject to capital gains tax on the $987 difference

In order to properly report taxes, miners must now closely track when they successfully mine coins to determine their original value.


I'm sorry Gator but it matters not how YOU interpret it...According to the IRS you are liable for the value of the coin the moment you mine it, even if you never sell it.

When you exchange your Bitcoin for equipment you realize your gain...

There's no income until you take your asset/commodity to market and sell it for money.

If you paint a picture, it provides you with no income until you can find a buyer for it, and turn it in to money. You cannot pay your taxes in paintings!


As far as I'm aware Bitcoin hasn't been declared as official US money so we cannot be mining an income!

http://www.bitcoinx.com/texas-congressman-plans-submit-bill-classify-bitcoin-currency/

When you can pay your taxes directly in Bitcoin, and it incurs no capital gains tax to hold it like money, then you can claim it's income as it's mined!

little update... to my surprise my CPA put the equipment on a depreciation schedule. He is aware of the short useful life, but his reasoning makes a lot of sense. We will depreciate for 2013, since I only mined for 2 months if we took the whole thing it would have been a massive one-time loss, which really wouldn't have done me any favors year over year. By depreciating we can recapture the losses next year on the equipment sales. I already dumped cubes around $150-200, which is significantly less than what I paid for them a few months back, so that will show up on 2014's books. The filing came out good (felt fair), and all my records were clean and detailed, overall went smooth and unless BTC goes to $0 I'll probably be in business mining another year.

keep it running and depreciate it like any capital investment, for example, a computer.

Another aspect of this whole story to take into account came to my attention listening to the latest episode of the Epicenter Bitcoin podcast.

In the United States, capital losses can only be deducted against regular income up to a limit of $2000 per year.

The implication is that in the hopefully unlikely event of some serious nuclear event in the valuation of Bitcoin, holders of any kind need some kind of diversification of investment gains in order to have other capital gains to deduct losses against.

Do farmers have to pay tax on cow manure because they *could* sell it as fertilizer?

What about my vegetable garden?  Do I have to report the grown produce?  Is that income since I could sell it?

I agree, it's as though you're chopping some wood in the yard with the intention to sell firewood at some point, but they expect you to pay taxes when you stack it instead of when you sell it.

My biggest beef with all of this is I only have one way exchange. I buy Bitcoin and mine Bitcoin, buy more gear with Bitcoin. I never exchanged any Bitcoin for USD but they want to have me pay taxes on it. I know people will say, "it's property" but honestly, I've never looked at it that way and it feels stupid to have to care this much. When I had to spend a few hours this morning on spreadsheets the whole thing just seems crazy. I'm not the IRS, but if I were it would be a lot different. My primary change would be there's nothing reportable until you exchange for dollars, once you exchange then you realize the gain, and mining would simply establish a cost basis. Paying tax on a virtual thing I can trade that never got turned into dollars and is sitting with a lesser value than when it was paid to me just seems so stupid. And most ASIC equipment is priced near break-even anyways so you really can't have an operating profit on mining unless BTC is moving exactly sideways or up in price, otherwise expense of the equipment can easily exceed the revenue when converted to USD. Regardless of exchange all the accounting must be reported in USD, your success or failure is 99% attributed to market forces of supply and demand that you have no control over. Had to rant, sorry but I think it kinda sucks and took much of the fun away from mining. Keep in mind a CPA or the IRS will only accept dollars, more you need to report the more it's gonna cost.

If this all works the way we think, this really isn't hard to track, especially because everyone involved in this is a self-selecting population that has the general computer proficiency to do it.

This all just looks complicated by mediocre old people standards! Although to be fair it is unreasonable that we have to be exceptional compared to the general population just to comply.

I met with a CPA and he is learning as we go, which is somewhat understandable as this stuff is new to the rest of the world. Not everyone is a crypto-nerd like all of us... The good news is he was interested and seemed intrigued, not scared off by it at all. My homework assignment is to get my spreadsheets cleaned up. I'll do my best to pass along feedback to the community, but if we go outside the box a little I may keep that on the DL.

I think they pushed the guidance out the door without considering the use case of mining with a pool and having a small operation. It seems like for a large operation engaged in solo-mining the guidance makes a lot of sense, but for a small operator working with a pool, not so much.

So, here's a question... (Generally Speaking) People don't mine BTC, pools mine BTC. Individuals do 'work' for the pools. So, in this particular interpretation, the pools bear the burden of tax responsibility for having mined the coins, correct? If you were to say that because an individual actually finds the block, and thus "mines" the coins, wouldn't that make the specific individual responsible for the tax burden of the 25 BTC? I fail to see how the wording of their statement, strictly interpreted, incurs a tax burden on individual miners.

Based on the wording of the IRS' statement, I don't believe they really understand the process. Certainly, I think they are hoping the the 'threat' of the IRS is enough to convince people to pay taxes on income they (at this point in time) can't possibly track or regulate. Also, what does this mean for people mining every *other* crypto? I don't mine BTC, but I get paid in it. Their statement doesn't cover currencies of the week, or even LTC for that matter.

What you said is reasonable, damn guy really make people angry.

Interesting Thread

Pretty standard deal for the big G. Create a policy regarding something that is so ambiguous no one could possibly follow it even if they wanted to. They create criminals with these bullshit positions that are designed to discourage people from participating, not follow rules.
FU eye R ass

Strangely enough warehouse management software is perfect for tracking this kind of thing, because the individual Bitcoin payments can come into "inventory" as receipts with the market price as accessory metadata, and a purchase/cash-out could be entered as an order. Any WMS material selection function can be configured to select by FIFO so the software itself figures out the basis essentially for you.

I think it's a big mistake not to file, because it exposes you to terrible retroactive enforcement risks. Also ideally as the ecosystem increases in size and takes on greater non-informal sector use cases, not filing now is just going to force a miner to concoct an elaborate laundering scheme if the time comes that held Bitcoins would be very useful to use for completely over-the-table transactions. The whole system is definitely rotten, but I don't think that necessarily means that it's a good idea to invite even worse consequences. I like to think of it like being accosted by a mugger, it's definitely arguably the moral high ground not to comply, but in practice it's not worth getting stabbed to death just to keep your wallet.

I went to http://bitcoincharts.com/charts/btceUSD#rg180ztgSzm1g10zm2g25zv and clicked "load raw data"- the column all the way to the right is the day's weighted average price and that is what I used for payouts. I'm just making spreadsheets to get a better idea of how this looks before I make any decisions. I am trying to get a hold of a CPA but I'm almost certain that the mention of Bitcoin has scared them off. Left to my own devices I might not report but will keep my detailed records ready for next year. I only had 2 months of mining in 2013 so that's not really my concern as much as 2014 will be.

My problem is I've got all these 0.05 payouts, and it's around one per day. Each one is converted to USD, but along the way I was spending BTC on new mining gear. The IRS is expecting me to treat each time I bought gear to be a sale, but my cost basis tax lots are 0.05BTC each!! So if I'm using a FIFO method that would mean my first whole bitcoin spent would come from the first 20 payouts- trying to make a running system with daily payouts and fractional spending is f'ing insane. I'll need to find a way to maybe just take my annual average cost basis and say "good enough". That method might even be allowed, I mean non-public companies don't need to worry about GAAP requirements, pretty sure we can determine a reasonable method be it LIFO, FIFO, or average cost so long as we stick with it.

Lastly, I was chatting on a fairly popular chat room tonight about this. Everyone there was basically saying I am insane for even considering filing my mining income. Seems the general vibe on the forums here is much different than the pool chat rooms. I wonder what the casual mining non-message-board-addict is thinking. The only moment I started getting worried was when I read these forums and saw all the panic.

I'm pretty much convinced that it would take a while to find a CPA that doesn't look at you like you're talking about aliens, or asks for a 1099 from the "Bitcoin company".

My thinking on this exact question is that establishing the basis now as legitimately as possible should reduce problems with any future capital gains (hopefully!).

I know, famous last words right?

I'm personally not too concerned about the record-keeping, unless there's some compelling information I'm not privy to yet, because it seems insane that the IRS would get so granular as to scrutinize pool shifts. I'm figuring just settling the amount mined by day and extending by say a Coinbase quote for that day would be perfectly fine for establishing basis. That's already kind of insane, but the wording of the guidance kind of suggests to me that would be the right approach. Admittedly this is pretty trivial to track just with very basic relational database proficiency, spreadsheet lookups, or very simple coding.

I'm tempted to just write a quick and dirty python script that does this straight off the CSV Bitcoin-qt can dump, assuming the Coinbase API has a function for historical lookups via HTTP GET (?). If anybody thinks that might be useful I'll post the script if I actually do that.

You know what's really fucking scary? He's paying a CPA and even she doesn't know this shit.

The guidance pretty explicitly says this is not true, although this is exactly what most people probably would've thought before. Income tax on the mined Bitcoins themselves is paid upfront based on fair market value regardless of what you do with them per the published guidance, but that fair market value then later serves as the basis if you trigger a taxable event that produces capital gains.

That's what I thought prior to the IRS guidelines, but unfortunately you are wrong. I suggest you bone up on it before making statements presented as fact.

Are you mining with ASIC gear? If so, is the cost being expensed as one-time payments?


FYI, here's a summary of the IRS guidance: You are supposed to log the BTC as you mined it as INCOME, at the value of BTC on the day it was paid to your wallet. Then that income also serves as your cost basis for what you are already doing. So it sounds like you have half of the math done. FWIW, I wanted it to be like the way your CPA thinks it is, but unfortunately it didn't end up like that.

My CPA wants me to provide her with the value of the bitcoin when I mined it vs when I sold it.  It doesn't have to be the same btc, that's a daunting task to calculate.  She just needs a number for the books.  She needs a basis value for when it was mined vs when it was sold.  And she's treating it like short term gains, like stocks.  I'll use the difficulty vs my hash rate to calculate what I mined.  I can look at my payout history on btcguild, but that doesn't reflect the date mined, just the date it moved it from btcguild to my wallet.  My CPA doesn't know what to do, we're really just guessing.  There are simply some huge deposits into my checking from coinbase that need accounted for,  that's what we're doing.  If you never sell any btc, you need not report anything. 

I've always considered this a hobby, so I don't believe anything special is required. I'm trying to get a hold of CPAs to discuss it but my impression is the entire topic of Bitcoin scares them off.

Just a quick run through my expenses versus mining revenues produces a decent loss, much of that is due to the equipment expense, actually all of it. I bought a lot of gear with revenues from mining, and honestly I cannot even imagine trying to run a FIFO tally on all of those BTC equipment purchases; my best attempt will be to use an average payout basis to serve as cost, but a good number of my purchases will show a loss, which will only add to the basic revenue/expense losses I'm already seeing. This is more speaking for 2014. For 2013 the activity it small enough it almost seems stupid to record. I also haven't even calculated electricity yet. I guess if I had profits I could see the point of all this, but to jump through all these hoops just to show a big loss seems so silly and like a time-suck. My spreadsheets lay everything out, but if I end up hiring a CPA I'll need to somehow make this understandable. I think when mining with a pool these new rules really fuck us into creating a big audit flag, pretty stupid if you ask me.

I just keep thinking, if I was running a lemonade stand or knitting scarves at a LOSS would I really bother reporting it to the IRS? It's not like I'm skipping on owing them anything, not to mention the ridiculous detail involved in daily payouts on my spreadsheets.

Is this all just standard schedule C stuff for an individual or does this require any special legal manuevering?

By the nature of capitalizing equipment if it's not intended to serve a use for more than 1 year you cannot depreciate it. No matter how much someone may want to there isn't a way to depreciate something that will only serve a use for less than a year. Now, with that said, the outlook might change if BTC appreciates significantly in price, but your forecast of useful life is supposed to be based on historical evidence, and thus far ASIC gear shows no evidence of a useful life beyond 12 months.

In my own operation I am flipping old equipment anyways, so I won't even come close to a year. Purchase price of the asset is an expense, and the salvage value is what you sell it for and is recorded as a revenue. This is a line item against expense in the same year, and just added to revenue if the sale happens in the following year. Personally, based on my mining experience (which is what your accounting is supposed to be based off), the idea of putting any ASIC gear on a depreciation schedule sounds completely ridiculous.

I'd assume since to the IRS, miners are creating "property" not unlike any other product, mining machines can be counted as manufacturing equipment, as well as costs incurred to operate them.

Again that is my assumption, but this does need more clarification from someone more certified than I.

Is there anybody out there with real advice on the basics on how mining hardware could properly be deducted for US tax purposes?

Standard depreciation schedule ideas seem completely insane for the cost of hardware that gets bricked within well under a year.

Any legitimate advice, even on how to properly explain this to a tax professional, is greatly appreciated, as I'm sure lots of people have this same question.

Please no general conspiracy theories or bitching, because I understand it's nice to have political opinions, but what you think about the IRS is not helpful to people trying to actually accomplish something.