Bitcoin Forum

If they are going to treat it as property, how would mined coins by a company set up as a corporation be treated?  My impression is that per the IRS's position, bitcoins mined would be the same as a the creation of a product you create/produce for sale but does not sell. It becomes on the shelf inventory, and there is no taxable event until it sells. This applies to all companies that make products through a process, hard materials or digital.  If you own a software application, or a script (plugin) you developed, and sell it for $50 per copy, and make 1000 copies on CDROM, you don't owe the IRS taxes on the copies until they sell. It's all 1s and 0s, so what difference is there between using computers to create scripts or plugins or software, or bitcoins? All property right? You just have to view it from a manufacturing standpoint.  And the fact that they have ruled it is property, the manufacturing stance would in my opinion apply. Manufacturing being the creation of something tangible "property" from the use of labor, machines, raw materials, and energy resources.  So you mine the coins, put them on paper wallets as inventory to sell. But hold them... For sale at a later date, which would be taxable.  You'd have to set up an s-corp to do this, or is my thinking way off??

My point being, using the above methodology, unless you sell the product you've created... The "property" you now own that you have produced using hardware and software (or in this industry they call them miners), would not be taxable until you sell that property for fiat or exchange for goods.

The IRS will soon be as irrelevant as Blockbuster Video. They and the fiat empire upon which they are built are being rendered obsolete as we speak.

Yes. (Other than the s corp part)

It is not a problem for the IRS. It is normal for things to be taxable upon sale.

The mining aspect seems to be incredibly confusing.

Is there anything wrong with the idea of declaring mining revenue when gains are realized (i.e. sold for fiat or goods purchased), at basis $0.00? Then deducting hardware/electricity as expense?

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!

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.

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.

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.

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.

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, 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.

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

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.

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?

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.

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).

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.

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.

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.  ???

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.

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.

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.

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.

Tax court is different from criminal court.  Essentially, it is a civil action (like being sued) and innocent until proven guilty doesn't apply.  It becomes criminal when you don't follow the tax court's order, and all they have to do is prove you didn't comply with the order.

And as I understand it, mortgage is not a deductible expense anyway.  It's not even an expense related to business in the least - it's you paying later for a house you already bought a long time ago.  

I found something: https://www.youtube.com/watch?v=fvqkQvOWgeo

What kind of depreciation schedule would fly for an ASIC miner?

The standard 5 year for computer equipment is absolutely insane. Most of these units become useless as bricks within a year even if that.

The IRS has gotten it all wrong. All their statement will do is push onshore people to offshore services and companies where they cannot be taxed. I live and work in an offshore country where there are no capital gains taxes and cryptos aren't taxed in any shape or form. I'm already seeing a rise in what can best be described as "offshore crypto farms" where instead of you mining and manufacturing your own cryptos, you simply rent mining capacity or buy them cheaply. Either method means that you haven't technically manufactured them yourselves, rather you're buying a pre-manufactured product, which is tax exempt on purchase. Added to this, if the contract is written well, then the cryptos could be held in offshore "trust" wallets and only withdrawn as and when needed, thus obviating any reporting of them. You've simply paid for a service/product combination and the very existence of the mined cryptos isn't a taxable event. You could almost create a futures and options market that way, but that's another story...

Since the USA has introduced FATCA that is seeing US citizens and residents caught in a wider reporting/taxation net, the simple separation of an asset you own and enjoy overseas versus a product and service that you've bought and paid for could see cryptos becoming the "flee" asset of choice.

The upside of the statement is that the USA government has effectively rubber-stamped cryptos as viable and recognisable assets, hence they have a real value. Nothing like stimulating the very economy you're opposed to!

Very true.
Not only that,  but it an attack on avoiding the inflation tax, which by design Bitcoin was designed to avoid.
So the IRS is not only saying you are not allowed to have a competing currency against the dollar, but you will have subsidize the dollar debasement done by the FED.

Not allowing competing currencies is illegal, since  it is something the constitution allows.

Also not only it is an attack on Bitcoin, but also on all alternative private currencies.

The good news it is a sign that we are winning the war, we may have lost a battle, but not the war.

I am a believer in freedom, and in the spirit of Bitcoin, and this law is unenforceable, even for people willing to comply it will be a bookkeeping nightmare, so I believe the law will be enforce on large business dealing with Bitcoins, therefore severely hurting the Bitcoin economy.

You should ask yourself why are they afraid of letting Bitcoin and the dollar compete on a level playing field, with same laws applying to each currency instead of discriminating against Bitcoiners. Is it because the dollar will depreciate in value and Bitcoin will appreciate in value over the years.


  

How come I don't get to declare losses on my dollars due to inflation?

NO!

Bad advice. You cannot setup a depreciation schedule (I.e., capitalize equipment) because the useful life is less than 1 year. This may vary depending on your outlook, but it am firm that nothing in my rig is intended for use greater than 8 months and the salvage value is also very low due to increasing difficulty. Appreciation in BTC may change this outlook over time, but you are supposed to establish depreciation schedules according to future expectation from historical knowledge, and everything I've seen shows this equipment will operate at a LOSS anything further out than 8 months. This is not a dump truck or an oven, it is an ASIC miner, and anyone mining BTC right now is using one. You cannot capitalize (depreciate) equipment that in intended for short-term (1 year or less) use. For equipment that serves a life of less than 1 year you record a 1-time expense for the cost of the mining gear. Many will do this wrong and overpay, those who do it correctly will show a net loss and have a higher audit risk. Awesome.

People that don't know enough about mining are giving bad advice all over the place. Stop with the depreciation schedule stuff, it's not suitable for mining activity with ASIC chips.

On the recent IRS ruling that BTC is property subject to capital gains on disposal of coins, and that miners must additionally pay income tax on the value of the BTC when mined, someone thinks being outside the USA will help but they are sorely mistaken...


As a former Treasury official was purported to have said, "we will burn the fingers of the goldbugs up to their armpits". And he also said, "its our dollar and your problem".





I hope you also understand that FATCHA will compel the nations of the banks in all nations to comply and remember the developing world is short the dollar due to massive bond issues in dollars to the ZIRP carry trade. The USA is still in control of the world as we go into this implosion 2016ish.

---

See below on what the former IRS Commissioner told Aaron Russo when he was making the movie about there being no income tax law in the USA.

If you incorporate you can depreciate 100% of the cost in the first year under section 179. The 2014 limit is 25,000... However that will likely be increased as it has for the last 3 years, to roughly 250k.

i wonder what happens when you only mine coins that have no exchange at time of mining...  or what if the only exchange is some spreadsheet or rudimentary web site operated by some random person/group

are they expecting people to use these to estimate "profit"

seems a bit odd

Do you have to actually incorporate in 2013 or can this be done retroactively?

Google Rev Proc 2013 30

You can't incorporate retroactively however you can elect for S retroactively.

Yikes!  If this is in fact good advice to be listened to, it would be heeded more if it came in a package that is more pleasant to consume.

Quite honestly, even my accountant admits that any advice related to bitcoin is at best guess at best, because bitcoin is so new and the tax/revenue agencies and accounting profession at large are still busy wrapping their heads around it (while they wonder, individually, if they too should buy in ;) ).  No one knows the "one true" way to do this, and especially a non-professional (I assume if you're an accountant or similar, you'd say so).

I'm not an accountant or CPA, in fact I haven't worked in the financial industry for over 5 years, but I've dealt with plenty of bull. Details are here, as specific as I'll ever get, on my background: https://bitcointalk.org/index.php?topic=530299.msg5913035#msg5913035

I know what you mean, I think. I could be more polite, right? Well, the problem is it's very frustrating and damaging to see so much bad advice. I literally had someone compare this to owning a bakery and depreciating on an oven. Some guy who has never mined Bitcoin ever takes one accounting class and learns about depreciation and they think it applies to everything, very annoying to watch it spread and be recited as gospel. The very important rule with capitalizing equipment is that it MUST have a useful life beyond 1 year. Without getting into WHY depreciation is good for real businesses with that type of equipment we can just eliminate the static and just say "no". This ASIC gear, historically speaking, cannot be projected for a useful life beyond 1 year, and therefore it cannot be put on a depreciation schedule. Now, if someone wants to do that they can, but they will end up showing excessive profits that do not really exist. At this point someone would need to try to make a case FOR depreciating because the reasons why not to are so pronounced.

I'm meeting with a CPA tomorrow and should be able to get some feedback.

I am the oven guy, and I was speaking to you as if you were ignorant of the concept of depreciation, and I apologize for misunderstanding.   My position is that a standalone mining rig would be considered by the IRS to be in asset class 00.12.  While, logically, it shouldn't, as you have pointed out it may (although a high enough rise in $/btc  or an anomalous drop in the hashrate may invalidate that assumption) have a useful life less than a year.   I, not wanting to take an aggressive stance against IRS rulings, would put my mining rig in the asset class 00.12.   And, yes, I am a miner with a recently purchased rig. 

J_dubbs is 100% correct in everything he's saying.

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/A-Brief-Overview-of-Depreciation

Sure, if you sell it to a fool that will never make money from it.   Documenting a sale or a donation to a electronics salvage operation would help as well.  But if it is never "disposed of",  then I would follow IRS guidelines not to raise red flags as a precursor to an audit.  That's just me, and I do not claim to be a CPA or a tax attorney.  I'm just a guy that fills out my own schedule C.

The buyer being a fool thing is tough... I mean, I bought a cube high with USD right when they came out, mined BTC paid for the next 3 cubes and each was cheaper than the one before it. My first cube cost me $1,000 and just last week I sold it to someone for $275, mined with it for oh I don't know 3 months at the most(?). Not very long. Sold a blade for $100, and my average cost on 11 of those was over $230 each. The most I paid for one was $400, yes for one blade. So I sold a blade and a cube for $375, then turned around and bought some BTC and paid for most of a 180gh/s Antminer through a forum seller. I'm selling old gear at a loss to cover new gear, and the spread between selling USD and buying with BTC makes it possible, but also I'm taking on more risk. The thing is, everyone starts mining on the outside. They purchase with USD, maybe eventually they stumble across Jones Gear and think it's full of the best prices. The best deals involve the most risk. I find a group buy, I send some BTC to a complete stranger known only by a forum name, prepay a label, and then hope that my gear arrives. Luckily it always has, but if it doesn't there's no buyer protection on these transactions, and that level of risk is needed to purchase at prices better than the fools.

See, the fools are just new, and we all started out like that. Maybe they aren't quite fools but just not willing to trust a stranger for a purchase on the forums but still ballsy enough to speculate on BTC, but everyone starts somewhere and it's gotta be in their comfort zone, which means purchasing with dollars for many starting out. I just sold a BFL Jalepeno for $120, will that guy ever make money off it? If we keep trading sideways, never; if BTC goes to $5,000 he should see profits, but to achieve that he might need to keep it plugged in a few months and operate at a monthly loss hoping for BTC to trend up again. It's impossible to say anyone will "never make money off" something because that depends entirely on where BTC trades at on a future date unknown, and the further out you go the more unpredictable it is. People unplugged their miners when BTC was $30 because the electricity was costing more than the revenue. One BTC @30 per month revenue just wasn't enough to cover the extra $60 in electricity. Well, ultimately they missed a chance to have thousands in profits at the end of 2013 because they decided to unplug and stop speculating. Everyone with less skin in the game pays more, it's almost part of the learning curve.

And thanks for being a good sport about the oven stuff. I wasn't trying to pick on you it just was the easiest example to reference.


Edit: I also believe "useful life" of equipment is to be based on methodology that means "expected profitable life". If you have evidence or reason to believe a piece of equipment will operate at a monthly loss after the first year then I don't believe you should be putting it on a depreciation schedule. No evidence on planet Earth thus far indicates that ASIC mining equipment will be operating efficiently for mining after one year. The conservative approach in accounting assumes nothing about bullish speculation on pricing to concoct a bloated useful life on equipment to justify a depreciation schedule. Conservative assumptions in accounting are to be based on experience and historical performance, not speculation.

...which has come a long way from the times of the Constitution and the Coinage Act of 1792 :(