Bitcoin Forum

So I "invested" in BFL mining equipment on 6/14/13.  Long term capital gains tax requires that any investment returns be on investments over 1 year old, otherwise it is taxed at ordinary income rates.  If I decide to sell any of the BTC generated from a BFL miner ordered a year ago, would it be reasonable to claim that USD income as long term capital gains?  Or would I have to wait for a year after that BTC is generated in order to sell it and be taxed at the capital gains rate?

Opinions?

And I'm not interested in a "don't pay your taxes" discussion.  This would be a large enough amount of money that I would want to be sure pay appropriate taxes on it, lest it attract the wrong sort of attention from the IRS.

It is so messed up of a topic, that the response you do not want may actually be the best answer (I only mean that because if you do get audited, low level auditors DO NOT like things they are not familiar with).

But, from a capital gains standpoint it would be 12 months after the day you received the BTC (either solved the block or received a pool pay out).   Your rig would have to be depreciated over a number years (5 or 10 depending on your accountant) to expense that cost.   Your electricity is an expense so that would offset any BTC that you sell without waiting 12 months.
Don't forget that capital gains tax rates now depend on your income level and you may have to pay 3.8% for obamacare on top of the rate if your income is high enough.

First, we all pray to whatever gods there be that capital gains will be what the IRS applies...

Anyway, I think it's probably realistic to file based on the creation date of the coins that are sold, and not on the purchase date (advance or otherwise) of the device used to mine them.

I wonder about the deduction for this type of equipment in the case where you haven't yet received it, but have already paid for it.  I believe that will have to be treated as any other depreciable equipment asset - so you'll be able to set up your depreciation schedule starting from when you paid, and not from when it is actually received.  I know for a fact that that's how balloon-making machines are treated, having bought one and taken delivery in the following tax year.  The catch there is that you later have to show that the equipment was actually used against the income you later claim.  But the big catch may be that, rather than making something tangible, you're creating an intangible good:  I'm unfamiliar with that, in re taxation.  Will bitcoin even be considered a 'good'?  I'm unclear on that.

yet another taxation thread. all im going to say is

think income tax when you cash out to fiat

nothing at all to do with capital gains(from UK rules atleast), bitcoins are not a share (percentage of a company) or a commodity(raw material).

treat it like going on vacation and buying $2000 of foreign currency. then coming back 1 month later having won a foreign lottery and changing the $1,000,000 foreign value back into your native currency.

How your income is taxed (capital gains vs straight income)...
Has nothing to do with your equipment...
Though your computer equipment...
Should be expensed and depreciated over 3 years or whatever.

I'm a Professional Trader for 15 years...
So BTC business income is likely analogous to trading business income.

Basically, only non-professionals...
Can take advantage of Capital Gains tax breaks for long-held positions.

For professionals, everything is straight income...
(And I have an office with about 8-10 PCs, etc)...
Though dividends and foreign dividends may be handled in a special way.

In the US, that is not correct.   Capital Gains and how they are taxed depend on holding periods and they apply to "professionals" as well.
Sgt. problem will be that the IRS will interpret his cost basis as income so even if he holds 12 months his gain will be his sale price minus the cost basis (which will probably be interpreted as the trading price on the day he got the BTC).

My own point of view is that you are buying equipment to run a business. This business is "mining" bitcoins and your equipment is part of that business -- as are your electricity, commissions, and any other expenses. If you choose to depreciate it rather than expense it, then you only get a fractional deduction against income each year -- as a previous poster pointed out. If you take a section 179 deduction (in the US) for small business equipment you can deduct the total cost in the first year. Regardless, your income is business income and not a capital gain. Consequently, it gets taxed according to the structure of the business you have set up -- schedule C if you didn't bother to create a business for this. I do agree that whatever rationale you choose, you should pay taxes. Right or wrong regarding treatment, you won't be evading taxes -- which the IRS thinks poorly of.

Thanks for the opinions all, I would tend to agree with you!

The question is:  can you really do a Section 179 for equipment you haven't received, and haven't actually used to generate income in the year it was purchased?

If you're integrating that machine into an existing operation that has a history with the IRS, I would think you could.

But what about if you've never mined before, and have never had any previous tax events related to bitcoin?  Interesting question.

First off, Are you a mining company, or someone who purchased a mining rig, plugged it in and started mining?
Secondly are you a foreign national who is earning income within the US?

I speculate you have invested in nothing, but rather purchased equipment as a private individual.
I further speculate you are not paying someone else to mine on their equipment, in their commercial venue.

To sum up your question; You did not invest capitol in your privately held property. You pay for the power, and location of equipment from the sweat of your mining operation, so there is no capitol investment there. Therefore your entire question is moot, unless you are a foreign individual, who is paying a US firm to mine for you, and sending you the profits through a holding agent. An investment is money making money, not money purchasing private property. What and how you use your property to make a living is not income, therefore does not fall under title 26 IRS code.

No.    You have to have received it.  And have a business.

As the previous poster said, the answer would be "No" with this fact set. I was looking at the cap gains vs income issue and threw 179 there as a fillip if you met the business criteria. For section 179 specifically, the rules are pretty clear. The equipment must also be placed in service in the year purchased to qualify. Also, use must be more than 50% for the business. And of course, if your business makes a loss there is no deduction -- but an accelerated depreciation carry forward provision could apply.

With regard to the poster who suggested that use of your property to make a living is not income, I refer you to the definition of a trade or business found in Treasury Regulation 1.183-2. This summary is taken from Wikipedia but it's accurate. If what your doing sounds like this, then it's probably better to file as a business -- especially if there is substantial income. This is not tax advice by the way. But it should tell help you decide if you need to consult an accountant. Again, I hope it helps.

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Treasury Regulation 1.183-2(a) defines activity not engaged in for profit as "any activity other than one with respect to which deductions are allowable for the taxable year under section 162 (business expenses) or under paragraph (1) or (2) of section 212 (investment expenses)." While this definition tells the reader nothing more than not for profit activity means non-business and non-investment activity, subsection (b) of Regulation 1.183-2 provides 9 factors which may be used to determine whether an activity is, or is not, for profit:

1.    The manner in which the taxpayer carries on the activity: If the activity is carried on "in a business like manner and maintains complete and accurate books and records" it is indicative of the activity being for     profit.[3]
2.    The expertise of the taxpayer or his advisors: "Preparation for the activity by extensive study of its accepted business, economic, and scientific practices, or consultation with those who are experts therein, may indicate that the taxpayer has a profit motive where the taxpayer carries on the activity in accordance with such practices." [4]
3.     The time and effort expended by the taxpayer in carrying on the activity: If a taxpayer devotes a significant amount of time to the activity, it indicates the activity is for profit. The fact that a taxpayer does not devote a significant amount of time to the activity does not adversely affect the for profit determination so long as the taxpayer "employs competent and qualified persons to carry on such activity." [5]
4.    Expectation that assets used in activity may appreciate in value: If the taxpayer expects to profit from the activity, this indicates it is for profit.[6]
5.     The success of the taxpayer in carrying on other similar or dissimilar activities: "The fact that the taxpayer has engaged in similar activities in the past and converted them from unprofitable to profitable enterprises may indicate that he is engaged in the present activity for profit, even though the activity is presently unprofitable." [7]
6.    The taxpayer's history of income or losses with respect to the activity: "Where losses continue to be sustained beyond the period which customarily is necessary to bring the operation to profitable status, such losses, if not explainable, as due to customary business risks or reverses, may be indicative" that the activity is not for profit. "A series of years in which net income was realized would of course be strong evidence that the activity is engaged in for profit." [8]
7.    The amount of occasional profits, if any, which are earned: "Substantial profit, though only occasional, would generally be indicative that an activity is engaged in for profit, where the investment or losses are comparatively small." Also, "an opportunity to earn a substantial profit in a highly speculative venture is ordinarily sufficient to indicate that the activity is engaged in for profit." [9]
8.    The financial status of the taxpayer: "The fact that the taxpayer does not have substantial income or capital from sources other than the activity may indicate that an activity is engaged in for profit." [10]
9.    Elements of personal pleasure or recreation: "The presence of personal motives in carrying on of an activity may indicate that the activity is not engaged in for profit... It is not, however, necessary that an activity be engaged in with the exclusive intention of deriving a profit." [11]

With regard to these 9 factors, section 1.183-2(b) stresses that "no one factor is determinative" as to whether or not an activity is engaged in for profit, and that a determination cannot be made simply because the factors indicating a for profit activity outnumber the factors indicating a not for profit activity, or vice-versa.[12] Section 1.183-2(b) also emphasizes that this list of 9 factors is not exhaustive, so that "in determining whether an activity is engaged in for profit, all facts and circumstances with respect to the activity are to be taken into account."[2]

OK then, Where does the US Government get the right to impose a direct tax on the people? A business is an organization of people, no matter how it is run. Article 1, section 8 is where WE give congress the taxing powers. Treasury regulations only apply to the executive branch businesses, like the Ginnie Mae and Fannie Mae.
The sooner everybody stops listening to those who have a vested interest in the current tax scam the sooner you will realize you have been bamboozled. Companies like Block, Hewitt, Intuit and others, as well as the nation's, practicing accountants all make money from the peoples ignorance. In order to be free the people must be able to trade their life's time (which they own) for private property (Money, equipment, anything you can touch). The government has never been given the power to impose any form of capitation with out the apportionment restriction.

"...THE POWER TO TAX IS THE POWER TO DESTROY..."Brushaber v. Union Pacific R.R. Co., 240 US 1, 21 (1916)
....The Amendment in question does not bestow any new powers to Congress...Stanton v. Baltic Mining Co., 240 U.S. 103 (1916)

For better, more detailed, information on this issue I suggest you get the book INCOME TAX Shattering the Myths  by Dave Champion.

Those laws you are discussing do not apply the the public in general, or to private businesses, only to Government Corporations, Withholding Agents, and Foreigners, earning US derived INCOME.

A bitcoin mining operation is private not public, and therefore has no nexus to Subtitle A or C of the internal revenue code. Any body who says different is either profiting from this misconception, or is ignorant of the law, and has swallowed the BLUE PILL and want to remain in the bliss that slumber provides.

INCOME TAX Shattering the Myths  by Dave Champion

Right, I obviously didn't understand where you were coming from.

Just to be clear, my point was that if you want to follow the system as it exists today, then the rules are...x, y, and z. If you don't want to follow the system, then I don't have much to say. You're taking on a whole other set of risks. That's not my game so I'll forbear from offering an opinion. 

A tax attorney gave a talk at the recent bitcoin conference that covered his opinion on how bitcoin should be taxed in the US.  You can check it out when they get around to posting it.

In terms of mining, his recommendation was that yes you can take the 179 deduction provided that the equipment was placed into service in the year in which you are claiming the deduction.

Expenses such as electricity and the home office are valid deductions as well.

Any gains you make on the investment of bitcoins are subject to the same capital gains rules as they are for stocks and similar investments.  You'll get the best capital gains rate if you hold for 1 year + 1 day.

In terms of income, anything you mine is subject to income tax whenever you convert the virtual currency into fiat.  So if you hold your mined coins for 5 years, your business will show no income in those first 4 years.  However if you sell all your coins for USD in that 5th year, you will then owe income tax on the entire amount.

His recommendation was to sell the coins in the year that they are mined, immediately buy them back, and then hold them for a year.  This way you only pay long term capital gains tax should the value of bitcoin rise significantly.

Happy to pass on the contact info of the attorney who gave the talk.  Just send me a PM.

Excellent information. I will come back to this page again come tax season.

In the meantime I'm just keeping really good records.