Solo mining would be rough.  According to my deepbit account: "Number of blocks found by you: 0"

It can only be investment income, not just any income. It isn't a big deal or anything so long as you actually have an unrealized gain.  You'll get to take the deduction on the gain for the pieces you sell to service the debt, and any residual interest will carry forward indefinitely until you have other investment income or sell the balance of the bitcoins.

Now you're thinking, that is one of the tricks rich people use.  I would caution you that investment interest is only deductible to the extent of your investment income though.  The unused portion does carry forward to future years.  But we have clients paying ten of thousands of dollars a year in investment interest and they can't deduct any of it because they have nothing to offset it with.

And five years ago I was pretty much in the same mindset trying to come up with crazy schemes involving gifts and gambling losses to try and avoid paying taxes on 60k in poker winnings. Since all my income was gambling income I was going to make like $10,000 bets with friends on things I'd be guaranteed to lose so I could write it off against my gambling income.  They would be in low or zero tax brackets and owe nothing on the win, and then gift it back to me.  But then I talked to an accountant who told me there was no point because even though the form of the transaction was there, it couldn't possibly stand up in an audit.  There's just not a lot individuals can do besides outright cheating.  All the loopholes are pretty much for the businesses and the super wealthy.

That doesn't work.  First, there is an IRS doctrine you should be aware of called substance over form.  Basically it doesn't matter how you attempt to structure a transaction (the form) you still get taxed on the actual economic substance of the exchange.

Second, the gift situation applies on assets for which you have already paid taxes.  So I earned $100,000 in wages, paid my taxes, and I can gift you $13,000 of it without paying any additional tax.  I still paid tax on my entire $100,000 though, and it would work the same way no matter if I gifted stock, gold, cash, bitcoins, etc. it doesn't matter.  The gift tax is an additional tax on top of everything else, much like the estate tax.

The only way I can think of to be able to be able to legally have a tax free gain on capital assets is to die, and leave an estate with just under the minimum taxable amount.  All your assets get stepped up to fair value in your estate, but you only pay tax if if the total estate if over a certain amount.  At the federal level it's currently $5 million, but most states have their own estate taxes on top of that, so in my state it's $1M.  So here's some free tax planning:  Get your gran to start mining bitcoins and then leave them to you in her will.  If they go way up you can spend them tax free!

http://www.youtube.com/watch?v=Maz9ddxEQnM

1. Yes, it's taxable for both to the extent that what they receive exceeds their costs.  See my example about doing your taxes.  You can see it right on the IRS webpage: http://www.irs.gov/taxtopics/tc420.html

"Bartering occurs when you exchange goods or services without exchanging money. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of goods and services received in exchange for goods or services you provide must be included in income in the year received."

2. Gifts are taxable if you give more than $13,000 to any one person in any year.  There is more to it than that, but suffice to say for ordinary gifts between family members for birthdays and Christmas the tax doesn't enter into it.  The gift tax is really there to stop people from being able to gift all their assets before they die and avoid the estate tax.

3.  A tax lawyer or a CPA could never make that argument because the law is very clear.  All realized gains are taxable, no matter what source the income might be derived from.  You can come up with whatever contrivance you want when you engage in these transactions, but that doesn't make it a nontaxable event.  And jumping from having a tax lawyer defending a certain position on a tax return to knowingly filing a fraudulent return and blaming it on software is a huge leap and they shouldn't even be in the same conversation.  I would lose my license if I knowingly signed any fraudulent tax return.

ROI

They might pay off, they might not.  It depends on how you estimate future difficulty growth.  If everyone is rational about it then difficulty growth would slow to a crawl if new hardware is not profitable.  But if that shift happens it actually does become profitable again for all current and future miners, and so more people will jump on.  It's like a pendulum and it's tough to know where the equilibrium will end up.  Logically, difficulty should reach the point where it is just breakeven considering electricity and depreciation, but that's in an ideal world.

It's still income in any case if you buy something with appreciated bitcoins.  If you bought a bitcoin for $10 and exchanged it a month later for something worth $20 (cash, goods, or services) you have a $10 gain, there is no way around that.  Bartering transactions are still taxable.  

Let's say you bought bitcoins when they were a penny each or mined them, so either way your cost basis is negligible.  If you pay me 10 bitcoins right now to do your taxes and bitcoins are worth $17 each at the moment, we are actually both taxed on $170 in income.  I am taxed on it because I performed a service and received $170 in compensation for it.  It isn't 100% clear right now how the IRS will classify bitcoins, but if you think they are either a currency or a capital asset then I should recognize the $170 in income once I receive the payment, regardless of whether I sell the bitcoins or not.  The $170 becomes my basis in the bitcoins, and if I later sell them for $150 then I have a $20 capital loss, if I sell for $200 I have a $30 capital gain.  In the same way you are taxed on $170 in income because you received the $170 service and gave up a capital asset for which you had effectively zero cost basis.  You still have to recognize the gain whether you convert the bitcoins to cash and use that to pay for the service or if you straight up trade bitcoins for the service.

Jurisdiction does not matter at all.  What matters is what you got in exchange for the bitcoins and what you had in them (your basis).  Miners have zero basis so 100% of the value is income, but they can also write off expenses incurred to produce the bitcoins so effectively they only get taxed on their profit.  Traders get taxed on the fair value of goods or services they receive in excess of how much they paid for the bitcoins they traded.

What brand of 5830 do you use?  I've been 100% stable setting mine at 925mhz clock, 300mhz memory using sapphire 5830s and ubuntu as my OS.  I flashed mine using RBE too.  I haven't really tried fine tuning but 975 and 950 clocks crashed within hours.

Pegging one currency to another requires heavy intervention and market manipulation by a central bank, like how China pegs their currency to the dollar.  They have trillions of dollars of US currency so whenever their currency falls by more than a percent or so against the dollar they can prop it up by buying yuan with dollars.  Conversely when their currency rises vs. the dollar (which is definitely what it would be doing in a free market) they can just buy more US dollars with yuan and cause it to drop back down.  But even they can't keep their currency down forever, and they've had to gradually let it rise.  Bitcoins would of course do the same thing in the very long run, so it would be impossible to peg it any currency.

They sure would.  The IRS taxes all income, broadly construed, from whatever source derived, and it doesn't matter if you receive cash, merchandise, or services in exchange for your bitcoins, it's still taxable.  Most people would respond to this with "but how would they know?", and of course they wouldn't be able to in most situations, but telling people how to cheat on their taxes is not tax advice regardless of how likely it is to work.

Yes, you can either take the expense of the rig over three years or take the entire thing in the year purchased, but generally it's best to take the entire thing in the first year, otherwise whatever expense you didn't take this year will end up as taxable income.

Filing schedule C is how you classify it as a business.  There is no paperwork or anything you need to do register before simply filing your taxes.  Take a look at the form: http://www.irs.gov/pub/irs-pdf/f1040sc.pdf

Sales goes on line 1, which like I said would just be the dollar value of the bitcoins you've sold, depreciation goes on line 13, and you'll probably have some utilities, supplies, and other expenses to further reduce your income.

I wouldn't say that.  Paypal obviously doesn't get taxed because it's just a means of transferring money, but you still have to pay taxes on earnings regardless.

The biggest thing regarding whether you're going to get caught for cheating on your taxes is when you move large sums of money around in short periods of time.  I threw $10k out there just because of the law where banks report transactions of that amount to the IRS.  It's not really a cutoff where your taxes get more complex.  It's just the more revenue the IRS sees coming in the more likely they are to take a closer look at your expenses.  And if you don't keep good records you could be screwed.  For example if you paid $20k for equipment, utilities, internet, etc. and cashed out $25k in bitcoins you are only required to pay taxes on the $5k in profit, but you report everything.  And then the IRS if they are suspicious will send you a letter asking you to come up with receipts to justify those expenses.

Really big mining operations, which there are probably less than 5 that would meet this criteria, would run into a situation where they cannot write off all their equipment purchases in the year they bought them, but instead would have to take the expenses over a three year period.  So if you bought $1.5M in equipment and generated $2M in bitcoins, the IRS would only let you take $500k in expenses for the equipment and force you to pay tax on $1.5M in profit even though you were only up $500k in cash.  That's the type of situation where it will be tricky, but if you have a small amount of equipment you don't really need to worry about it.  Even if you were an early adopter and made $100k on $1k of equipment your taxes are still easy.

That's one possibility of what will happen, but we've yet to see for sure whether difficulty will continue to scale that quickly.

Oh well, it looks like it's time for me to give up Bitcoin then.  Maybe it was for the best.  Now I...I finally have time to do what I've always wanted: write the great American novel. Mine is about a futuristic amusement park where dinosaurs are brought to life through advanced cloning techniques.  I call it "Billy and the Cloneasaurus."

1. I don't think Wal-Mart is analogous because people can simply shut off their rigs if they're losing money, they don't have to sell them.  Sabotaging yourself just to put someone else out of business couldn't possibly be a viable plan with BTC unless you could somehow end up with over 50% of the hashing power and control the network.  Other than that being a big player doesn't really have any advantage like economies of scale, so it wouldn't be worth losing money to get there.

2. Your bottom line is net income.  If you do things that are negative expectation it hurts your bottom line.  Just because someone could afford to burn money doesn't mean they would.

3. I've never heard anyone say "that's a lot of iron" but right now I think I have 17 5830s online.  It would be a lot more, but GD70s are pieces of shit and I've had 3 arrive DOA so I have a lot of idle capacity.

Hordes of panicky people seem to be fleeing Mt. Gox for some unknown reason.  Professor, without knowing precisely what the danger is, would you say it's time for our viewers to crack each other's heads open and feast on the goo inside?

Forget to switch user ids before posting the second spam message?

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