Bitcoin, Virtual and Crypto Currencies, Mining Pools, and the IRS

[CaptainAK]

I will preface this with I am not a lawyer or an accountant, just a guy, so am I reading this wrong? Oh and this really just affects Pool Operators in the US....  for the moment anyway.

These are from the actual IRS notice.. http://www.irs.gov/pub/irs-drop/n-14-21.pdf

"Q-10: Does virtual currency received by an independent contractor for performing services constitute self-employment income?

A-10: Yes. Generally, self-employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee. Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax.

See FS-2007-18, April 2007, Business or Hobby? Answer Has Implications for Deductions, for information on determining whether an activity is a business or a hobby."

and

"Q-13: Is a person who in the course of a trade or business makes a payment using virtual currency worth $600 or more to an independent contractor for performing services required to file an information return with the IRS?

A-13: Generally, a person who in the course of a trade or business makes a payment of $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to the IRS and to the payee on Form 1099-MISC, Miscellaneous Income. Payments of virtual currency required to be reported on Form 1099-MISC should be reported using the fair market value of the virtual currency in U.S. dollars as of the date of payment. The payment recipient may have income even if the recipient does not receive a Form 1099-MISC.

See the Instructions to Form 1099-MISC and the General Instructions for Certain Information Returns for more information. For payments to non-U.S. persons, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities."

So basically if you are mining a pool, you are an independent contractor, and if an independent contractor makes more than $600 worth of convertible currency from a pool in a given year, the owner would have to send them a 1099-MISC. Plus there are additional rules for withholding to foreign entities.

This means that (at least for pools in the US) that the average pool owner would have some SERIOUS tax work to do under these new rules and they would need to start following KYC guidelines for user registration. The work involved could be mitigated by some of the popular pool software, like MPOS, adding more registration info requirements (KYC) and keeping a log of payouts in the db that can be queried when needed.

No question involved here, just an observation and maybe a call for people to give their opinions as well as get the ball rolling on possible future updates to Pool Mining platforms.

[roslinpl]

So we can sayvin few words : irs new rules sux?

Perhaps it can help with less number of trolls too but whats the price for that ..

[CaptainAK]

They potentially suck for anyone connected to a US based mining pool, whether you are a US citizen or not. I am willing to bet miners outside of the US are not eager to give up their personal info and I bet pools owners are not happy about having to collect KYC data for every miner on their pool and creating 1099-MISC for all miners who make over $600 US in a year.

[DPoS]

that's why System D exists and grows bigger and bigger

http://www.foreignpolicy.com/articles/2011/10/28/black_market_global_economy

 "System D is a slang phrase pirated from French-speaking Africa and the Caribbean. The French have a word that they often use to describe particularly effective and motivated people. They call them débrouillards. To say a man is a débrouillard is to tell people how resourceful and ingenious he is. The former French colonies have sculpted this word to their own social and economic reality. They say that inventive, self-starting, entrepreneurial merchants who are doing business on their own, without registering or being regulated by the bureaucracy and, for the most part, without paying taxes, are part of "l'economie de la débrouillardise." Or, sweetened for street use, "Systeme D.""

[roy7]

I think you are misreading this. Basically they are saying if you pay someone with bitcoin instead of USD you still treat it the same way. 1099 still required over $600, etc.

Miners are not employees or independent contractors for the pool operator. If anything, it is the pool operator who is performing a service for the miners.

If you have a $6000/yr housekeeper and start paying them in BTC instead of USD it has no effect on your need to report their pay on a 1099 form/etc, that's the point of the Q&A you quoted.

[eleuthria]

Pools are service providers for miners, not the other way around.  Miners can mine on their own, or they can shop around for the pool service that fits their needs.  Pools provide miners with reporting and notification tools, while also allowing miners to create an arrangement where if any miner of a pool finds a block they are agreeing it will be spread between all miners, with the pool doing the job of accounting for it and making sure everybody gets their cut.


As a miner, you are paying the pool for its service in most cases, either as direct fees, or optional "donations" (which would still be classified as fees for tax purposes).  It is far more logical for the miner to be the one sending a 1099 to the pool for the services they paid for.  Of course, with the average pool fee being 0-2%, you'd have to have mined approximately $30,000 worth of BTC per year for that to be the case.  And lucky for BTC Guild miners, the pool service is part of a corporation, and you don't have to file 1099s for money paid to a corporation for services (except for certain exceptions such as lawyers and accountants, architects, engineers, and a few others).

[CaptainAK]

For the sake of argument (discussion), if I owned a mine (wallet) and I wanted to get a group of people (a pool of miners) together to mine it, wouldn't that make me the employer since the mine (wallet) is one that belongs to me? In that situation, wouldn't this be like any other business where the owner has the primary ownership of the resources, invites employees to help produce a product (coin), takes a cut of the profits off the top, and pays his employees (independent contractors) from what is left over?

A miner CAN solo mine, but then he/she falls into the self-employment tax arena. Mining on a pool is essentially working for a mining corporation to receive a cut of the mined product. It is the mining operation (the owner of the wallet/mine) that generates the coin and has primary responsibility for the taxes.

There are already a few places starting to discuss repercussions of the new rules clarification:

http://www.verticaladvisors.com/articles/bitcoin-the-irs-stated-it-is-taxable-now-what/

If you go with the scenario of the miners paying a pool for services (which would mean that the miner is a legal part owner of the wallet, giving him/her specific rights concerning the future of that wallet), it would probably mean that every miner would have to keep track of their own payout amounts, time, date, and the current BTC/coin value at that moment. That will rarely if ever happen. I only say that miner would be a part owner of the wallet, because for the pool to be considered a service, it would have to be hosting a miner-owned wallet and providing a stratum interface. If the pool owned the wallet outright, then the miners would be employees/independent contractors.

I think the only way to know for sure would be to have the IRS define if miners, who own no part of the mining operation (if they do, they are employees), are actually buying a service or providing labor as an independent contractor.

I am fairly certain that many people will dismiss this and I very well may be wrong about it (I hope so), but if I am not, things may get messy. I am not saying this to start a war of any sort, but if I can see it this way, you can be dang sure the IRS will look at it like that also.

[Asinine]

Just a heads up:  Calling a potato a potahtoe and reworking the language after the fact to insist it's a fruit instead of a vegetable is likely not going to impress anyone.

[LostDutchman]

According to the ruling, solo miners could face as much as a 40% tax penalty, depending on thier tax bracket.

For sure the Self Emlployment tax of about 13% and Medicare Tax of about 3% will be due.

Corporations do not face this however.

My %.02.

[Ridicuss]

According to the ruling, solo miners could face as much as a 40% tax penalty, depending on thier tax bracket.

For sure the Self Emlployment tax of about 13% and Medicare Tax of about 3% will be due.

Corporations do not face this however.

My %.02.

Dutchman, Nice to see you again. I am really missing something here. Why would income tax from coins gained from solo mining be any higher than income tax from coins from a pool.  Isnt it all income (cost basis calculated) from the time it was received all the same?

BTW I had a hefty tax bill for 13. I did not become a corporation until mid Dec. Made allot of mistakes last year that I paid dearly for but understand the whole thing much better now..

Best Regards,

M

[LostDutchman]

According to the ruling, solo miners could face as much as a 40% tax penalty, depending on thier tax bracket.

For sure the Self Emlployment tax of about 13% and Medicare Tax of about 3% will be due.

Corporations do not face this however.

My %.02.

Dutchman, Nice to see you again. I am really missing something here. Why would income tax from coins gained from solo mining be any higher than income tax from coins from a pool.  Isnt it all income (cost basis calculated) from the time it was received all the same?

BTW I had a hefty tax bill for 13. I did not become a corporation until mid Dec. Made allot of mistakes last year that I paid dearly for but understand the whole thing much better now..

Best Regards,

M

A corporation pays tax on its profits, not income as it goes as does an individual, therefore if the corp's money is all spent out at the end of the tax year, there is not corp tax due.

Now depending on how the money has been exrtracted from the corp there will be at least some tax due but there are ways to minimise even that.

Glad you are learning about legal tax avoidance which is not nearly the same thing as tax evasion.

Tax avoidance by following the rules is 1000% legal.

Best wishes and thank you for you kind comments.

My $.02.