"Hobby losses" wtf?
The basic idea is that hobbies are generally money losing operations. If they were money makers, they'd be businesses, not hobbies.
But hobby profits are taxable. For example, if you raise show cows as a hobby, and sell a prize winner for $15,000, you have a $15,000 taxable gain. It wouldn't be fair to tax you fully on that gain and not allow you to deduct any of your expenses. Imagine if it cost you $20,000 last year to buy food and supplies for that cow. Is it fair to charge you a $15,000 taxable gain next year when you sell it?
But it's also not fair to let you deduct the $20,000 when you incur it. What if you never sell that cow? Hobbies are one of the ways we spend money; if they were always deductible, everything would be deductible. (My hobby is driving expensive sports cars. Maybe one day I'll make a profit at it, but until then, I need to deduct the costs of all my sports cars.)
Hence .. hobby losses. When you have hobby losses, you can use them to offset hobby profits (either in that same year or carried over). So if you spend, say, $20,000 buying food and supplies for your cow, you can report that as a hobby loss. Then, next year when you sell the cow, you can use the carried over loss to offset the $15,000 taxable sale and thus not pay any taxes as it would be a loss overall.
If you mine Bitcoins and it's not a business, it's a hobby. If you have losses (electricity, equipment) you should be able to carry them over as hobby losses and use them to offset an eventual profit when you sell your Bitcoins. However, I think you're okay even if you don't report them because you should be able to deduct them anyway as a cost basis. (When you sell something, you can generally deduct what it cost you to acquire it.)
http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_183
