tax liabilities on a bitcoin-only business arrangement?

[amspir]

Assume the following business arrangement:

A fund is established for investors to pool funds for the purchase of a bitcoin mining rig.   Investors contribute bitcoins to the fund.

The mining rig is purchased in bitcoin and delivered to an operator.  Any remainder of the fund is redistributed back to the miners according to share.

The operator runs the rig.  Profits from mining are pooled into a fund.

Periodically, this fund pays the operator a reimbursement in bitcoin using current exchange rates that compensates the operator for the electricity and any other overhead, plus a commision from the net profit.

The remainder of the net profit is distributed to the investors according to share.

This operation continues until the mining rig is no longer profitable to run.

So in this arrangement, would it be sufficient for investors to pay their tax liability as capital gains from when they convert their bitcoins from and to USD?

Would the operator have to pay a tax liability?  (As a business that accepts the bitcoin reimbursement as gross income, then deducts the overhead costs for electricity and other overhead?)

Assume USA jurisdiction, but discussion of other tax jurisdictions is welcome.

[Chucky1976]

I personally don't see how they can tax it since it is not federally regulated. That is just my personal opinion. No verification of transactions.

[amspir]

I personally don't see how they can tax it since it is not federally regulated. That is just my personal opinion. No verification of transactions.

My idea is to make investment anonymous.  Investors would supply a receiving address along with their payment.  Investors would only be referenced by their receiving address.  To encourage trust in the operator,
the operator would regularly post a semi-public record of payments and mining profits which would be available to the investors.  Investors should be able to verify the records, otherwise it looks like a shady scam.

[Thanatopsis]

Well, wherever you are doing this you are probably going to be liable for income taxes at least. In the US (and most other countries) income is defined as an economic gain not exclusively (but including) as an increase in cash. Specifically the US tax code applies to "income realized in any form, whether money, property, or services" which clearly includes Bitcoin.

So, if you do this in the way you specify here will have to pay corporate tax on the corporate income of the "investment vehicle" (depending on how you structure this) and as a little extra, possibly violate a boatload of regulations regarding the issuing of securities (depending on how you structure your investment vehicle). You may also have to collect withholding taxes in the name of the IRS from the income of your investors.

If you structure it as a partnership for instance, the IRS also requires every partnership to file a yearly form listing all partners (including full name and address) and their share of the income to check that against the tax returns of each partner. If they are a foreign partner, you have to withhold taxes for the IRS to make sure they actually pay up and report the income.

Just because you want to do everything in Bitcoin does not change the tax treatment of the whole thing. If you make profits in Bitcoin and distribute these to investors of course that is taxable income (both personal and possibly corporate), depending again on how you structure the investment vehicle. My advice: speak to an accountant before you do something like this...

[Bit_Happy]

Clearly liable for income taxes when you convert to paper money, the rest is still developing.

[amspir]

Just because you want to do everything in Bitcoin does not change the tax treatment of the whole thing. If you make profits in Bitcoin and distribute these to investors of course that is taxable income (both personal and possibly corporate), depending again on how you structure the investment vehicle. My advice: speak to an accountant before you do something like this...

Are there limits on what has to be reported?   I'm talking about an investment in purchasing a $7000 USD miner, which would require about $3 worth of electricity a day.  At the current network difficulty and price of BTC, the miner should pay for itself in 3 months.