Tax Man

[bcpokey]

For those who have been or going to begin mining, how do you handle your operations for reporting?

Is there a more effective way of reporting other than simply Selling XX coins for YY fiat = income - cost of electricity/hardware to generate them? Do you have to account at some level for the coins you've generated and stashed away in your wallet?

If you sell/rebuy/sell after you generate coins, do you take capital gains/losses on the difference of what you're buying/selling after generation? How does one account for this (usually brokers generate a statement I believe for cap gain/loss)?

I guess it doesn't need to be an exhaustive tax treatment, but I am curious how others are handling their gains/losses at the hands of BTC gods. I imagine others are thinking about this with the upcoming ASIC release as well.

[FrogBBQ]

Maybe you should read this. Looks to me to be a big can of worm for IRS at present though.

[bcpokey]

Maybe you should read this. Looks to me to be a big can of worm for IRS at present though.

Interesting article, but mostly reflects my original post, in terms of not really knowing how to approach the subject.

The organization published its first memorandum, "Staying Between the Lines: A Survey of U.S. Income Taxation and its Ramifications on Cryptocurrencies," to provide some legal insight on the taxability of cryptocurrencies such as bitcoin. In the memo, the organization argued that crytocurrencies are compatible with tax regulation structures. It also stressed the importance for taxpayers to determine on their own whether taxes are due on a bitcoin-related transaction based on whether one has "experienced a realization event."

Such events would include selling goods, like BitBrew, or selling bitcoins themselves for cash. In instances where a taxpayer has provided a service in exchange for bitcoins, a realization event has probably occurred, and any gain or loss would likely be calculated using fair market values for the service provided, according to the memo.

"For users of bitcoin who may be concerned about being impacted by current tax policy, I would recommend that if you have any inkling that you may be under a tax jurisdiction, you should certainly do your best to abide by whatever rules you think you're impacted by and play it on the safe side," Elias said. "Just be cautious with it."

The taxpayer should determine on their own whether taxes are due, and abide by whatever rules you think you're impacted by, hmm.

Well, as to the moment it seems like my original guess is the safest, I was curious if anyone had come up with a workable rationale to alternate tax treatments other than simply declaring money taken from exchanges as income, which would I think stand up the best to any kind of scrutiny.


I don't think this is an entirely irrelevant question though, especially as I contemplate the jump into ASICs, if I were to plunk thousands of dollars into hardware that could potentially generate more (tens of) thousands of dollars, it becomes something that I expect the IRS would be quite interested in. And can of worms or no, when the IRS comes along auditing, I believe the burden lies on the taxpayer to defend their choices.

[MinorMiner]

Maybe you should read this. Looks to me to be a big can of worm for IRS at present though.

From the article: "The lack of response by governments at the moment could be due in part to the relatively small bitcoin market, which hasn't reached a critical mass yet. However, all that could change once the number of coins derived by mining drops by half in November, which, in Elias's opinion, could create a huge spike in value, perhaps reaching as high as $1,000 per bitcoin. "

That would be frickin awesome .. Goodbye mortgage .. lol.

[bcpokey]

Maybe you should read this. Looks to me to be a big can of worm for IRS at present though.

From the article: "The lack of response by governments at the moment could be due in part to the relatively small bitcoin market, which hasn't reached a critical mass yet. However, all that could change once the number of coins derived by mining drops by half in November, which, in Elias's opinion, could create a huge spike in value, perhaps reaching as high as $1,000 per bitcoin. "

That would be frickin awesome .. Goodbye mortgage .. lol.

Would be nice, but very unlikely to happen, that guy is a bit off the rail imho. There's no reason for a 100x valuation increase in coins, due to a decrease in mining reward.

[Stephen Gornick]

If you sell/rebuy/sell after you generate coins, do you take capital gains/losses on the difference of what you're buying/selling after generation?

You'll probably see varying opinions on this.

There are a few ways that it could be done properly with different tax consequences.   You mostly need to be consistent -- like for determining the cost basis you might use the monthly closing price each month (rather than picking whichever numbers provide you the results you are looking to obtain).  

How does one account for this (usually brokers generate a statement I believe for cap gain/loss)?

I doubt most miners keep accurate records on this.  It could be simple if the miner kept a separate wallet for mining payouts and the only trading was converting those funds to USDs in a separate exchange account.    Then you simply use the trading records as revenue at whatever the trades show and at the end of the year whatever is left in the wallet is recognized as revenue use the spot price at that time.

Here's a related article on the Bitcoin wiki:
 - http://en.bitcoin.it/wiki/Tax_compliance

[bcpokey]

If you sell/rebuy/sell after you generate coins, do you take capital gains/losses on the difference of what you're buying/selling after generation?

You'll probably see varying opinions on this.

There are a few ways that it could be done properly with different tax consequences.   You mostly need to be consistent -- like for determining the cost basis you might use the monthly closing price each month (rather than picking whichever numbers provide you the results you are looking to obtain).  

How does one account for this (usually brokers generate a statement I believe for cap gain/loss)?

I doubt most miners keep accurate records on this.  It could be simple if the miner kept a separate wallet for mining payouts and the only trading was converting those funds to USDs in a separate exchange account.    Then you simply use the trading records as revenue at whatever the trades show and at the end of the year whatever is left in the wallet is recognized as revenue use the spot price at that time.

Here's a related article on the Bitcoin wiki:
 - http://en.bitcoin.it/wiki/Tax_compliance

Ahh, danke for the link. The wiki has evolved since I last set foot in bitcoin world. Well it sounds like some accountant has taken a look at these issues, and thrown his hands up a little bit as well, at least on the matter of mining.
But it looks like the "safe" route is fairly cut and dry as you mention, and if you wish to cap gains by trading, you need to make a clear books trail.

Appreciate the feedback, as you increase your investment, so needs you increase your "above the boardness" it seems.

[FrogBBQ]

It seems that this lawyer has been going through the bitcoin & taxes issue here in a booklet you can get for 0.429 BTC.

[bcpokey]

It seems that this lawyer has been going through the bitcoin & taxes issue here in a booklet you can get for 0.429 BTC.

I was going to be dismissive of this, as usually these guides just tell you everything you already know dressed up with pretty pictures and dire warnings, but I learned something even in the preview video (FBAR? bah), so this might be a valuable find after all. Thank you for sharing this.

Makes me kind of sad how complicated it is to be a law abiding citizen.

[hardcore-fs]

Hong Kong Solution.....
Since it is currency/market speculation any profit/loss is NOT the business of the Tax Authority, UNLESS you are a company.

It is the same as the Stock market, any money you make personally and not as a company is YOURS and is NOT taxed.

HC

[DanielleEber]

List mining as either "Accounting Services" or "Database Services".  This is on the premise that what mining does is maintain the Bitcoin account books (the block chain).  Mining rewards are merely a data entry in the account book.  It becomes income for tax purposes when you get local currency or some other barter value out of your data entry.  The IRS calls this "constructive receipt".  Compared to an independent accountant who does work for other people, maintaining paper accounts or a spreadsheet and making entries for his own time are not income yet.  It becomes income when he gets a payment from someone that he can go spend elsewhere.

Like any business, you can deduct expenses for hardware, software, networking, and utilities.

[bcpokey]

List mining as either "Accounting Services" or "Database Services".  This is on the premise that what mining does is maintain the Bitcoin account books (the block chain).  Mining rewards are merely a data entry in the account book.  It becomes income for tax purposes when you get local currency or some other barter value out of your data entry.  The IRS calls this "constructive receipt".  Compared to an independent accountant who does work for other people, maintaining paper accounts or a spreadsheet and making entries for his own time are not income yet.  It becomes income when he gets a payment from someone that he can go spend elsewhere.

Like any business, you can deduct expenses for hardware, software, networking, and utilities.

That is certainly a novel approach, and I think I like it. I'll probably have to consider the justifications a little more seriously, but that's definitely an interesting way to approach it.
Thanks for the suggestion

[eldentyrell]

List mining as either "Accounting Services" or "Database Services".  This is on the premise that what mining does is maintain the Bitcoin account books (the block chain).
...
Like any business, you can deduct expenses for hardware, software, networking, and utilities.

This is pretty much what I do -- report it as income with a suitably vague heading.

I was at one point tempted to report it under "income from illegal activities" out of an abundance of caution.  But I suppose putting anything other than "zero" in that box is pretty much begging for an audit.

[DanielleEber]

This is pretty much what I do -- report it as income with a suitably vague heading.

The important question is *when* you report it.  I have made money in the Second Life virtual world for the last 6 years, and it has it's own virtual currency used internally.  But the owners of Second Life reserve the right to delete your account for any reason.  So my balances in virtual currency are not "in my hands" yet, they are just a data entry on their servers.  What I do is report cash out to US dollars at the point it reaches PayPal from Second Life.  At that point I have "constructive receipt" in the sense the IRS uses it, meaning I can spend the PayPal balance on other stuff, or deposit it in checking like I would a paycheck from a job.  So far, the IRS has not questioned my returns.

An issue with reporting accumulated bitcoin mining balances as income is what value to put on them, since that varies constantly.

[firefop]

When to report is the correct answer.

Personally, I cash out enough to pay my electric bill. I pay income tax on this without reducing it in anyway.

The btc piling up in my cold storage wallets and won't be reported unless and until I turn them in for fiat.

[jjiimm_64]

When to report is the correct answer.

Personally, I cash out enough to pay my electric bill. I pay income tax on this without reducing it in anyway.

The btc piling up in my cold storage wallets and won't be reported unless and until I turn them in for fiat.

You would make out better reporting the earnings NOW on btc earned.  Then when you sell later, you only pay capital gains.

ex:
earn 1000 btc and stash in cold storage till btc hits 50$

ex1: 
  pay income tax now @ 12usd: 0
  pay income tax after selling: 50,000 usd:  ~30%  pay 15,000 usd tax
  total tax paid: 15000 usd.

ex2:
  pay income tax now @ 12usd: pay 3600
  pay income tax after selling (capital gains) 50,000 ~15% pay 7500 usd tax
  total tax paid: 11100

[firefop]

You would make out better reporting the earnings NOW on btc earned.  Then when you sell later, you only pay capital gains.

ex:
earn 1000 btc and stash in cold storage till btc hits 50$

ex1: 
  pay income tax now @ 12usd: 0
  pay income tax after selling: 50,000 usd:  ~30%  pay 15,000 usd tax
  total tax paid: 15000 usd.

ex2:
  pay income tax now @ 12usd: pay 3600
  pay income tax after selling (capital gains) 50,000 ~15% pay 7500 usd tax
  total tax paid: 11100

I disagree - 15% cap gains is very likely to increase to 30% or even 40% before the end of obama's term in office. In addition to that, we don't know what the gain on btc/usd will actually be... we can assume up but just don't know how much. In addition I can continue purchasing goods and services using bitcoin I've saved - with it never having to be reported, legally bitcoin has a legal status. Finally, I might be moving out of country soon, in which case my tax liability status will change according to whatever laws are in the place I move to... in which case, why pay now when I could possibly have much reduced income tax rate later on.

[jjiimm_64]

You would make out better reporting the earnings NOW on btc earned.  Then when you sell later, you only pay capital gains.

ex:
earn 1000 btc and stash in cold storage till btc hits 50$

ex1: 
  pay income tax now @ 12usd: 0
  pay income tax after selling: 50,000 usd:  ~30%  pay 15,000 usd tax
  total tax paid: 15000 usd.

ex2:
  pay income tax now @ 12usd: pay 3600
  pay income tax after selling (capital gains) 50,000 ~15% pay 7500 usd tax
  total tax paid: 11100

I disagree - 15% cap gains is very likely to increase to 30% or even 40% before the end of obama's term in office. In addition to that, we don't know what the gain on btc/usd will actually be... we can assume up but just don't know how much. In addition I can continue purchasing goods and services using bitcoin I've saved - with it never having to be reported, legally bitcoin has a legal status. Finally, I might be moving out of country soon, in which case my tax liability status will change according to whatever laws are in the place I move to... in which case, why pay now when I could possibly have much reduced income tax rate later on.

All valid reasons to do it the way your doing it.  Isn't diversity a wonderful thing.

I do not think they will be raising cap gains any time soon...  Obama having a hard enough time just getting 2% to pay a little more salary tax, not even touching the cap gains stuff.

[bcpokey]

I didn't want to step into this thread too much, because I mostly wanted to hear ideas from other people, but I have to say something...

The notion that because "that durned Obama" is in office, capital gains tax rate will go up to 40% is ridiculous. It hasn't been 40% in the past 50+ years (don't know exactly when it has ever been that high). It is currently 15%, a historic all-time low. The inertia working against a 25% increase is immense. Obama himself isn't even talking about 40%, last I heard he was down to 20%, because he didn't gain traction on ANY increase in his first term. Maybe in the future it will go go up as the US faces more and more fiscal failure, but it's certainly going to be one of the later things to worry about.

That said, in my opinion by the time BTC reaches $50/coin, in order to get there it would require much broader adoption in actual usage, perhaps necessitating less withdrawal to fiat.

So both sides still have a point. Carry on.