Regarding Taxes on Mining (USA)

[dontListen2me]

This appears to be a topic not normally considered here.

If I am mining in any one of the the United States, what tax forms should I file?
Am I my own business? Is Sole Proprietorship assumed by the government?
If mining is considered a business, does anyone have instructions for how to arrange one's situation to be properly legal?

If mining is not considered a business, and taxes should be filed, does someone know what to do, or where to find advice?

If I were to take a stab in the dark I would guess that the default answer is pay out the wazoo and ask a lawyer.
I just really don't want to be audited. Never have, and I'm not trying to either.

Thanks for any help provided.

[btcminer]

If you're making enough money from mining, yeah, definitely consult a lawyer.

Otherwise I doubt you're going to get in trouble. Unless they're just out to get you for using bit coin period. (In which case, only a lawyer or someone very skilled legally can help you anyway.)

Otherwise, it's probably something similar to recreational gambling. As long as it's 'recreational' you should be safe. At least until further notice (e.g. government takes a stance on bitcoin).

I think you're  more likely to end up with nothing from mining (because the government decides to ban the exchange of bitcoins for cash) than to get in trouble with the IRS for mining.

[Auspician]

I have a bit of legal experience in the US.  My understanding is that taxes are only paid upon US dollar based earnings.  Meaning that if you were to cash out BTCs for USD, you could be liable for income taxes on those USD funds (unless it is less than $500 per year).  However, one of the main benefits of BTCs is that mining and trading is entirely beyond the jurisdiction of any government, both legally and technically. 

My suggestion would be to not report BTC based earnings unless it is a very large amount.  ie: if you can't afford to pay a lawyer to determine exactly how this should be done, then odds are you aren't making enough money for most of the tax laws to apply to you or to be on the government's radar. 

On a personal note, if you start paying taxes on BTC based earnings it will likely encourage the IRS to start auditing other people who are involved in the BTC community.  I'd rather play a wait-and-see game to determine if the IRS will start going after people, and only take appropriate action at that time. 

For the moment, BTCs are a tax and duty free somewhat-untraceable international currency.  I don't know about you, but I'd like to keep it that way.

[je_bailey]

I'm a die-hard pro-tax liberal so I'm all about reporting any dollar profit I make as additional income.

Saying that, I don't believe you have to go into details of how you got it unless it was a lot. I'm sure a tax accountant would be able to provide you additional details.

[dontListen2me]

Thank you, sirs.

As someone who has no formal business or trading experience, I appreciate your knowledge and suggestions.

[Adam]

This appears to be a topic not normally considered here.

If I am mining in any one of the the United States, what tax forms should I file?
Am I my own business? Is Sole Proprietorship assumed by the government?
If mining is considered a business, does anyone have instructions for how to arrange one's situation to be properly legal?

If mining is not considered a business, and taxes should be filed, does someone know what to do, or where to find advice?

If I were to take a stab in the dark I would guess that the default answer is pay out the wazoo and ask a lawyer.
I just really don't want to be audited. Never have, and I'm not trying to either.

Thanks for any help provided.

I am a tax professional and although it obviously hasn't come up in tax court yet, here is my take.  Bitcoins are not recognized as a currency or store of value yet, so it should be perfectly acceptable to treat any bitcoins you own as if they didn't exist when it goes time to file your taxes.  However, by that logic when you cash in your bitcoins for dollars you need to claim 100% of that as income.  Similarly if you trade the bitcoins for merchandise you would need to claim the fair value received as income.

Treat your mining operation as a schedule C business.  Take section 179 for all your computer equipment (it's a tax write off for 100% of the cost instead of depreciating it over its useful life).  Keep track of all your mining expenses separately from any personal expenses so you have a nice clear set of records in case the IRS comes snooping around.  If your mining is done at home it is tricky, but come up with a fair allocation for utilities for the house as a whole to allocate to your business.   If you own your home you can also take a tax write off for the depreciation on the percentage of the house used for mining.

I have lots more tips, but I tend to ramble when I'm not sure if anyone is listening so I'll stop for now.

[dontListen2me]

Is there any specific stuff to pay attention to considering per state that anyone can mention?


I am sure I read somewhere in the economics board that trading BTC for profit is subject to capital gains tax.
This tax to my knowledge is treated differently even between state to state.

[Adam]

First, there is no way in this world I see the IRS letting you treat bitcoins as capital gains even for trading, much less for mining so don't worry about that.  Capital gains are given preferential treatment at the federal level and taxes at either 5% or 15% instead of between 10 and 35%, but each state can set their own tax rules.  Mine treats capital gains as ordinary income for tax purposes.  But forget that, because bitcoins aren't capital gains.

How big of a mining operation are you talking about here?  If it's less than $10,000 I wouldn't worry about the specifics too much.  Just record all your expenses including hardware and all your income from sales or trades of bitcoins.  Report it on schedule C of your form 1040.  Sales - expenses = taxable income.  If you end up losing money you can actually write it off against your normal income.

[dontListen2me]

I'm not running anything near $10k. I just don't want to get bitten for a foolish mistake.

Thank you very much for your help and clarifications.

[GooberGoo]

I'm not running anything near $10k. I just don't want to get bitten for a foolish mistake.

Thank you very much for your help and clarifications.

This then begs the question, what if we DO run over $10k?

I have an IT background by trade so I'm leaning towards converting a few of my spare parts into some powerful mining rigs.
Not that I will make over 10K but for the sake of arguing hypotheticals, then what?

I'm sure many folks mining who have an entire array of rigs are probably dealing with the same question now.

[EyeRis]

Much to repeat what has essentially already been said. I think you honestly should not worry about it. Many people right now are making a much larger sum of cash via ebay and their paypal's are not being taxed.

[bob]

And just make sure you keep good records on your expenses.

[Adam]

Much to repeat what has essentially already been said. I think you honestly should not worry about it. Many people right now are making a much larger sum of cash via ebay and their paypal's are not being taxed.

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.

[Hollie]

@Adam, so I just file a Schedule C business and take out the section 179 for the expenses for the small mining operation?

How do I classify it as a business?

[Saint Cad]

So then can I run mining as a business and expense out the cost of my rig (probably under a depreciation schedule) and extra power consumed?  If so, then that may definately change the profitability curve for many of us especially if of a mine and hold strategy until 2014. 

[Adam]

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.

[Adam]

So then can I run mining as a business and expense out the cost of my rig (probably under a depreciation schedule) and extra power consumed?  If so, then that may definately change the profitability curve for many of us especially if of a mine and hold strategy until 2014. 

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.