Anybody in the US mine at home and call it a business?

[eissug]

Well I called my accountant. They are going to research into it more before making a recommendation for me. I’m the first person around here to even ask about something like this. Small town USA. My current business is an S-Corp so that is what this would fall under. I really wanted that electricity write off.

I am not aware of any reason you need to be a business to write off your electricity expense in the US.  Quite a few sole-proprietorship "businesses" are run without formal structures.

For example, you are allowed to deduct expenses from a hobby (a hobby is also a business that looses money for 3 or more years  ) up to the income of the hobby.  This is why I recommended earlier to try to have a few dollars profit after expenses in case the IRS does call you a hobby instead of a business.

If you are a hobby and not a business, and the IRS accepts that, then you will not owe self employment tax on the BTC mined.  The determination of hobby can be made by percentage of income vs your normal paycheck...but you won't know what those subjective percentages are until after you are audited.   

If you can prove on paper that you have a profit motive and you loose money, the write-off could extend to cover your personal income (unlike the hobby) or the losses could be carried forward.

If the IRS determines you are a business, you may be subject to self employment tax on the earned BTC if you get an auditor in a good mood.  It you have a big enough mine it may be worth forming an S-Corp and paying an attorney to figure out how to limit those taxes.  Probably not worth it.  I'm considering my small after work "hobby" passive income since it involves far less time than dealing with tenants. 

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[Druiz287]

Lots of good information in this thread.  I think everything is very black and white except for when it comes to the proceeds from mining.  And this is mainly because they are distributed in BTC.  Coinbase, for example, records the amount of BTC received in BTC percentages and also in USD at the CURRENT EXCHANGE RATE.  If you use the standard accrual based accounting, revenue is reported when it is EARNED and not PAID.  So I would assume to list the revenues at the rates earned.  The problem comes when you have to list your assets in your balance sheet.  Do you list them at the value when mined or at current values?  I would think values when mined, based on the accounting's "COST PRINCIPLE" where you list it under your assets at the price you paid, not what the market value is.  Then, when you exchange that into USD, you post "Loss on capital sale" or "Gain on capital sale" and have those earnings taxed accordingly.  That may not be the right answer legally, but it makes the most sense to me at the very basic accounting level, following the accrual based principles.  That's what I learned in business school, and that's how I was planning to account for my S-Corp, but I could be wrong.  Does anyone see a potential flaw in that?

[shellyfinest]

Lots of good information in this thread.  I think everything is very black and white except for when it comes to the proceeds from mining.  And this is mainly because they are distributed in BTC.  Coinbase, for example, records the amount of BTC received in BTC percentages and also in USD at the CURRENT EXCHANGE RATE.  If you use the standard accrual based accounting, revenue is reported when it is EARNED and not PAID.  So I would assume to list the revenues at the rates earned.  The problem comes when you have to list your assets in your balance sheet.  Do you list them at the value when mined or at current values?  I would think values when mined, based on the accounting's "COST PRINCIPLE" where you list it under your assets at the price you paid, not what the market value is.  Then, when you exchange that into USD, you post "Loss on capital sale" or "Gain on capital sale" and have those earnings taxed accordingly.  That may not be the right answer legally, but it makes the most sense to me at the very basic accounting level, following the accrual based principles.  That's what I learned in business school, and that's how I was planning to account for my S-Corp, but I could be wrong.  Does anyone see a potential flaw in that?

I'm not an accountant, but that's the way I understand it (all as you describe , including the value when mined piece) ... I've heard of people mining directly into an exchange wallet to help with the tracking of earned coins at the rate at the time of mining.  I imagine US based exchanges are best for tracking / calculating this.

I also heard about the website Cointracking(dot)info that has software to assist in the calculations and is supposed to be compatible with most of the exchanges (where you export/download your exchange trade records and upload that into the software to help calculate everything, or do it through an API function). 

I haven't really checked it out but I may have to, seems easy though I know there are dangers leaving money on exchanges...

[A.Delaney]

Well I called my accountant. They are going to research into it more before making a recommendation for me. I’m the first person around here to even ask about something like this. Small town USA. My current business is an S-Corp so that is what this would fall under. I really wanted that electricity write off.

I am not aware of any reason you need to be a business to write off your electricity expense in the US.  Quite a few sole-proprietorship "businesses" are run without formal structures.

For example, you are allowed to deduct expenses from a hobby (a hobby is also a business that looses money for 3 or more years  ) up to the income of the hobby.  This is why I recommended earlier to try to have a few dollars profit after expenses in case the IRS does call you a hobby instead of a business.

If you are a hobby and not a business, and the IRS accepts that, then you will not owe self employment tax on the BTC mined.  The determination of hobby can be made by percentage of income vs your normal paycheck...but you won't know what those subjective percentages are until after you are audited.   

If you can prove on paper that you have a profit motive and you loose money, the write-off could extend to cover your personal income (unlike the hobby) or the losses could be carried forward.

If the IRS determines you are a business, you may be subject to self employment tax on the earned BTC if you get an auditor in a good mood.  It you have a big enough mine it may be worth forming an S-Corp and paying an attorney to figure out how to limit those taxes.  Probably not worth it.  I'm considering my small after work "hobby" passive income since it involves far less time than dealing with tenants. 

Since my current business is already an S-Corp. Wouldn’t it be best to just mine under that entity? No self employment tax to worry about then. It wouldn’t be considered a hobby though at that point no matter what the income was then right?

[A.Delaney]

Lots of good information in this thread.  I think everything is very black and white except for when it comes to the proceeds from mining.  And this is mainly because they are distributed in BTC.  Coinbase, for example, records the amount of BTC received in BTC percentages and also in USD at the CURRENT EXCHANGE RATE.  If you use the standard accrual based accounting, revenue is reported when it is EARNED and not PAID.  So I would assume to list the revenues at the rates earned.  The problem comes when you have to list your assets in your balance sheet.  Do you list them at the value when mined or at current values?  I would think values when mined, based on the accounting's "COST PRINCIPLE" where you list it under your assets at the price you paid, not what the market value is.  Then, when you exchange that into USD, you post "Loss on capital sale" or "Gain on capital sale" and have those earnings taxed accordingly.  That may not be the right answer legally, but it makes the most sense to me at the very basic accounting level, following the accrual based principles.  That's what I learned in business school, and that's how I was planning to account for my S-Corp, but I could be wrong.  Does anyone see a potential flaw in that?

Since my earnings go right to my hardware wallet. I would have to keep track of the BTC price right at that moment the payment came through. That time would vary every day. This would be a huge PITA. So I’m sure that how it’s suppose to be done. If the price of BTC is down though when you cash out or at the end of the year. Do you lose money then?

[Druiz287]

While I'm not an accountant either, I know that revenue is reported when it is EARNED if you are on the accrual basis (which almost all businesses use).  So yes, this would be a requirement according to the IRS.  And don't worry, you can find charts to verify the BTC/USD exchange rate at any moment in time if you are looking to file taxes and expense things the right way (according to the IRS).  I use Coinbase for my very small mining operation, and no matter how negative people think of this online wallet and exchange, I can tell you that they make it easy for business owners because any account with over 20 transactions by providing tax documents for free.  (That's not an endorsement or recommendation, but it makes my life as a business owner much easier)

However, I will tell you that the point of BTC is to be untraceable and taxable.  IF you have it going to a hardware wallet and decided not to report any earnings, theoretically you could do it.  Not that I am advocating this, but in times of capital GAINS (USC/BTC price raises since the time earned) then it would be advantageous.  Remember that you will always pay taxes on income earned (read: mining profits) and you will also pay taxes on capital gains (read: if BTC goes up between time earned and sold).  I do believe its advantageous to keep good records and post losses.  For example, I've mined since bitcoin was at $19k, and now at $9k I have a right to post losses on capital gains, resulting in a lower taxable income if I cash out.  However, I can still post that revenue earned at the $19k rate and it makes my company look rich on paper, regardless of how much my assets are. 

Just like how an Antminer S9 on paper may look like it is only worth $100 (say after depreciation and a $100 salvage value), and if I sell it for $1,000 I have to pay taxes on that $900 because it is technically a capital gain (I have already gotten lots of tax losses after depreciating it every month).  For the record, I don't mind paying taxes on any of my gains.  If I'm paying taxes, I'm making profit and that's why I do what I do.  I also want to make my business look as profitable as possible to get credit benefits.  And that costs money in taxes as well.  But at the end of the day, my philosophy is that if you aren't familiar with FASB standards, GAAP, and IRS standards talk to a trusted accountant.

[eissug]

Since my current business is already an S-Corp. Wouldn’t it be best to just mine under that entity? No self employment tax to worry about then. It wouldn’t be considered a hobby though at that point no matter what the income was then right?

They might want to separate out the activity if they found (or considered) evidence that you weren't trying to make money and were loosing.  The likely hood they would is probably low as long as the ratio of mining income stays low to other sources.  No one would mine specifically to loose money.  (unless they were laundering money?)

Anyway, the benefit of the S-Corp in your case would be paying yourself an income comparable to other incomes of people managing mines and limiting your self employment income to just that.

Basically, whatever rules the IRS has, they will try to enforce the ones that give them the biggest benefit.   

I do like the, and have thought myself about, the idea of buying mining gear at the end of the year to shift income to the next year.

I've also wondered what the benefits or disadvantages of exchanging ALL of your BTC on the last day of the year for USD and then buying it all back immediately would be.  Technically you could take all of your losses/gains at that time and then only have one coin to track the next year???  That one is a little too deep for me at the moment. 

[A.Delaney]

Is everybody using coinmarketcap for the BTC value at the time of payment? It seems each exchange has a different BTC price. I want to say my Trezor shows the same value as coinmarketcap for the BTC price. Would the IRS agent have a way to confirm the BTC price you reported was the actual price at that time?

[kenji]

If you do, don't tell the bank you are running a bitcoin mining business.  Call it a data center.  I've seen folks reporting back from 10 different banks all of denied a business account based on the business being a bitcoin mine.
Everything else is true. Write offs for internet usage, any upgrades for the power and infrastructure. 

Assuming you're getting an LLC for the insurance to protect your miners, it's best to not lie and be as transparent as possible. When the time comes that you need to actually use your insurance because your miners were stolen, or they burned the place down, or the place is burned down and your miners are destroyed, you'll want to be sure that your bank/insurance company knows exactly what it is you're doing and what it is you have so that they're covered.

[Bucc5207]

Tax professional (Enrolled Agent) here.  IRS laid out their position in Notice 2014-21 https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21.  They haven't had much more to say about it since, but they did go after coinbase.com to get information about investors on the grounds that they believe there is a large reporting gap related to crypto transactions.  Last I read, a judge ruled partially in IRS's favor, and ordered coinbase to turn over some of the requested info. 

Without going into too much boring detail, and not agreeing or disagreeing with specific posts in this thread:
1. Mining is absolutely a business.  IRS said as much in Notice 2014-21.
2. Mining revenue is the dollar value of mined bitcoin on the day you received it.  Because mining involves frequent small acquisitions, bookkeeping is somewhat burdensome.
3. Once the bitcoin is mined, it's an investment asset in your hands, with a cost basis equal to its dollar value when earned (see #2).  Subsequent sale or spending of it triggers capital gain or loss.  Again, recordkeeping is somewhat burdensome.
4. Since mining is a business, you can deduct ordinary and necessary business expenses to offset the revenue.  Typical expenses would be electricity, equipment depreciation, internet access, rent, etc.  Home office expenses would be allowed under the usual rules for that.  In your home, a separate ISP account would be needed to take internet expenses, and you need a solid way to prove the actual cost of electricity used in mining.  IMO, it's not a good idea to get too aggressive claiming deductions on any home-based business.
5. Choice of entity (sole proprietorship, corporation, S-corp, etc) is a complex topic you should discuss with a competent tax advisor.  IMO, for a small home operation, simplest is best.  That means sole proprietorship or single-member LLC (which by default is taxed the same as a sole proprietor). 
6.  If you report losses, you do risk having your mining activity challenged as a hobby.  That's another complex issue best discussed with a competent advisor. 
7.  If you have other business activities, I think it's better to report mining separately (e.g., on its own Sch C).

[kenji]

My buddy started an LLC. Called names it something along the lines of digiallending and did not mention bitcoin. Getting all the business benefits with less risk if things go south. Relatively small operation like 10 S9's all at his house.

Well if he's not letting it be known what he's doing he's not getting all the benefits. I believe a good reason to setup an LLC for mining is for the various business insurances you can get if something goes wrong. He probably isn't paying to get the insurance because if something did go wrong and he did need that insurance money and no one knows what is going on there or how much his business is worth, insurance isn't just going to hand him that money. Likewise with the legal side of things, if he did get the LLC for the business benefits such as taking liability off himself if something went wrong and the miners burned his house down or someone got hurt, he would likely be liable and not his LLC. (as far as I'm aware)

[Druiz287]

Just tried to open a secondary business account, this time at capital one instead of my local bank.  In the online process they asked me if I would be dealing in any kind of crypto-currency.  Specifically the question asked for the creation, sale, or exchange of digital or virtual currency.  As a miner operating an legitimate corporation, I answered honestly under the CFTRA and was denied a business bank account.

Well, if they don't want my USD proceeds after I have traded digital currencies, I will have to find another bank that does.  SunTrust doesn't seem to mind my deposits.

[A.Delaney]

Have you tried US Bank?

[DPoS2]

Tax professional (Enrolled Agent) here.  IRS laid out their position in Notice 2014-21 https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21.  They haven't had much more to say about it since, but they did go after coinbase.com to get information about investors on the grounds that they believe there is a large reporting gap related to crypto transactions.  Last I read, a judge ruled partially in IRS's favor, and ordered coinbase to turn over some of the requested info.  

Without going into too much boring detail, and not agreeing or disagreeing with specific posts in this thread:
1. Mining is absolutely a business.  IRS said as much in Notice 2014-21.
2. Mining revenue is the dollar value of mined bitcoin on the day you received it.  Because mining involves frequent small acquisitions, bookkeeping is somewhat burdensome.
3. Once the bitcoin is mined, it's an investment asset in your hands, with a cost basis equal to its dollar value when earned (see #2).  Subsequent sale or spending of it triggers capital gain or loss.  Again, recordkeeping is somewhat burdensome.
4. Since mining is a business, you can deduct ordinary and necessary business expenses to offset the revenue.  Typical expenses would be electricity, equipment depreciation, internet access, rent, etc.  Home office expenses would be allowed under the usual rules for that.  In your home, a separate ISP account would be needed to take internet expenses, and you need a solid way to prove the actual cost of electricity used in mining.  IMO, it's not a good idea to get too aggressive claiming deductions on any home-based business.
5. Choice of entity (sole proprietorship, corporation, S-corp, etc) is a complex topic you should discuss with a competent tax advisor.  IMO, for a small home operation, simplest is best.  That means sole proprietorship or single-member LLC (which by default is taxed the same as a sole proprietor).  
6.  If you report losses, you do risk having your mining activity challenged as a hobby.  That's another complex issue best discussed with a competent advisor.  
7.  If you have other business activities, I think it's better to report mining separately (e.g., on its own Sch C).

to throw this all into a ditch..  the above only makes sense if you solo mine.. if you pool mine then you are providing work and the pool is then paying you for a service... so slap them with all kinds of employer taxes while we are at it and demand healthcare!!   Most miners never mine ANY bitcoins since they never find a block.  What legal papers/contract were signed between the miner and the pool?? Just proof of work/shares that isn't on any radar of the IRS.   It is like a bunch of guys pooling their money for lottery tickets.. only when things get big do the IRS start sniffing around for their cut

Should we all spam the IRS with millions of pages of records of $hitcoin mining and trading??  List billions of mined and traded dogecoin or the hundreds of worse coins?

And to take it further..  if you don't have autopayouts set, then you never got paid yet for your work at the pool until you do.. that could be years until you claim it just like if you were a contractor and did a bunch of work on  house but never got paid until 3 years later.  You suppose to pay taxes on the work you provided without getting paid??? And then what value was the BTC then? When the pool operator allocated into his ledger to eventual pay his debt to you or when you actually get it?

Income tax ran its course this 100 years and it is time to switch to VAT or whatever.

[eissug]

The IRS is much less concerned about any formal organization of your business than you are. You might be breaking state rules or laws, but if you are capable of being a business then you already are in the eyes of the IRS. You might as well count the cost of your equipment, tools, and electricity.

They will be very happy to allow you not to do so by taxing a greater amount of your income.

Make sure to tell your accountant about any credits you might have received on the solar. That might be important to consider.

[Bucc5207]

to throw this all into a ditch..  the above only makes sense if you solo mine.. if you pool mine then you are providing work and the pool is then paying you for a service... so slap them with all kinds of employer taxes while we are at it and demand healthcare!!   Most miners never mine ANY bitcoins since they never find a block.  What legal papers/contract were signed between the miner and the pool?? Just proof of work/shares that isn't on any radar of the IRS.   It is like a bunch of guys pooling their money for lottery tickets.. only when things get big do the IRS start sniffing around for their cut

Should we all spam the IRS with millions of pages of records of $hitcoin mining and trading??  List billions of mined and traded dogecoin or the hundreds of worse coins?

And to take it further..  if you don't have autopayouts set, then you never got paid yet for your work at the pool until you do.. that could be years until you claim it just like if you were a contractor and did a bunch of work on  house but never got paid until 3 years later.  You suppose to pay taxes on the work you provided without getting paid??? And then what value was the BTC then? When the pool operator allocated into his ledger to eventual pay his debt to you or when you actually get it?

Income tax ran its course this 100 years and it is time to switch to VAT or whatever.

Tax law often doesn't make sense.  Logical or not, it's the law.  When they send you a bill for taxes, penalties, and interest, "That makes no sense" is not a defense.  It pays to educate yourself.

[Iannn]

I am treating it like a business.  I was told to pay off the mining rig and then pull out at at least enough usd to cover electricity costs and then a little more on top of that so the business is not working at a loss.  I don't know if its the right way but it seems reasonable to me.  People who know more than I do please feel free to shred me to pieces.....

[Bucc5207]

I am treating it like a business.  I was told to pay off the mining rig and then pull out at at least enough usd to cover electricity costs and then a little more on top of that so the business is not working at a loss.  I don't know if its the right way but it seems reasonable to me.  People who know more than I do please feel free to shred me to pieces.....

Not quite sure what you're saying, but it sounds a bit backwards to me.  I don't mean to shred you, because you might have just gotten some bad advice.  Profit is either there or not there, regardless of whether you take any of it out as cash.  If the business were not operating at a profit (ignoring equipment depreciation, which is not a small 'ignore'), there wouldn't be enough USD available to cover the electric bill.  Will it still cover the power bill tomorrow, when the difficulty goes up another 8-10%?  How about later this month, when it bumps up again?

[Druiz287]

I am treating it like a business.  I was told to pay off the mining rig and then pull out at at least enough usd to cover electricity costs and then a little more on top of that so the business is not working at a loss.  I don't know if its the right way but it seems reasonable to me.  People who know more than I do please feel free to shred me to pieces.....

Most of us aren't here to shred you to pieces, my friend.  Bucc5207 makes a great point: profit does not mean cash.  My balance sheet shows my cash to have increased a LOT in the past 4 months, but my income statements show losses for most of those months.

It is important to recognize that when you began a business, legally there are only two sources of funding: equity and debt.  Equity you don't have to pay back but you give control to whoever gave you the money (great if this is YOU investing the money).  Debt you do have to pay back, but it is technically an expense (great if this is YOU loaning the money).  So here are two scenarios:

***
Equity of 4000 to start the business with 3600 for a mining rig (depreciated over a year):
100 a month in electricity
800 a month in profits from mining
300 a month in depreciation of the rig
_________________________________
$700 cash in the company bank account monthly after paying electricity
Only $400 of that is taxable (after depreciation on your machine)

***

Debt of 4000 loan to start the business with 3600 for a mining rig (depreciated over a year):
100 a month in electricity
800 a month in profits from mining
300 a month to pay back the loan for the rig
300 a month in depreciation of the rig
_________________________________
$400 cash in the company bank account monthly after paying electricity
$300 back in your bank account after your loan being repaid
Only $100 of that is taxable (provided you didn't make interest on the loan)

***

Equity vs debt runs into issues when you start looking at your financial ratios (leverage, quick, current, etc.) but if you're not a huge corporation it has no importance.  The importance for you should be in the tax liability.  These scenarios are given no type of slack for appreciation or loss of value based on exchange rate.  This is complex because of the exchange rates but you should always give yourself enough CASH slack to pay your operating expenses (rents, electricity, etc.).  I started my business with 3k in cash.  I used that for operating expenses until last month when I finally converted a lot of crypto into fiat (and took a huge loss on it due to realizing gains when BTC was above 19k).

In crypto, like anywhere else, your profits are listed when it is EARNED not when it is converted into CASH (although you may have another round of profits if BTC/USD has increased)

[Bucc5207]

Bucc5207 makes a great point: profit does not mean cash.

....

So here are two scenarios:

***
Equity of 4000 to start the business with 3600 for a mining rig (depreciated over a year):
100 a month in electricity
800 a month in profits from mining
300 a month in depreciation of the rig
_________________________________
$700 cash in the company bank account monthly after paying electricity
Only $400 of that is taxable (after depreciation on your machine)

***

Debt of 4000 loan to start the business with 3600 for a mining rig (depreciated over a year):
100 a month in electricity
800 a month in profits from mining
300 a month to pay back the loan for the rig
300 a month in depreciation of the rig
_________________________________
$400 cash in the company bank account monthly after paying electricity
$300 back in your bank account after your loan being repaid
Only $100 of that is taxable (provided you didn't make interest on the loan)

Sorry to contradict after your kind vote of confidence.  Both scenarios result in $400 of taxable income.  You don't get a tax deduction for repaying principal on a loan.  Unless the loan is interest-free, the debt scenario results both in lower net income and less cash.