Possibly dangerous tax situation when mining in US

[mgio]

I am not an accountant, so please correct me if this is incorrect.

I'm assuming that you are someone who is trying to follow ALL the rules as best as they can (and many of them are unclear right now).

Here is a hypothetical scenario:

- You mine a coin a day for the month of November. Bitcoin is at $1000, so you mine 30 coins worth $30,000.

You would owe income tax on those coins, on that $30,000.

- Now let's say bitcoin crashes to $10 in December. You sell off the 30 coins for $300 and take a $29,700 loss.

You can declare that as a capital loss on your taxes.

Now the problem is the 30 coins you mined aren't a capital gain, they are declared as income. So you can't deduct the $29,700 capital loss from them. You can only deduct up to $3,500 per year off of your income.

So you'll be stuck owing taxes on $26,500 and have no money to pay it as your coins only earned you $300 in fiat!

This seems pretty scary. Am I wrong in this scenario or is this really what would happen?

[1714964810]

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[DeathAndTaxes]

The "good news" is that your capital loss doesn't disapear.  You can keep applying $3,500 of it until it is either gone or you die.  However yes what you described could happen.  I would guess most miners are not paying taxes on mined coins.  Still if you want to play by the book I would sell enough of the coins to cover your tax liability and put that money aside (and be sure to make quarterly tax payments) that way you are covered.

[mgio]

The "good news" is that your capital loss doesn't disapear.  You can keep applying $3,500 of it until it is either gone or you die.  However yes what you described could happen.  I would guess most miners are not paying taxes on mined coins.  Still if you want to play by the book I would sell enough of the coins to cover your tax liability and put that money aside (and be sure to make quarterly tax payments) that way you are covered.

Yes, that is true, but you could be totally screwed for that year if you don't have enough savings to cover that tax liability.

I plan on paying income tax on my mined coins since that way I can deduct the costs of everything I paid to mine the coins (mining hardware, computer and networking equipment, etc).

The other issue is if you don't declare the mined coins and later sell the coins on the exchange that IRS says "where did you get that money? where did you get those coins?" you will not be able to point to any transaction where you bought those coins and established a basis for their value for the purpose of calculating your capital gains.

For small time miners maybe the IRS won't care. But for those of us who have hundreds of thousands of $ in bitcoin the IRS WILL notice when those bitcoins are liquidated and so the rules will need to be followed.

[DeathAndTaxes]

I don't disagree with anything.  The same scenario can happen for those who exercise stock options for example.  It happens.  The only way to hedge yourself is to ensure you have the USD to cover the taxes and make payments throughout the year. 

Something like I mined 1 BTC today.  It is worth $x, my costs are estimated to be $y (electricity + ammortized hardware).  My gain is $x - $y and thus my taxes are going to be 25% * ($x - $y).  I will put aside that money now.  If it don't have enough I will sell coins now to ensure that I do.

[other_side]

I'm assuming that you are someone who is trying to follow ALL the rules as best as they can (and many of them are unclear right now).

If tomorrow Federal Government declares bitcoin as illegal activity, your IRS declaration will be prove of your involvement.
In other words, bitcoin was not designed to please the government.

[caminilegroup]

I'm assuming that you are someone who is trying to follow ALL the rules as best as they can (and many of them are unclear right now).

If tomorrow Federal Government declares bitcoin as illegal activity, your IRS declaration will be prove of your involvement.
In other words, bitcoin was not designed to please the government.

If tomorrow it is declared illegal, then you stop. Up until that point you were doing nothing illegal.

[other_side]

If tomorrow it is declared illegal, then you stop. Up until that point you were doing nothing illegal.

Really? From FBI quote.

Article I, section 8, clause 5 of the United States Constitution delegates to Congress the power to coin money and to regulate the value thereof. This power was delegated to Congress in order to establish and preserve a uniform standard of value and to insure a singular monetary system for all purchases and debts in the United States, public and private. Along with the power to coin money, Congress has the concurrent power to restrain the circulation of money which is not issued under its own authority in order to protect and preserve the constitutional currency for the benefit of all citizens of the nation. It is a violation of federal law for individuals, such as von NotHaus, or organizations, such as NORFED, to create private coin or currency systems to compete with the official coinage and currency of the United States.

“Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism,” U.S. Attorney Tompkins said in announcing the verdict. “While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country,” she added. “We are determined to meet these threats through infiltration, disruption, and dismantling of organizations which seek to challenge the legitimacy of our democratic form of government.”

[caminilegroup]

If tomorrow it is declared illegal, then you stop. Up until that point you were doing nothing illegal.

Really? FBI quote.

Article I, section 8, clause 5 of the United States Constitution delegates to Congress the power to coin money and to regulate the value thereof. This power was delegated to Congress in order to establish and preserve a uniform standard of value and to insure a singular monetary system for all purchases and debts in the United States, public and private. Along with the power to coin money, Congress has the concurrent power to restrain the circulation of money which is not issued under its own authority in order to protect and preserve the constitutional currency for the benefit of all citizens of the nation. It is a violation of federal law for individuals, such as von NotHaus, or organizations, such as NORFED, to create private coin or currency systems to compete with the official coinage and currency of the United States.

“Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism,” U.S. Attorney Tompkins said in announcing the verdict. “While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country,” she added. “We are determined to meet these threats through infiltration, disruption, and dismantling of organizations which seek to challenge the legitimacy of our democratic form of government.”

You can't even compare that to bitcoin

was found guilty by a jury in Statesville, North Carolina, of making coins resembling and similar to United States coins; of issuing, passing, selling, and possessing Liberty Dollar coins; of issuing and passing Liberty Dollar coins intended for use as current money;

He was minting his own money, yes, but he was making coins that resembled us currency. You are an idiot to try and compare the two. Please tell me how bitcoin resembles any us currency available today?

[msc]

- You mine a coin a day for the month of November. Bitcoin is at $1000, so you mine 30 coins worth $30,000.
You would owe income tax on those coins, on that $30,000.

Mined coins aren't taxable income until you sell them to someone else.  

[TheButterZone]

I'm assuming that you are someone who is trying to follow ALL the rules as best as they can (and many of them are unclear right now).

If tomorrow Federal Government declares bitcoin as illegal activity, your IRS declaration will be prove of your involvement.
In other words, bitcoin was not designed to please the government.

If tomorrow it is declared illegal, then you stop. Up until that point you were doing nothing illegal.

Ex post facto clause (Article 1, Section 9, Clause 3) is an ideal, not a true defense, especially when the state is so corrupt, its laws so numerous, that practically anything down to breathing can result in your prosecution.

[The00Dustin]

I would be more concerned about this (from http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html, emphasis mine):

c. De-Centralized Virtual Currencies

            A final type of convertible virtual currency activity involves a de-centralized convertible virtual currency (1) that has no central repository and no single administrator, and (2) that persons may obtain by their own computing or manufacturing effort.

            A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter. By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter. In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.

Perhaps one could argue that mining is finding, not creating, (claiming that "satoshi nakamato" created it al when bitcoin the p2p network was initiated) or maybe it's worth registering as a money transmitter in that dollar range, but do you want to tango with the feds?

[DeathAndTaxes]

Registration is easy.  Compliance is the hard part.  Registering with no intent on complying with the Bank Secrecy Act is just stupid.  It is like saying "I know what the law requires and I am just going to ignore it anyways.  Anyone have a problem with that?".

[mgio]

- You mine a coin a day for the month of November. Bitcoin is at $1000, so you mine 30 coins worth $30,000.
You would owe income tax on those coins, on that $30,000.

Mined coins aren't taxable income until you sell them to someone else.  

I wish that were true, and to be honest the IRS hasn't said anything official about it. But any accountant will tell you that that based on how taxes work that isn't the case. BItcoins mined are revenue and will almost definitely be taxed as income based on their value at the time they were mined. This is really annoying actually, since it means that you need to keeps records of every fraction of a bitcoin you mine and the exchange rate at that time. It's unclear how granular this must be. I have records by day, but theorecticaly you probably need to record every time you get a payout from your mining pool.

[mgio]

I would be more concerned about this (from http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html, emphasis mine):

c. De-Centralized Virtual Currencies

            A final type of convertible virtual currency activity involves a de-centralized convertible virtual currency (1) that has no central repository and no single administrator, and (2) that persons may obtain by their own computing or manufacturing effort.

            A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter. By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter. In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.

Perhaps one could argue that mining is finding, not creating, (claiming that "satoshi nakamato" created it al when bitcoin the p2p network was initiated) or maybe it's worth registering as a money transmitter in that dollar range, but do you want to tango with the feds?

You could also argue that it is the mining pool that is creating the currency and they are simply paying you for the work you have done to help them find a block. This is the case for most people out there these days since few solo mine now. And for those that mine in a pool it is likely that they have never actually been the one to find a block, so did they actually ever create any units of a virtual currency?

[The00Dustin]

I would be more concerned about this (from http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html, emphasis mine):

c. De-Centralized Virtual Currencies

            A final type of convertible virtual currency activity involves a de-centralized convertible virtual currency (1) that has no central repository and no single administrator, and (2) that persons may obtain by their own computing or manufacturing effort.

            A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter. By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter. In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.

Perhaps one could argue that mining is finding, not creating, (claiming that "satoshi nakamato" created it al when bitcoin the p2p network was initiated) or maybe it's worth registering as a money transmitter in that dollar range, but do you want to tango with the feds?

You could also argue that it is the mining pool that is creating the currency and they are simply paying you for the work you have done to help them find a block. This is the case for most people out there these days since few solo mine now. And for those that mine in a pool it is likely that they have never actually been the one to find a block, so did they actually ever create any units of a virtual currency?

I was thinking this after I posted, but the question is do you want to have to make an argument if it comes down to it?  Another thought I had was maybe even though the definition of another person on that guidance includes businesses, transferring BTC to an exchange doesn't count as selling it to them, and maybe the exchange is still the only actual money transmitter because of that (they don't buy it from you, and they sell it to another person for you).  But again, not a lawyer, don't know.

[msc]

BItcoins mined are revenue and will almost definitely be taxed as income based on their value at the time they were mined.

Based on the price at which exchange? 

[mgio]

BItcoins mined are revenue and will almost definitely be taxed as income based on their value at the time they were mined.

Based on the price at which exchange? 

It doesn't matter, but it would be safest to use mtgox. Alternatively, if you primarily use another exchange to sell your coins, you can probably use their exchange rate. Just because the exchange rate isn't set in stone, doesn't mean there isn't a fair market value for the bitcoins and you still owe taxes on them. If you drastically underestimate the price on your tax return the IRS will come after you.

This isn't the only situation where there is this kind of ambiguity. If you were to barter with someone, or if you were to do some work and you were paid in goods instead of cash, you need to estimate the fair market value of the goods exchanged or received on your tax return.

[LostDutchman]

I'm assuming that you are someone who is trying to follow ALL the rules as best as they can (and many of them are unclear right now).

If tomorrow Federal Government declares bitcoin as illegal activity, your IRS declaration will be prove of your involvement.
In other words, bitcoin was not designed to please the government.

If tomorrow it is declared illegal, then you stop. Up until that point you were doing nothing illegal.

STOP?

Pardon me but are you nuts?

Offshore servers, offshore corporation, offshore bank accounts, offshore ATM card denominated in USD..............................

My tax money is greatly used to fight illegal wars anyway, so I believe it is an act of patriotism to avoid paying for them.

My $.02.

[Nebulous]

This is actually a very good question, after thinking about it for a while I can't come up with a concrete answer, too much depends on the valuation of bitcoins as an asset and their stability (or lack thereof).

I can not give you an answer until the price of bitcoins stabilize;

[hanwong]

I am not an accountant, so please correct me if this is incorrect.

I'm assuming that you are someone who is trying to follow ALL the rules as best as they can (and many of them are unclear right now).

Here is a hypothetical scenario:

- You mine a coin a day for the month of November. Bitcoin is at $1000, so you mine 30 coins worth $30,000.

You would owe income tax on those coins, on that $30,000.

- Now let's say bitcoin crashes to $10 in December. You sell off the 30 coins for $300 and take a $29,700 loss.

You can declare that as a capital loss on your taxes.

Now the problem is the 30 coins you mined aren't a capital gain, they are declared as income. So you can't deduct the $29,700 capital loss from them. You can only deduct up to $3,500 per year off of your income.

So you'll be stuck owing taxes on $26,500 and have no money to pay it as your coins only earned you $300 in fiat!

This seems pretty scary. Am I wrong in this scenario or is this really what would happen?

This is exactly what would happen in your scenario. You owe income tax. You will have a separate capital loss deduction. You must treat your two activities as two separate businesses. One is your mining business, which by consensus, is to treat it as ordinary income. The second is your investing business.

It would be the equivalent of working at a programming job that pays you in bitcoins. That's your salary. You need to pay income tax on your salary.

Then you decide to hold onto those bitcoins as an investment. Your investment goes sour and you cash out at a loss on your investment.

Your investment loss doesn't change the fact that you earned income from your work, and therefore must pay ordinary income tax on that work.

[Entropy-uc]

Actually, other threads in legal are reporting that the IRS is delivering opinions that bitcoin is not a capital good.

This means that you can't claim a capital gain on your bitcoins and have to recognize all income from the sale of bitcoin as earnings.

It also implies that you don't need to recognize the bitcoin as income when it is mined.  A farmer doesn't pay taxes on corn when it grows, he pays when he sells it for cash.

There are likely to be legal disputes every step of the way here.  You would be wise to get an accountant and a formal opinion letter from the IRS on how to handle things properly.

[lorix]

Correct.

Tax only comes into play when the BTC is exchanged into fiat and a capital gains event has occurred. And even then, only when the fiat is obtained in a form that can be directly tracked and tied to a specific individual like through a bank. If somebody from Localbitcoins meets you and hands you $10k for 10 BTC in cash without asking for a receipt then it's not like the IRS will know unless you deposit it somewhere.

Another example would be if you dug up a 10 pound gold nugget in your backyard - you wouldn't be instantly liable to pay the tax on it but if you sold it to a merchant then every cent of the registered transaction would be.

There is a reason gift cards are such popular purchases for BTC... 

[msc]

If somebody from Localbitcoins meets you and hands you $10k for 10 BTC in cash without asking for a receipt then it's not like the IRS will know unless you deposit it somewhere.

You're still required to report it, even if it's in cash.  And, even if you meet someone offshore to make the exchange.  Sure, the chances of IRS finding out may be next to nothing, but if they do, it's jail time.  

If you want to dodge taxes, that's your business.  Let's just be clear on what's legal and what's not.

Tax only comes into play when the BTC is exchanged into fiat and a capital gains event has occurred.

I honestly don't think there's another reasonable way to handle if if you're treating BTC as an investment.  If you're using it as an everyday currency that may be different.  But everyone's tax situation is unique, and you should make your own decision and be ready to defend it.

[drewster]

- You mine a coin a day for the month of November. Bitcoin is at $1000, so you mine 30 coins worth $30,000.
You would owe income tax on those coins, on that $30,000.

Mined coins aren't taxable income until you sell them to someone else.  

I wish that were true, and to be honest the IRS hasn't said anything official about it. But any accountant will tell you that that based on how taxes work that isn't the case. BItcoins mined are revenue and will almost definitely be taxed as income based on their value at the time they were mined. This is really annoying actually, since it means that you need to keeps records of every fraction of a bitcoin you mine and the exchange rate at that time. It's unclear how granular this must be. I have records by day, but theorecticaly you probably need to record every time you get a payout from your mining pool.

I am not positive, but I think you can just use mark-to-market accounting, basically realizing gain or loss based on the value at year end.
 ?

[NewLiberty]

If tomorrow it is declared illegal, then you stop. Up until that point you were doing nothing illegal.

Really? FBI quote.

Article I, section 8, clause 5 of the United States Constitution delegates to Congress the power to coin money and to regulate the value thereof. This power was delegated to Congress in order to establish and preserve a uniform standard of value and to insure a singular monetary system for all purchases and debts in the United States, public and private. Along with the power to coin money, Congress has the concurrent power to restrain the circulation of money which is not issued under its own authority in order to protect and preserve the constitutional currency for the benefit of all citizens of the nation. It is a violation of federal law for individuals, such as von NotHaus, or organizations, such as NORFED, to create private coin or currency systems to compete with the official coinage and currency of the United States.

“Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism,” U.S. Attorney Tompkins said in announcing the verdict. “While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country,” she added. “We are determined to meet these threats through infiltration, disruption, and dismantling of organizations which seek to challenge the legitimacy of our democratic form of government.”

You can't even compare that to bitcoin

was found guilty by a jury in Statesville, North Carolina, of making coins resembling and similar to United States coins; of issuing, passing, selling, and possessing Liberty Dollar coins; of issuing and passing Liberty Dollar coins intended for use as current money;

He was minting his own money, yes, but he was making coins that resembled us currency. You are an idiot to try and compare the two. Please tell me how bitcoin resembles any us currency available today?

They didn't resemble US currency in any meaningful way.
The jury was simply wrong and the resulting injustice will ultimately be rectified.
That case is not settled law anyway, it has yet to be concluded, and hasn't gone to appeal yet either.
The FBI didn't prove their case, there was never any intent to counterfeit (intent is a necessary element of the crime).
If you ever listened to von Nothaus, just about every statement he ever made about them was to distinguish them from US currency and say how they were different (and as he'd aver, better).