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Author Topic: Bitcoins and Taxes  (Read 1354 times)
chapmanjw
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January 16, 2014, 09:54:01 PM
 #1

Since the IRS has yet to provide any real guidance in dealing with virtual currencies (see http://www.irs.gov/pub/irs-pdf/p2104c.pdf where they recommend to Congress that they should provide guidance, LOL), how should mining income be treated for tax purposes?  My tax accountant isn't really sure at this point (I haven't found anyone who truly is).

As far as payments received or sent for a service or good, I think the exchange rate at the time of the transaction makes the most sense.  However, when it comes payments received from mining pools, should each payout be treated the same (use the exchange rate at that time)?  Or should it only matter when the currency is exchanged for a service, a good, USD, etc. (basically not value it until it is used for something other than crypto currency trading)?

This is probably a bucket of worms, but I wanted to see what others though.  Thanks.
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giantdragon
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January 16, 2014, 10:06:21 PM
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I think mining is similar to the manufacturing in terms of tax laws. For example, if you produce furniture you have to count taxes for the price you have sold it and not the average market price at the time of production (if it was not ever sold and just rotten in warehouse you must pay zero taxes, even can deduct loses as I know).
chapmanjw
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January 16, 2014, 10:14:03 PM
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I think mining is similar to the manufacturing in terms of tax laws. For example, if you produce furniture you have to count taxes for the price you have sold it and not the average market price at the time of production (if it was not ever sold and just rotten in warehouse you must pay zero taxes, even can deduct loses as I know).

That's a good way to look at it.  In that context, it basically has no value until it is exchanged for something that does have value.  Simple enough. 
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January 17, 2014, 10:46:31 AM
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God no.... once the gov gets involved look forward to a complete broken mess. If they start taxing then its almost not even worth while to mine anything then.

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January 17, 2014, 01:29:09 PM
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http://www.reddit.com/r/Bitcoin/comments/1uccfz/i_am_a_tax_attorney_here_are_my_answers_to_the/

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chapmanjw
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January 18, 2014, 01:58:49 AM
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Thanks for the article.  He makes it simple for me:

"Gains on bitcoins are taxable income. They become taxable when you sell bitcoins for cash or exchange them for goods or services."
mskryxz
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January 18, 2014, 06:07:34 AM
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im lost

say i mined 10 Bitcoins over 1 year. i did not sell any. i accumulated extra $200 per month in electricity than normal. i also paid say $3,000 for my mining gear. what do i report/deduct for my taxes?

the only thing i understand is that while i created 10 bitcoins out of thin air, i did not sell it for cash, so i do not report capital gains. but can i still claim a deduction to my expenses such as the electrcity, mining gear, and the depreciation?
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January 18, 2014, 07:24:15 AM
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im lost

say i mined 10 Bitcoins over 1 year. i did not sell any. i accumulated extra $200 per month in electricity than normal. i also paid say $3,000 for my mining gear. what do i report/deduct for my taxes?

the only thing i understand is that while i created 10 bitcoins out of thin air, i did not sell it for cash, so i do not report capital gains. but can i still claim a deduction to my expenses such as the electrcity, mining gear, and the depreciation?

I don't think you can deduct personally. It must be a business. And yes no gains, just like unsold inventory.

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January 18, 2014, 08:39:46 AM
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the IRS distinguishes between hobbies and businesses. the best way to establish your bitcoin operations as a business in my non-lawyerly opinion is to incorporate an llc, register a tax id, and establish a business bank account.  this does not complicate filing too much so long as you are a sole proprietor and treat the llc as a passthrough, filing only a personal return.  then your hardware depreciation is clearly deductible.

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January 18, 2014, 01:43:16 PM
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im lost

say i mined 10 Bitcoins over 1 year. i did not sell any. i accumulated extra $200 per month in electricity than normal. i also paid say $3,000 for my mining gear. what do i report/deduct for my taxes?

the only thing i understand is that while i created 10 bitcoins out of thin air, i did not sell it for cash, so i do not report capital gains. but can i still claim a deduction to my expenses such as the electrcity, mining gear, and the depreciation?

I don't think you can deduct personally. It must be a business. And yes no gains, just like unsold inventory.

My understanding is that it is considered a hobby at the level you describe, and therefor you cant deduct beyond the amount you sell. if it cost you $4000 for the year to mine, and you sold $4500 worth, then you could subtract the cost from the income and pay taxes on the $500. Since you did not "sell" any of the product of your hobby, you don't have anything to deduct the expenses from. Anything left in bitcoin wouldn't show up on your taxes this year. If you sell a bitcoin 2 years from now, there may be more clear regulations, or you may have to do it as a capitol gains where you paid $0 for the asset, then sold it for $100,000.

I am not a tax accountant or lawyer, but this is how I'm handling my mining and selling of my bitcoins until more specific laws are revealed.
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January 18, 2014, 05:13:41 PM
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Why so eager to bend over for the IRS kleptocrats?

It's YOUR money. They have no legitimate claim to it. Keep it away from their sticky fingers as much as possible. Get a second passport. Get bank accounts outside the US with that passport. Check out The Dollar Vigilante and TDV passports.

Don't give your money to the IRS. They'll just piss it away on drone-murdering kids at weddings.

If you give your money to the IRS voluntarily when you don't have to, you are directly supporting murder and evil.

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January 18, 2014, 05:18:10 PM
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the IRS distinguishes between hobbies and businesses. the best way to establish your bitcoin operations as a business in my non-lawyerly opinion is to incorporate an llc, register a tax id, and establish a business bank account.  this does not complicate filing too much so long as you are a sole proprietor and treat the llc as a passthrough, filing only a personal return.  then your hardware depreciation is clearly deductible.
I don't know about US, but in some countries (e.g. Russia) keeping corporation registered without enough profit is prohibitory expensive (You must pay fixed-sum contributions to the social security fund no matter do you have any profit or not. After this law was passed in Russia ~500K small businesses was forced to work "unregistered" evading taxes entirely.). I think you need to check if similar taxation apply in your country and weight is it worth to register your mining business at all.
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February 02, 2014, 12:29:56 AM
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im lost

say i mined 10 Bitcoins over 1 year. i did not sell any. i accumulated extra $200 per month in electricity than normal. i also paid say $3,000 for my mining gear. what do i report/deduct for my taxes?

the only thing i understand is that while i created 10 bitcoins out of thin air, i did not sell it for cash, so i do not report capital gains. but can i still claim a deduction to my expenses such as the electrcity, mining gear, and the depreciation?

keep a record of your cost basis for when you do sell so you can determine gain.   Or you could mark-to-market your bitcoins produced so you can clear your deduction now (or a portion) and then if you do sell at a different price at a later time, you would have a new cost basis as the price locked in from when you marked it.

the main rule of accounting is to be consistent.   but would be nice if the IRS did run a few examples of mining taxation for a 3 year period

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February 02, 2014, 04:48:06 AM
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Thanks for the article.  He makes it simple for me:

"Gains on bitcoins are taxable income. They become taxable when you sell bitcoins for cash or exchange them for goods or services."

That is how I did my 2013 taxes... I actually sold all of my coins in December for cash and claimed that as income.

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February 02, 2014, 10:20:25 AM
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Thanks for the article.  He makes it simple for me:

"Gains on bitcoins are taxable income. They become taxable when you sell bitcoins for cash or exchange them for goods or services."

So what if I have cloud mining, and auto reinvest all gains on more cloud mining, does that count as gain, or a reinvestment?
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February 02, 2014, 12:37:29 PM
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Thanks for the article.  He makes it simple for me:

"Gains on bitcoins are taxable income. They become taxable when you sell bitcoins for cash or exchange them for goods or services."

So what if I have cloud mining, and auto reinvest all gains on more cloud mining, does that count as gain, or a reinvestment?

If you sell the coins for cash then spend them, then it's taxable. IF you use the coins to purchase, then probably not, but different countries have different laws, but most probably fall under capital gains tax which is what you want to look in to.

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