As miner, should I declare my computers/electricity for tax purposes?

[mskryxz]

I've never sold a bitcoin so I have no gains to report.

However, I've been mining for a year and purchased expensive computer parts to mine.

Will I be able to declare those as a business expense for tax purposes even though I didn't report any income( i didn't sell any coins)

[pungopete468]

If you operate a business (have a FEIN) and the equipment you purchased is directly related to your business class then you can deduct them as operating expenses...

[mgio]

I've never sold a bitcoin so I have no gains to report.

However, I've been mining for a year and purchased expensive computer parts to mine.

Will I be able to declare those as a business expense for tax purposes even though I didn't report any income( i didn't sell any coins)

If you are a miner, you have gains to report. Every coins you mined needs to be declared as income at the moment you mined it.

[pungopete468]

I've never sold a bitcoin so I have no gains to report.

However, I've been mining for a year and purchased expensive computer parts to mine.

Will I be able to declare those as a business expense for tax purposes even though I didn't report any income( i didn't sell any coins)

If you are a miner, you have gains to report. Every coins you mined needs to be declared as income at the moment you mined it.

Not true. You have no financial gain until you sell. Think of Bitcoin as an inventory item. Your asset cost is the cost of equipment and power. As a business you don't pay income tax on unsold inventory...

If you own a rock quarry you don't pay taxes on all the rocks you own but haven't sold yet.

[e521]

I've never sold a bitcoin so I have no gains to report.

However, I've been mining for a year and purchased expensive computer parts to mine.

Will I be able to declare those as a business expense for tax purposes even though I didn't report any income( i didn't sell any coins)

If you are a miner, you have gains to report. Every coins you mined needs to be declared as income at the moment you mined it.

Not true. You have no financial gain until you sell. Think of Bitcoin as an inventory item. Your asset cost is the cost of equipment and power. As a business you don't pay income tax on unsold inventory...

If you own a rock quarry you don't pay taxes on all the rocks you own but haven't sold yet.

what if you use it to buy something?
by the way OP, which Country we are talking about?

[pungopete468]

I've never sold a bitcoin so I have no gains to report.

However, I've been mining for a year and purchased expensive computer parts to mine.

Will I be able to declare those as a business expense for tax purposes even though I didn't report any income( i didn't sell any coins)

If you are a miner, you have gains to report. Every coins you mined needs to be declared as income at the moment you mined it.

Not true. You have no financial gain until you sell. Think of Bitcoin as an inventory item. Your asset cost is the cost of equipment and power. As a business you don't pay income tax on unsold inventory...

If you own a rock quarry you don't pay taxes on all the rocks you own but haven't sold yet.

what if you use it to buy something?
by the way OP, which Country we are talking about?

If you use it to buy something then you should follow the tax rules regarding bartering.

[mskryxz]

I've never sold a bitcoin so I have no gains to report.

However, I've been mining for a year and purchased expensive computer parts to mine.

Will I be able to declare those as a business expense for tax purposes even though I didn't report any income( i didn't sell any coins)

If you are a miner, you have gains to report. Every coins you mined needs to be declared as income at the moment you mined it.

Not true. You have no financial gain until you sell. Think of Bitcoin as an inventory item. Your asset cost is the cost of equipment and power. As a business you don't pay income tax on unsold inventory...

If you own a rock quarry you don't pay taxes on all the rocks you own but haven't sold yet.

what if you use it to buy something?
by the way OP, which Country we are talking about?

usa

[mskryxz]

I've never sold a bitcoin so I have no gains to report.

However, I've been mining for a year and purchased expensive computer parts to mine.

Will I be able to declare those as a business expense for tax purposes even though I didn't report any income( i didn't sell any coins)

If you are a miner, you have gains to report. Every coins you mined needs to be declared as income at the moment you mined it.

Not true. You have no financial gain until you sell. Think of Bitcoin as an inventory item. Your asset cost is the cost of equipment and power. As a business you don't pay income tax on unsold inventory...

If you own a rock quarry you don't pay taxes on all the rocks you own but haven't sold yet.

exactly since i sold 0 coins, i don't owe any capital gains.

but what i am wondering is, will i still be able to claim a deduction on the extra electricity i've been paying for? and will i be able to take a deduction for the equipment purchased and depreciation?

do i need to register as a business or can this be classified as a hobby?

[mskryxz]

If you operate a business (have a FEIN) and the equipment you purchased is directly related to your business class then you can deduct them as operating expenses...

Do you recommend I register as a business then?

Here is my scenario example:

Bill has 2 computers which he bought for $2,000 each for a total of $4,000.
Bill was able to mine 20 Bitcoins from January 2013 to December 2013.
Bill did NOT sell any of his bitcoins and did not purchase any items with his bitcoins.
Bill also has a full time job and does mining as a hobby.

What is Bill's best approach in reporting his hobby/business with the IRS that will benefit both Bill and the IRS while completely complying with the IRS.
Bill does not want to get in trouble with the IRS

[pungopete468]

If you operate a business (have a FEIN) and the equipment you purchased is directly related to your business class then you can deduct them as operating expenses...

Do you recommend I register as a business then?

Here is my scenario example:

Bill has 2 computers which he bought for $2,000 each for a total of $4,000.
Bill was able to mine 20 Bitcoins from January 2013 to December 2013.
Bill did NOT sell any of his bitcoins and did not purchase any items with his bitcoins.
Bill also has a full time job and does mining as a hobby.

What is Bill's best approach in reporting his hobby/business with the IRS that will benefit both Bill and the IRS while completely complying with the IRS.
Bill does not want to get in trouble with the IRS

I'm no CPA but I've operated a business for several years and handled my own taxes. Don't take this as legal advice.

If you want to claim a deduction on the $4,000 dollars you will need to pay for a business license and get yourself a FEIN. Otherwise your expenses won't qualify as "business expenses." You would look at it like a business which operates under a loss until you make a transaction with your Bitcoins. Keep in mind if you spend them on more Bitcoin mining equipment this is deductible.

Your bitcoins will be viewed as an inventory item and the cost of electricity is the cost of your inventory. Once you sell them or buy something with them (barter) you will need to record it and pay taxes accordingly. If you operate at a loss or break-even you probably won't owe taxes at all and if you make a profit you can claim the applicable deductions to where you may owe no taxes or at least reduce your tax liability.

It's not uncommon for a business owner to pay themselves as a W2 employee. It's actually less of a headache in my opinion. I put myself on regular payroll with ADP and let them take care of everything. (Of course, it doesn't matter who is paying you as long as it's recorded accordingly.)

You will have no trouble with the IRS if you treat it this way unless they come right out and set a public policy. This is the closest real world analogy I can see for tax purposes.

The only way I would say "go ahead and register a business" would be if you plan to deduct your hardware expenses and electricity from other taxable income directly related to your mining.

You can only reduce your personal income tax liability for certain business related expenses like (gas, lodging, basically anything required as part of your business.) I don't think you will be able to reduce your personal tax liability by operating a "bitcoin mining business" because I believe they will be filed as separate returns if you are a W2 employee with another company.

I always filed separately at least...

[mgio]

I've never sold a bitcoin so I have no gains to report.

However, I've been mining for a year and purchased expensive computer parts to mine.

Will I be able to declare those as a business expense for tax purposes even though I didn't report any income( i didn't sell any coins)

If you are a miner, you have gains to report. Every coins you mined needs to be declared as income at the moment you mined it.

Not true. You have no financial gain until you sell. Think of Bitcoin as an inventory item. Your asset cost is the cost of equipment and power. As a business you don't pay income tax on unsold inventory...

If you own a rock quarry you don't pay taxes on all the rocks you own but haven't sold yet.

Sorry, you are wrong here. BItcoin is not an inventory item. It is a capital asset. They are taxed when they are mined, and you are taxed again on any capital gains when they are sold.

You will actually save way more money in taxes overall if they are treated that way anyways.

[mgio]

If you operate a business (have a FEIN) and the equipment you purchased is directly related to your business class then you can deduct them as operating expenses...

Do you recommend I register as a business then?

Here is my scenario example:

Bill has 2 computers which he bought for $2,000 each for a total of $4,000.
Bill was able to mine 20 Bitcoins from January 2013 to December 2013.
Bill did NOT sell any of his bitcoins and did not purchase any items with his bitcoins.
Bill also has a full time job and does mining as a hobby.

What is Bill's best approach in reporting his hobby/business with the IRS that will benefit both Bill and the IRS while completely complying with the IRS.
Bill does not want to get in trouble with the IRS

I'm no CPA but I've operated a business for several years and handled my own taxes. Don't take this as legal advice.

If you want to claim a deduction on the $4,000 dollars you will need to pay for a business license and get yourself a FEIN. Otherwise your expenses won't qualify as "business expenses." You would look at it like a business which operates under a loss until you make a transaction with your Bitcoins. Keep in mind if you spend them on more Bitcoin mining equipment this is deductible.

Your bitcoins will be viewed as an inventory item and the cost of electricity is the cost of your inventory. Once you sell them or buy something with them (barter) you will need to record it and pay taxes accordingly. If you operate at a loss or break-even you probably won't owe taxes at all and if you make a profit you can claim the applicable deductions to where you may owe no taxes or at least reduce your tax liability.

It's not uncommon for a business owner to pay themselves as a W2 employee. It's actually less of a headache in my opinion. I put myself on regular payroll with ADP and let them take care of everything. (Of course, it doesn't matter who is paying you as long as it's recorded accordingly.)

You will have no trouble with the IRS if you treat it this way unless they come right out and set a public policy. This is the closest real world analogy I can see for tax purposes.

The only way I would say "go ahead and register a business" would be if you plan to deduct your hardware expenses and electricity from other taxable income directly related to your mining.

You can only reduce your personal income tax liability for certain business related expenses like (gas, lodging, basically anything required as part of your business.) I don't think you will be able to reduce your personal tax liability by operating a "bitcoin mining business" because I believe they will be filed as separate returns if you are a W2 employee with another company.

I always filed separately at least...

There is no point in getting a business license. It's a waste of time and money since you have no employees, no customers, etc. You can have a business without registering. You do not need a license. You only need to register if you decide to incorporate, but there is no point in doing so. These rules might be different in your state, so I recommend you consult an accountant.

I have talked to an accountant and he advised that there is no reason to incorporate. Your business can be considered a sole proprietorship and all your expenses can be deducted.

[Bob Derber]

I am an accountant and at least for my US mining clients we believe bitcoins are taxed when the coinbase is complete.  This has been helpful to some as they have some significant expenses that they would have lost had they not have had the income to offset those expenses -  from the computers purchased to an allocation of home electrical use and even, for some, depreciation of their home office where their mining activity is conducted.

mgio is correct, a 'business license' or incorporating is not required.  Either or both may help evidencing that you are mining as part of a 'trade or business' as opposed to an 'activity for profit.' The difference between these two is a bit much for a board discussion but your accountant will know what it is and how, in your particular circumstances, it impacts your deductions and your taxes.

No specific IRS ruling says your coinbase award is taxed when you receive it.  We expect the IRS to say so.  Some know some tax people point to gold miners who do not report found gold as income.  This had more to do with the fact that you could not value the gold found because you did not know either its purity or how to reduce it to being a marketable quantity.  Had you been mining and happened on a gold coin, you would be taxed the moment it was found on it's value as the value was reasonably determinable.

So the value of the coinbase is reasonably determinable.  We have the indexes for bitcoin, and while you might argue each index is different, some higher, some lower, and whether you might use daily average price, or bid/ask as of the time the block was added to the block chain or the coinbase was spendable at 99 confirms, I would only suggest that once you chose a way to value it - stick with that method. 

Hope this helps.  Bottom line is..... tell Bill to go see his accountant.  20 bitcoin may be a marginal amount of money if earned in the earlier part of last year.  Tell bill to let his accountant determine if what Bill was doing was a 'hobby' or 'an activity for profit' or a 'trade or business.'  It's a determination that is technical but quick to make.  Your expenses may offset much of the income if the bitcoins were mined before March last.....

Oh and BTW - 20 bitcoins.... nice!

bob