[IRS] If Bitcoin is property, then the IRS may have a BIG problem!

[Stratobitz]

If they are going to treat it as property, how would mined coins by a company set up as a corporation be treated?  My impression is that per the IRS's position, bitcoins mined would be the same as a the creation of a product you create/produce for sale but does not sell. It becomes on the shelf inventory, and there is no taxable event until it sells. This applies to all companies that make products through a process, hard materials or digital.  If you own a software application, or a script (plugin) you developed, and sell it for $50 per copy, and make 1000 copies on CDROM, you don't owe the IRS taxes on the copies until they sell. It's all 1s and 0s, so what difference is there between using computers to create scripts or plugins or software, or bitcoins? All property right? You just have to view it from a manufacturing standpoint.  And the fact that they have ruled it is property, the manufacturing stance would in my opinion apply. Manufacturing being the creation of something tangible "property" from the use of labor, machines, raw materials, and energy resources.  So you mine the coins, put them on paper wallets as inventory to sell. But hold them... For sale at a later date, which would be taxable.  You'd have to set up an s-corp to do this, or is my thinking way off??

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[Stratobitz]

My point being, using the above methodology, unless you sell the product you've created... The "property" you now own that you have produced using hardware and software (or in this industry they call them miners), would not be taxable until you sell that property for fiat or exchange for goods.

[Beliathon]

The IRS will soon be as irrelevant as Blockbuster Video. They and the fiat empire upon which they are built are being rendered obsolete as we speak.

[casascius]

Yes. (Other than the s corp part)

It is not a problem for the IRS. It is normal for things to be taxable upon sale.

[greenlion]

The mining aspect seems to be incredibly confusing.

Is there anything wrong with the idea of declaring mining revenue when gains are realized (i.e. sold for fiat or goods purchased), at basis $0.00? Then deducting hardware/electricity as expense?

[waldox]

IRS's Ruling is an attack on Bitcoin

this is to the benefit of the bankers at the expense of bitcoin

Bitcoiners/Cryptocoiners will  get used to not reporting and they will subvert IRS like torrents have decimated the digital media industries, most in the tech generation feel its normal to copy copyright digital media because they grew up with it
IRS ruling burdens will normalize bitcoiners into ignoring the IRS, IRS have made a huge mistake. we may find ourselves with a new generation of IRS avoiders

you will see a big shift of people keeping all their money into crypto and rarely converting to fiat to avoid the IRS... accelerating bitcoin adoption

IRS is unconstitutional anyways, the money goes to fund the vatican!

[seriouscoin]

The mining aspect seems to be incredibly confusing.

Is there anything wrong with the idea of declaring mining revenue when gains are realized (i.e. sold for fiat or goods purchased), at basis $0.00? Then deducting hardware/electricity as expense?

The reason they make this rule for miners because they're afraid US miners sold btc abroad and thus.... no tax grab for them.

I guess they figure that btc can be moved easily (not like other tangible goods or products).

I bet my ass this would make mining corps like KNC become stronger and future of BTC mining would be outside of US.

[Pente]

IRS's Ruling is an attack on Bitcoin

this is to the benefit of the bankers at the expense of bitcoin

Bitcoiners/Cryptocoiners will  get used to not reporting and they will subvert IRS like torrents have decimated the digital media industries, most in the tech generation feel its normal to copy copyright digital media because they grew up with it
IRS ruling burdens will normalize bitcoiners into ignoring the IRS, IRS have made a huge mistake. we may find ourselves with a new generation of IRS avoiders

you will see a big shift of people keeping all their money into crypto and rarely converting to fiat to avoid the IRS... accelerating bitcoin adoption

IRS is unconstitutional anyways, the money goes to fund the vatican!

I don't know about our taxes being used to fund the vatican, but I do know they fund war and the death of innocent people. For that reason, I consider it to be HIGHLY immoral to pay most taxes.

BTW, I have no problem with property taxes. The money is generally used locally and I consider them to be more like user or rental fees for the land. Cryptocurrencies will have no effect on them anyway.

[amspir]

The mining aspect seems to be incredibly confusing.

Is there anything wrong with the idea of declaring mining revenue when gains are realized (i.e. sold for fiat or goods purchased), at basis $0.00? Then deducting hardware/electricity as expense?

You would probably get challenged in an audit, and end up paying the difference between the regular income tax rate and the capital gains tax rate.  You wouldn't be able to deduct your hardware and electricity as an investment for the purpose of capital gains.

[IrishFutbol]

If they are going to treat it as property, how would mined coins by a company set up as a corporation be treated?  My impression is that per the IRS's position, bitcoins mined would be the same as a the creation of a product you create/produce for sale but does not sell. It becomes on the shelf inventory, and there is no taxable event until it sells. This applies to all companies that make products through a process, hard materials or digital.  If you own a software application, or a script (plugin) you developed, and sell it for $50 per copy, and make 1000 copies on CDROM, you don't owe the IRS taxes on the copies until they sell. It's all 1s and 0s, so what difference is there between using computers to create scripts or plugins or software, or bitcoins? All property right? You just have to view it from a manufacturing standpoint.  And the fact that they have ruled it is property, the manufacturing stance would in my opinion apply. Manufacturing being the creation of something tangible "property" from the use of labor, machines, raw materials, and energy resources.  So you mine the coins, put them on paper wallets as inventory to sell. But hold them... For sale at a later date, which would be taxable.  You'd have to set up an s-corp to do this, or is my thinking way off??

No.  The IRS stated in their ruling that as soon as the BitCoin is mined, the miner owes taxes on: USD Value of BTC Received - Expenses to Mine.  And I'd advise people to be very very very careful about what they claim are expenses.

I'd also avoid the corporation set-up.  Not only would you pay taxes on the coins when they're mined, but now you're paying payroll taxes (SS & FICA) as well.

[IrishFutbol]

IRS's Ruling is an attack on Bitcoin

this is to the benefit of the bankers at the expense of bitcoin

Bitcoiners/Cryptocoiners will  get used to not reporting and they will subvert IRS like torrents have decimated the digital media industries, most in the tech generation feel its normal to copy copyright digital media because they grew up with it
IRS ruling burdens will normalize bitcoiners into ignoring the IRS, IRS have made a huge mistake. we may find ourselves with a new generation of IRS avoiders

you will see a big shift of people keeping all their money into crypto and rarely converting to fiat to avoid the IRS... accelerating bitcoin adoption

IRS is unconstitutional anyways, the money goes to fund the vatican!

It's a normal ruling that should have been expected a mile away.  Any other treatment and there'd be speculation that someone involved is also significantly involved in BTC.

It likely won't affect anything regardless though, at least in the short term.  The IRS is understaffed, and has bigger fish to fry.  They might target a few major players, but short of a targetted vendetta (think Tea Party v2.0), they will ignore 99.99% of BTC users.

And ignoring the IRS...you speak as someone who has nothing to lose.  Try telling someone with a few assets or a family to ignore the IRS...

[Pentax]

If they are going to treat it as property, how would mined coins by a company set up as a corporation be treated?  My impression is that per the IRS's position, bitcoins mined would be the same as a the creation of a product you create/produce for sale but does not sell. It becomes on the shelf inventory, and there is no taxable event until it sells. This applies to all companies that make products through a process, hard materials or digital.  If you own a software application, or a script (plugin) you developed, and sell it for $50 per copy, and make 1000 copies on CDROM, you don't owe the IRS taxes on the copies until they sell. It's all 1s and 0s, so what difference is there between using computers to create scripts or plugins or software, or bitcoins? All property right? You just have to view it from a manufacturing standpoint.  And the fact that they have ruled it is property, the manufacturing stance would in my opinion apply. Manufacturing being the creation of something tangible "property" from the use of labor, machines, raw materials, and energy resources.  So you mine the coins, put them on paper wallets as inventory to sell. But hold them... For sale at a later date, which would be taxable.  You'd have to set up an s-corp to do this, or is my thinking way off??

No, you're thinking is not way off.  This is the exact question, or pretty close, that I'm taking to my accountant next week as part of my annual visit.

I'll likely incorporate, but am going to my accountant, who is a good one, first.  This obviously entails other costs, such as incorporation, an annual report, annual fees, and filing a corporate return in addition to your private return, all of which increases your accounting costs, but it's likely a solid plan to consult an accountant first.

Oh, and as to kind of just holding them.  From that standpoint they're inventory.  Pretty sure that the value of the inventory is taxable.   Now if that value is when they're created or at the end of the year is a question I don't have the answer to.

[AnonyMint]

The coinbase transaction sends you coins from the network, so this must be reported as income.

When you dispose the coins, you must report capital gains (or loss).

[dmartig]

http://www.coindesk.com/irs-bitcoin-tax-guidelines-mean/

[casascius]

IRS's Ruling is an attack on Bitcoin

I don't see it this way.  I see it as adding certainty.  I saw my accountant long ago and discussed Bitcoin at length, and our assumptions based on existing law were pretty much exactly in line with this IRS guidance.  And I am someone who has used Bitcoin in every role imaginable: I've mined it, bought it, had capital gains and losses on it, paid bills with it, accepted payment with it, embedded it in a product for sale i.e. "cost of goods sold", held it as inventory, etc.

Now with this guidance, the way I understand it, the risk of running a mining operation is now less, as if you have losses in a mining operation, deducting them should be pretty straightforward.  And just about every mining operation is going to start out with a big probability of incurring losses.  Beforehand, one would be inclined to worry that an auditor or examiner would have to be persuaded that mining was even a legitimate business endeavor that could result in a deductible loss in the first place (as opposed to a hobby where losses are not deductible because you're paying for your own enjoyment).

Based on my limited understanding, Bitcoin is being treated better than silver and gold under the law.

[jbreher]

 I saw my accountant long ago and discussed Bitcoin at length, and our assumptions based on existing law were pretty much exactly in line with this IRS guidance.  

Can you explain to me the logic behind the taxable event of block creation by miners? AFAIK, entities that mine physical gold don't have a taxable event when they pull it from the ground, do they? Isn't the taxable event when they sell the gold?

[MashRinx]

No.  The IRS stated in their ruling that as soon as the BitCoin is mined, the miner owes taxes on: USD Value of BTC Received - Expenses to Mine.  And I'd advise people to be very very very careful about what they claim are expenses.

Would you mind elaborating on this further, or maybe Mike or someone else with this experience could?  I would think hardware costs and/or depreciation of that hardware as well as electrical would all be reasonable?  I have a follow-up with my accountant soon and would like to have as much information in this regard as possible.

Thanks in advance.

[AnonyMint]

The coinbase transaction sends you coins from the network, so this must be reported as income.

When you dispose the coins, you must report capital gains (or loss).

I saw my accountant long ago and discussed Bitcoin at length, and our assumptions based on existing law were pretty much exactly in line with this IRS guidance.  

Can you explain to me the logic behind the taxable event of block creation by miners? AFAIK, entities that mine physical gold don't have a taxable event when they pull it from the ground, do they? Isn't the taxable event when they sell the gold?

My rationale is the network of all users paid the coins to you in exchange for you providing a mining service.

Besides I wouldn't risk it on some flimsy interpretation you prefer, because fees and late penalties could be tacked on later. The IRS will always rule for the interpretation that nets them the most tax soonest. Good luck trying to defeat them in tax court.

Btw, I had this interpretation immediately upon learning of Bitcoin. It was obvious to me, well maybe that is because my sister and grandfather were both CPAs, my father is an attorney, and I self-taught myself double-entry cash and accrual accounting and tax accounting (when my sister and grandfather died).

[IrishFutbol]

No.  The IRS stated in their ruling that as soon as the BitCoin is mined, the miner owes taxes on: USD Value of BTC Received - Expenses to Mine.  And I'd advise people to be very very very careful about what they claim are expenses.

Would you mind elaborating on this further, or maybe Mike or someone else with this experience could?  I would think hardware costs and/or depreciation of that hardware as well as electrical would all be reasonable?  I have a follow-up with my accountant soon and would like to have as much information in this regard as possible.

Thanks in advance.

Depends on what you're using as hardware.

If you have a mining machine that is solely used for mining and absolutely nothing else, then you can easily deduct the depreciation of the machine and the electricity the machine uses (a reasonable recalculation should work for cost of electricity).  However, if you have a personal computer that you sometimes use to mine, and sometimes use to go online / watch movies / etc., you're not going to be able to deduct anything for this.

The IRS has been making a big push recently targeting business items that have personal use, which is why I'd advise against anyone trying to deduct the cost of their main computer as a bitcoin expense.

[MashRinx]

Depends on what you're using as hardware.

If you have a mining machine that is solely used for mining and absolutely nothing else, then you can easily deduct the depreciation of the machine and the electricity the machine uses (a reasonable recalculation should work for cost of electricity).  However, if you have a personal computer that you sometimes use to mine, and sometimes use to go online / watch movies / etc., you're not going to be able to deduct anything for this.

The IRS has been making a big push recently targeting business items that have personal use, which is why I'd advise against anyone trying to deduct the cost of their main computer as a bitcoin expense.

Thanks this helps.  MOST hardware is mining-specific, but I do have some hardware I will have to think about.  Do you know if there is any kind of % test of time that can be applied to determine if it's deductible, or even partially so, or is it basically that ANY personal use would exclude it?  My kids logging in for a few minutes to check on homework a couple times a week on a machine that continues to mine basically 100% of the time is one example.

Not trying to split hairs, so hopefully it doesn't come across that way.  I appreciate your feedback.