US Mining Hardware Deduction/Depreciation

[greenlion]

Is there anybody out there with real advice on the basics on how mining hardware could properly be deducted for US tax purposes?

Standard depreciation schedule ideas seem completely insane for the cost of hardware that gets bricked within well under a year.

Any legitimate advice, even on how to properly explain this to a tax professional, is greatly appreciated, as I'm sure lots of people have this same question.

Please no general conspiracy theories or bitching, because I understand it's nice to have political opinions, but what you think about the IRS is not helpful to people trying to actually accomplish something.

[Operatr]

I'd assume since to the IRS, miners are creating "property" not unlike any other product, mining machines can be counted as manufacturing equipment, as well as costs incurred to operate them.

Again that is my assumption, but this does need more clarification from someone more certified than I.

[J_Dubbs]

Is there anybody out there with real advice on the basics on how mining hardware could properly be deducted for US tax purposes?

Standard depreciation schedule ideas seem completely insane for the cost of hardware that gets bricked within well under a year.

Any legitimate advice, even on how to properly explain this to a tax professional, is greatly appreciated, as I'm sure lots of people have this same question.

Please no general conspiracy theories or bitching, because I understand it's nice to have political opinions, but what you think about the IRS is not helpful to people trying to actually accomplish something.

By the nature of capitalizing equipment if it's not intended to serve a use for more than 1 year you cannot depreciate it. No matter how much someone may want to there isn't a way to depreciate something that will only serve a use for less than a year. Now, with that said, the outlook might change if BTC appreciates significantly in price, but your forecast of useful life is supposed to be based on historical evidence, and thus far ASIC gear shows no evidence of a useful life beyond 12 months.

In my own operation I am flipping old equipment anyways, so I won't even come close to a year. Purchase price of the asset is an expense, and the salvage value is what you sell it for and is recorded as a revenue. This is a line item against expense in the same year, and just added to revenue if the sale happens in the following year. Personally, based on my mining experience (which is what your accounting is supposed to be based off), the idea of putting any ASIC gear on a depreciation schedule sounds completely ridiculous.

[greenlion]

Is this all just standard schedule C stuff for an individual or does this require any special legal manuevering?

[J_Dubbs]

Is this all just standard schedule C stuff for an individual or does this require any special legal manuevering?

I've always considered this a hobby, so I don't believe anything special is required. I'm trying to get a hold of CPAs to discuss it but my impression is the entire topic of Bitcoin scares them off.

Just a quick run through my expenses versus mining revenues produces a decent loss, much of that is due to the equipment expense, actually all of it. I bought a lot of gear with revenues from mining, and honestly I cannot even imagine trying to run a FIFO tally on all of those BTC equipment purchases; my best attempt will be to use an average payout basis to serve as cost, but a good number of my purchases will show a loss, which will only add to the basic revenue/expense losses I'm already seeing. This is more speaking for 2014. For 2013 the activity it small enough it almost seems stupid to record. I also haven't even calculated electricity yet. I guess if I had profits I could see the point of all this, but to jump through all these hoops just to show a big loss seems so silly and like a time-suck. My spreadsheets lay everything out, but if I end up hiring a CPA I'll need to somehow make this understandable. I think when mining with a pool these new rules really fuck us into creating a big audit flag, pretty stupid if you ask me.

I just keep thinking, if I was running a lemonade stand or knitting scarves at a LOSS would I really bother reporting it to the IRS? It's not like I'm skipping on owing them anything, not to mention the ridiculous detail involved in daily payouts on my spreadsheets.

[joae1975]

My CPA wants me to provide her with the value of the bitcoin when I mined it vs when I sold it.  It doesn't have to be the same btc, that's a daunting task to calculate.  She just needs a number for the books.  She needs a basis value for when it was mined vs when it was sold.  And she's treating it like short term gains, like stocks.  I'll use the difficulty vs my hash rate to calculate what I mined.  I can look at my payout history on btcguild, but that doesn't reflect the date mined, just the date it moved it from btcguild to my wallet.  My CPA doesn't know what to do, we're really just guessing.  There are simply some huge deposits into my checking from coinbase that need accounted for,  that's what we're doing.  If you never sell any btc, you need not report anything. 

[J_Dubbs]

My CPA wants me to provide her with the value of the bitcoin when I mined it vs when I sold it.  It doesn't have to be the same btc, that's a daunting task to calculate.  She just needs a number for the books.  She needs a basis value for when it was mined vs when it was sold.  And she's treating it like short term gains, like stocks.  I'll use the difficulty vs my hash rate to calculate what I mined.  I can look at my payout history on btcguild, but that doesn't reflect the date mined, just the date it moved it from btcguild to my wallet.  My CPA doesn't know what to do, we're really just guessing.  There are simply some huge deposits into my checking from coinbase that need accounted for,  that's what we're doing.  If you never sell any btc, you need not report anything.  

That's what I thought prior to the IRS guidelines, but unfortunately you are wrong. I suggest you bone up on it before making statements presented as fact.

Are you mining with ASIC gear? If so, is the cost being expensed as one-time payments?


FYI, here's a summary of the IRS guidance: You are supposed to log the BTC as you mined it as INCOME, at the value of BTC on the day it was paid to your wallet. Then that income also serves as your cost basis for what you are already doing. So it sounds like you have half of the math done. FWIW, I wanted it to be like the way your CPA thinks it is, but unfortunately it didn't end up like that.

[greenlion]

If you never sell any btc, you need not report anything. 

The guidance pretty explicitly says this is not true, although this is exactly what most people probably would've thought before. Income tax on the mined Bitcoins themselves is paid upfront based on fair market value regardless of what you do with them per the published guidance, but that fair market value then later serves as the basis if you trigger a taxable event that produces capital gains.

[J_Dubbs]

If you never sell any btc, you need not report anything. 

The guidance pretty explicitly says this is not true, although this is exactly what most people probably would've thought before. Income tax on the mined Bitcoins themselves is paid upfront based on fair market value regardless of what you do with them per the published guidance, but that fair market value then later serves as the basis if you trigger a taxable event that produces capital gains.

You know what's really fucking scary? He's paying a CPA and even she doesn't know this shit.

[greenlion]

I just keep thinking, if I was running a lemonade stand or knitting scarves at a LOSS would I really bother reporting it to the IRS? It's not like I'm skipping on owing them anything, not to mention the ridiculous detail involved in daily payouts on my spreadsheets.

My thinking on this exact question is that establishing the basis now as legitimately as possible should reduce problems with any future capital gains (hopefully!).

I know, famous last words right?

I'm personally not too concerned about the record-keeping, unless there's some compelling information I'm not privy to yet, because it seems insane that the IRS would get so granular as to scrutinize pool shifts. I'm figuring just settling the amount mined by day and extending by say a Coinbase quote for that day would be perfectly fine for establishing basis. That's already kind of insane, but the wording of the guidance kind of suggests to me that would be the right approach. Admittedly this is pretty trivial to track just with very basic relational database proficiency, spreadsheet lookups, or very simple coding.

I'm tempted to just write a quick and dirty python script that does this straight off the CSV Bitcoin-qt can dump, assuming the Coinbase API has a function for historical lookups via HTTP GET (?). If anybody thinks that might be useful I'll post the script if I actually do that.

[greenlion]

You know what's really fucking scary? He's paying a CPA and even she doesn't know this shit.

I'm pretty much convinced that it would take a while to find a CPA that doesn't look at you like you're talking about aliens, or asks for a 1099 from the "Bitcoin company".

[J_Dubbs]

I just keep thinking, if I was running a lemonade stand or knitting scarves at a LOSS would I really bother reporting it to the IRS? It's not like I'm skipping on owing them anything, not to mention the ridiculous detail involved in daily payouts on my spreadsheets.

My thinking on this exact question is that establishing the basis now as legitimately as possible should reduce problems with any future capital gains (hopefully!).

I know, famous last words right?

I'm personally not too concerned about the record-keeping, unless there's some compelling information I'm not privy to yet, because it seems insane that the IRS would get so granular as to scrutinize pool shifts. I'm figuring just settling the amount mined by day and extending by say a Coinbase quote for that day would be perfectly fine for establishing basis. That's already kind of insane, but the wording of the guidance kind of suggests to me that would be the right approach. Admittedly this is pretty trivial to track just with very basic relational database proficiency, spreadsheet lookups, or very simple coding.

I'm tempted to just write a quick and dirty python script that does this straight off the CSV Bitcoin-qt can dump, assuming the Coinbase API has a function for historical lookups via HTTP GET (?). If anybody thinks that might be useful I'll post the script if I actually do that.

I went to http://bitcoincharts.com/charts/btceUSD#rg180ztgSzm1g10zm2g25zv and clicked "load raw data"- the column all the way to the right is the day's weighted average price and that is what I used for payouts. I'm just making spreadsheets to get a better idea of how this looks before I make any decisions. I am trying to get a hold of a CPA but I'm almost certain that the mention of Bitcoin has scared them off. Left to my own devices I might not report but will keep my detailed records ready for next year. I only had 2 months of mining in 2013 so that's not really my concern as much as 2014 will be.

My problem is I've got all these 0.05 payouts, and it's around one per day. Each one is converted to USD, but along the way I was spending BTC on new mining gear. The IRS is expecting me to treat each time I bought gear to be a sale, but my cost basis tax lots are 0.05BTC each!! So if I'm using a FIFO method that would mean my first whole bitcoin spent would come from the first 20 payouts- trying to make a running system with daily payouts and fractional spending is f'ing insane. I'll need to find a way to maybe just take my annual average cost basis and say "good enough". That method might even be allowed, I mean non-public companies don't need to worry about GAAP requirements, pretty sure we can determine a reasonable method be it LIFO, FIFO, or average cost so long as we stick with it.

Lastly, I was chatting on a fairly popular chat room tonight about this. Everyone there was basically saying I am insane for even considering filing my mining income. Seems the general vibe on the forums here is much different than the pool chat rooms. I wonder what the casual mining non-message-board-addict is thinking. The only moment I started getting worried was when I read these forums and saw all the panic.

[greenlion]

Strangely enough warehouse management software is perfect for tracking this kind of thing, because the individual Bitcoin payments can come into "inventory" as receipts with the market price as accessory metadata, and a purchase/cash-out could be entered as an order. Any WMS material selection function can be configured to select by FIFO so the software itself figures out the basis essentially for you.

I think it's a big mistake not to file, because it exposes you to terrible retroactive enforcement risks. Also ideally as the ecosystem increases in size and takes on greater non-informal sector use cases, not filing now is just going to force a miner to concoct an elaborate laundering scheme if the time comes that held Bitcoins would be very useful to use for completely over-the-table transactions. The whole system is definitely rotten, but I don't think that necessarily means that it's a good idea to invite even worse consequences. I like to think of it like being accosted by a mugger, it's definitely arguably the moral high ground not to comply, but in practice it's not worth getting stabbed to death just to keep your wallet.

[iglasses]

Pretty standard deal for the big G. Create a policy regarding something that is so ambiguous no one could possibly follow it even if they wanted to. They create criminals with these bullshit positions that are designed to discourage people from participating, not follow rules.
FU eye R ass

[BitcoinAwesomeMan]

Interesting Thread

[sitecoin]

You know what's really fucking scary? He's paying a CPA and even she doesn't know this shit.

I'm pretty much convinced that it would take a while to find a CPA that doesn't look at you like you're talking about aliens, or asks for a 1099 from the "Bitcoin company".

What you said is reasonable, damn guy really make people angry.

[DarkKnight]

So, here's a question... (Generally Speaking) People don't mine BTC, pools mine BTC. Individuals do 'work' for the pools. So, in this particular interpretation, the pools bear the burden of tax responsibility for having mined the coins, correct? If you were to say that because an individual actually finds the block, and thus "mines" the coins, wouldn't that make the specific individual responsible for the tax burden of the 25 BTC? I fail to see how the wording of their statement, strictly interpreted, incurs a tax burden on individual miners.

Based on the wording of the IRS' statement, I don't believe they really understand the process. Certainly, I think they are hoping the the 'threat' of the IRS is enough to convince people to pay taxes on income they (at this point in time) can't possibly track or regulate. Also, what does this mean for people mining every *other* crypto? I don't mine BTC, but I get paid in it. Their statement doesn't cover currencies of the week, or even LTC for that matter.

[J_Dubbs]

So, here's a question... (Generally Speaking) People don't mine BTC, pools mine BTC. Individuals do 'work' for the pools. So, in this particular interpretation, the pools bear the burden of tax responsibility for having mined the coins, correct? If you were to say that because an individual actually finds the block, and thus "mines" the coins, wouldn't that make the specific individual responsible for the tax burden of the 25 BTC? I fail to see how the wording of their statement, strictly interpreted, incurs a tax burden on individual miners.

Based on the wording of the IRS' statement, I don't believe they really understand the process. Certainly, I think they are hoping the the 'threat' of the IRS is enough to convince people to pay taxes on income they (at this point in time) can't possibly track or regulate. Also, what does this mean for people mining every *other* crypto? I don't mine BTC, but I get paid in it. Their statement doesn't cover currencies of the week, or even LTC for that matter.

I think they pushed the guidance out the door without considering the use case of mining with a pool and having a small operation. It seems like for a large operation engaged in solo-mining the guidance makes a lot of sense, but for a small operator working with a pool, not so much.

[J_Dubbs]

You know what's really fucking scary? He's paying a CPA and even she doesn't know this shit.

I'm pretty much convinced that it would take a while to find a CPA that doesn't look at you like you're talking about aliens, or asks for a 1099 from the "Bitcoin company".

I met with a CPA and he is learning as we go, which is somewhat understandable as this stuff is new to the rest of the world. Not everyone is a crypto-nerd like all of us... The good news is he was interested and seemed intrigued, not scared off by it at all. My homework assignment is to get my spreadsheets cleaned up. I'll do my best to pass along feedback to the community, but if we go outside the box a little I may keep that on the DL.

[greenlion]

If this all works the way we think, this really isn't hard to track, especially because everyone involved in this is a self-selecting population that has the general computer proficiency to do it.

This all just looks complicated by mediocre old people standards! Although to be fair it is unreasonable that we have to be exceptional compared to the general population just to comply.