US Mining Hardware Deduction/Depreciation

[J_Dubbs]

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.

My biggest beef with all of this is I only have one way exchange. I buy Bitcoin and mine Bitcoin, buy more gear with Bitcoin. I never exchanged any Bitcoin for USD but they want to have me pay taxes on it. I know people will say, "it's property" but honestly, I've never looked at it that way and it feels stupid to have to care this much. When I had to spend a few hours this morning on spreadsheets the whole thing just seems crazy. I'm not the IRS, but if I were it would be a lot different. My primary change would be there's nothing reportable until you exchange for dollars, once you exchange then you realize the gain, and mining would simply establish a cost basis. Paying tax on a virtual thing I can trade that never got turned into dollars and is sitting with a lesser value than when it was paid to me just seems so stupid. And most ASIC equipment is priced near break-even anyways so you really can't have an operating profit on mining unless BTC is moving exactly sideways or up in price, otherwise expense of the equipment can easily exceed the revenue when converted to USD. Regardless of exchange all the accounting must be reported in USD, your success or failure is 99% attributed to market forces of supply and demand that you have no control over. Had to rant, sorry but I think it kinda sucks and took much of the fun away from mining. Keep in mind a CPA or the IRS will only accept dollars, more you need to report the more it's gonna cost.

[greenlion]

My primary change would be there's nothing reportable until you exchange for dollars, once you exchange then you realize the gain, and mining would simply establish a cost basis. Paying tax on a virtual thing I can trade that never got turned into dollars and is sitting with a lesser value than when it was paid to me just seems so stupid.

I agree, it's as though you're chopping some wood in the yard with the intention to sell firewood at some point, but they expect you to pay taxes when you stack it instead of when you sell it.

[djjacket]

My primary change would be there's nothing reportable until you exchange for dollars, once you exchange then you realize the gain, and mining would simply establish a cost basis. Paying tax on a virtual thing I can trade that never got turned into dollars and is sitting with a lesser value than when it was paid to me just seems so stupid.

I agree, it's as though you're chopping some wood in the yard with the intention to sell firewood at some point, but they expect you to pay taxes when you stack it instead of when you sell it.

Do farmers have to pay tax on cow manure because they *could* sell it as fertilizer?

What about my vegetable garden?  Do I have to report the grown produce?  Is that income since I could sell it?

[greenlion]

Another aspect of this whole story to take into account came to my attention listening to the latest episode of the Epicenter Bitcoin podcast.

In the United States, capital losses can only be deducted against regular income up to a limit of $2000 per year.

The implication is that in the hopefully unlikely event of some serious nuclear event in the valuation of Bitcoin, holders of any kind need some kind of diversification of investment gains in order to have other capital gains to deduct losses against.

[fr4nkthetank]

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.

keep it running and depreciate it like any capital investment, for example, a computer.

[J_Dubbs]

little update... to my surprise my CPA put the equipment on a depreciation schedule. He is aware of the short useful life, but his reasoning makes a lot of sense. We will depreciate for 2013, since I only mined for 2 months if we took the whole thing it would have been a massive one-time loss, which really wouldn't have done me any favors year over year. By depreciating we can recapture the losses next year on the equipment sales. I already dumped cubes around $150-200, which is significantly less than what I paid for them a few months back, so that will show up on 2014's books. The filing came out good (felt fair), and all my records were clean and detailed, overall went smooth and unless BTC goes to $0 I'll probably be in business mining another year.

[Gator-hex]

There's no income until you take your asset/commodity to market and sell it for money.

If you paint a picture, it provides you with no income until you can find a buyer for it, and turn it in to money. You cannot pay your taxes in paintings!

income
ˈɪnkʌm/
noun
noun: income; plural noun: incomes

    1.
    money received, especially on a regular basis, for work or through investments.

As far as I'm aware Bitcoin hasn't been declared as official US money so we cannot be mining an income!

http://www.bitcoinx.com/texas-congressman-plans-submit-bill-classify-bitcoin-currency/

When you can pay your taxes directly in Bitcoin, and it incurs no capital gains tax to hold it like money, then you can claim it's income as it's mined!

Let the IRS know what you think or you'll end up paying tax twice! Taxpayers may submit comments electronically via e-mail to the following address: Notice.Comments@irscounsel.treas.gov  Taxpayers should include “Notice 2014-21” in the subject line.

[whtchocla7e]

...I buy Bitcoin and mine Bitcoin, buy more gear with Bitcoin...

...My primary change would be there's nothing reportable until you exchange for dollars, once you exchange then you realize the gain, and mining would simply establish a cost basis...

When you exchange your Bitcoin for equipment you realize your gain...

[iglasses]

Digital currency miners—the people using their computers to solve complex math problems in order to release new money into the economy—have to track the value of their coins when first mined as well as when they use or sell them. If a miner mined one Bitcoin on January 1, 2013, when it was worth $13, then they must report $13 in direct income. Then, if they sold the Bitcoin on December 31, 2013, when it was worth roughly $1,000, they would be subject to capital gains tax on the $987 difference

In order to properly report taxes, miners must now closely track when they successfully mine coins to determine their original value.


I'm sorry Gator but it matters not how YOU interpret it...According to the IRS you are liable for the value of the coin the moment you mine it, even if you never sell it.

[Gator-hex]

Digital currency miners—the people using their computers to solve complex math problems in order to release new money into the economy—have to track the value of their coins when first mined as well as when they use or sell them. If a miner mined one Bitcoin on January 1, 2013, when it was worth $13, then they must report $13 in direct income. Then, if they sold the Bitcoin on December 31, 2013, when it was worth roughly $1,000, they would be subject to capital gains tax on the $987 difference

In order to properly report taxes, miners must now closely track when they successfully mine coins to determine their original value.


I'm sorry Gator but it matters not how YOU interpret it...According to the IRS you are liable for the value of the coin the moment you mine it, even if you never sell it.

The IRS asked for your comments, so it does matter how you interpret it, otherwise they wouldn't be asking for your feedback!

I have no idea what the price was when a coin was mined, do you? And which market price are we using? MtGox price was pretty low recently, the prices can differ by a wide margin depending which market you look at!

So you see it's bull, the only price you know, is the price you sold it at! That's because it's the only price that provided you with income!

[iglasses]

Totally agree it's BS and nothing more than an attempt to regulate btc out of existence but I also think it's a stretch to say they are asking for comments.  They allow people to submit comments, kind of a different thing.  And if I had a nickel for every random Senator who was drafting a bill I wouldn't need any bitcoin...lol

[J_Dubbs]

There's no income until you take your asset/commodity to market and sell it for money.

If you paint a picture, it provides you with no income until you can find a buyer for it, and turn it in to money. You cannot pay your taxes in paintings!

income
ˈɪnkʌm/
noun
noun: income; plural noun: incomes

    1.
    money received, especially on a regular basis, for work or through investments.

As far as I'm aware Bitcoin hasn't been declared as official US money so we cannot be mining an income!

http://www.bitcoinx.com/texas-congressman-plans-submit-bill-classify-bitcoin-currency/

When you can pay your taxes directly in Bitcoin, and it incurs no capital gains tax to hold it like money, then you can claim it's income as it's mined!

Let the IRS know what you think or you'll end up paying tax twice! Taxpayers may submit comments electronically via e-mail to the following address: Notice.Comments@irscounsel.treas.gov  Taxpayers should include “Notice 2014-21” in the subject line.

I agree with some of your thinking, BUT you are ignoring the IRS guidance. They said when it's mined it's to be treated as income, regardless of your decision to actually exchange it or not. Is it kinda bullshit? Sure, but that's the rules now. I think it works a lot similar if you are paid in a foreign currency for a service. Say instead of Bitcoins we were mining Euros with our ASIC chips. So you provide the service of mining with your equipment, and the pool pays you Euros. The moment you receive the payment is when you record the income in USD for accounting purposes. If you decide to hold onto the Euro it doesn't matter, the IRS still wants you to calculate income in terms of dollars and pay the taxes with dollars as well.

[greenlion]

little update... to my surprise my CPA put the equipment on a depreciation schedule. He is aware of the short useful life, but his reasoning makes a lot of sense. We will depreciate for 2013, since I only mined for 2 months if we took the whole thing it would have been a massive one-time loss, which really wouldn't have done me any favors year over year. By depreciating we can recapture the losses next year on the equipment sales. I already dumped cubes around $150-200, which is significantly less than what I paid for them a few months back, so that will show up on 2014's books. The filing came out good (felt fair), and all my records were clean and detailed, overall went smooth and unless BTC goes to $0 I'll probably be in business mining another year.

So you're deducting it over 2013-2014?

[bitndx]

a story problem


mine 1 BTC at $400   - logged as income
Cost to mine that same 1 BTC - $490 logged as expense

net loss - $90

sold same 1 BTC at $500


do you pay capital gains on $100 or $10?

[greenlion]

a story problem


mine 1 BTC at $400   - logged as income
Cost to mine that same 1 BTC - $490 logged as expense

net loss - $90

sold same 1 BTC at $500


do you pay capital gains on $100 or $10?

Capital gains is on the $100, because the fair market value establishes the basis.

[bitndx]

a story problem


mine 1 BTC at $400   - logged as income
Cost to mine that same 1 BTC - $490 logged as expense

net loss - $90

sold same 1 BTC at $500


do you pay capital gains on $100 or $10?

Capital gains is on the $100, because the fair market value establishes the basis.

So your mining business nets $10 but you pay taxes on $100

[greenlion]

a story problem


mine 1 BTC at $400   - logged as income
Cost to mine that same 1 BTC - $490 logged as expense

net loss - $90

sold same 1 BTC at $500


do you pay capital gains on $100 or $10?

Capital gains is on the $100, because the fair market value establishes the basis.

So your mining business nets $10 but you pay taxes on $100

Yes because your cost was already deducted against revenue in the first place. You're trying to double-deduct costs. Leaving out the income component of this situation gives a distorted picture exactly like what you described.

[smooth]

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.

Sure it does, in your model (which is correct in my opinion), you are being paid in BTC to provide a service. This ends up having the same effect as applying the original guidance to solo mining (income at the time of mining, then capital gain/loss if and when sold).

Based on the wording of the IRS' statement, I don't believe they really understand the process.

This is likely true to a large extent, but what you posted above does not demonstrate it.

In any case, to answer the OP, you should talk to an accountant. If the equipment has a useful life of less than a year, you do not put it on a depreciation schedule (publication 946, page 6). Even if for some reason you put it on a depreciation schedule, when you dispose of the property you can deduct the unappreciated value as a further loss. This ends up being about the same.

Finally you may be able to take a section 179 deduction for the equipment and expense it that way instead of depreciation (but again, not if it doesn't have a useful life of more than a year).

The tax laws are arbitrary and often dumb, but in this case it isn't that bad.

[CDNinATL]

There are 2 ways to approach this that I see. One is claim it's a hobby and use that route. For me since I just started and am looking at equipment investment.... Not sure if it would work with the IRS but it's likely they're looking at the big miners.

The other is treat it like the OP and go the safe route and use a CPA (also gives you some legal cushion I would think). Another thing that's likely going to happen is some major player will contest the guidance of the IRS. But that'll take some deep pockets, I'm sure!!

One more thing as a side note...I used to play a lot of online poker. I actually got to the point where I was able to hold my own and occasionally score some big wins (that being a couple hundred bucks at a time  ). The feeling in the poker community it wasn't worth reporting until you started having net wins for the year over $10K. Anything less, then it wasn't worth the IRS' time to look into it.

That said in the way BTC is traded and such...and that the way poker is played could be compared...

Anyways, hows that for my first post on this forum?? 

[Searing]

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.

that is what my CPA did wrote it all off..if they want to tax me at 25% for mining bitcoin then the equip to do so is depreciated as such

anyway went in thinking i had to pay 4k on my 16k gross profit according to coin desk paid 550 (750 with cpa fee) usd

only thing is if i get a refund on bfl equip (seeming more likely) then that will have to count as revenue this year on taxes in that i wrote it off

also got breaks for home office and being a 'new' business etc etc..was a grab bag of deductions last year

so anyway ...key point here is 1 yr and 1 day say next fall i can go nuts with my btc and purchase what i want and wave my 'legit' tax return in IRS face

for 550 bucks its worth that imho! the whole 46% tax capital gains tax if less then 1 year property thing and 20% on gains if more then 1 year and 1 day.

anyway how i did it with CPA advice..they wanted me to be a business i bloody well jumped in the pool as a business..er also got a Titan 10k unit

last year was paid for (was neptune switched it)....CPA lady said she wanted to take it off 2013 taxes in that i paid for it then i was like 'why' she

was like well it is 2.5k for taxes w/o it or 550usd taxes with it..so hell sure....take it off..so in real $$$ its like getting the titan for 8k vs 10k from knc

stuff like that it was all quite the 'republican' tax dance hoopla kinda times at the old cpa office

anyway the way it went down for me on IRS usa taxes

Searing