How to treat Bitcoin mining income for tax purposes?

[niko]

Mining income is clearly different from trading income/losses (capital gains and capital losses). Any thoughts as to reporting your mining income? I'd say mining is most similar to a lottery, and in Canada lottery winnings are not taxable - but then again, Bitcoin mining is surely not recognized and regulated as a lottery by the government.

[1714130816]

1714130816

[1714130816]

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[mckoss]

If you were to run mining as a business, you almost certainly would not have much in profits to report.

You should be able to deduct the cost of electricity, and depreciation of your hardware against your income.  I think most will find they are paying as much in electricity costs, as the value of the Bitcoin that they are receiving.

If you hold on to your Bitcoin, you should be able to claim all future gains in their value as a (hopefully, long-term) capital gain - which is taxed in the US at a much lower rate (15% max) than ordinary income (35% max).

[Stephen Gornick]

 - http://en.bitcoin.it/wiki/Tax_compliance

[Epoch]

Mining income is clearly different from trading income/losses (capital gains and capital losses). Any thoughts as to reporting your mining income? I'd say mining is most similar to a lottery, and in Canada lottery winnings are not taxable - but then again, Bitcoin mining is surely not recognized and regulated as a lottery by the government.

Mining income is most certainly not treated as lottery winnings. Stephen Gornick's link (https://en.bitcoin.it/wiki/Tax_compliance) is a good starting resource, though not exhaustive.

Bitcoin mining would fall under the same category as producing goods. Say you have a loom which makes sweaters. You sell those sweaters on eBay and get money. That money is considered income and is taxable in Canada. The bitcoin version: you have a PC which generates bitcoins. You sell those bitcoins on an exchange and get money. That money is considered income and is taxable in Canada.

There is a caveat: if your mining operation is small enough, it can be considered a 'hobby' and Revenue Canada will generally not worry about it. In this case, you will not be able to deduct operating expenses. If your operation is large enough (hard to say exactly what that point is ... perhaps a few thousand $ annually) it will be considered a 'business' (whether you have registered it as such or not) and all income must be reported and will be taxed. The one benefit of this is that you can deduct operating expenses (electricity and equipment depreciation being the main ones).

How does Revenue Canada know that you are selling bitcoins on an Exchange for cash? Well, under current regulatory rules the exchanges themselves (MtGox in Japan, or CaVirtex in Canada) are not treated as banks so they don't have to report anything. But eventually you need to deposit your bitcoin cash into your own bank. Your bank will eventually report it to Revenue Canada; it will have a record of all deposits that have been made during the year into your account (including deposits from your regular wages, and deposits from any bitcoin exchange). Revenue Canada compares the bank's report to the income you reported on your Income Tax form; if there is a significant discrepancy your return can be selected for a tax audit. That situation is best avoided.

The grey area is how to treat stored bitcoins. Say you mined 100 bitcoins worth $4, hung onto them for a year, and then sold for $5. A case could be made for one of 2 scenarios:

1] report value of bitcoins as they are created as taxable income. Then, when selling, report the difference between their value at time of creation and their value at time of selling as a taxable capital gain; or
2] report the value of bitcoins only at the time they are sold as taxable income.

In case [1], if you sold them for $3 (a loss) instead of $5, you could report it as a capital loss.

[paraipan]

@Epoch nice tax guide man, i just realized that we pay too many of them.
We live in the internet forest now so they can come and collect whenever they want

[niko]

Thanks for taking time to clarify things, Epoch. It will be interesting to see how taxation (and in effect recognition) of Bitcoin will play out in 2012 in different countries.

[Epoch]

Not a problem. I'm no lawyer, but this is my understanding. I'm just a small-time miner.

[lonelyminer (Peter Šurda)]

The tax wiki page says

it is possible that the taxing authority will treat the receipt of a Bitcoin through a mining pool, or from an individual mining operation, as a taxable event.

I would not be so sure about it.

Based on published articles and papers, for tax purposes, Bitcoin seems to be a commodity rather than security or currency. This seems to be the case both in the US (one article and one research paper) and EU (an article by a German lawyer). While this classification might change in the future, for the time being, it looks like it's a commodity.

From what I recall from the classes about accounting / taxation I took long time ago is that what you produce (commodities) is not taxed if you don't sell it. Let's say a company manufactures and sells widgets. In a tax period, it produces 1000 widgets and sells 10. It's not taxed based on the market price or cost of the 1000 widgets, rather on the difference between revenue and expenditures. Most likely, in this scenario, it would make a loss, so there should not be any income tax. If the market price or production cost of widgets changes, while this might affect your expenditures (for example, the law might say that you're supposed to value your reserves at actual cost, current cost or market price), this affects your expenditures side, but has no effect on your revenue.

So, I think that you should only pay income tax on the Bitcoins you mine if you either sell them or trade them for something else. If you just hoard them, there should be no income tax implication. It might become different if the legal classification changes and Bitcoins are treated as a security or currency (or an entirely new category). The first one, security, seems unlikely, since the miner is under no obligation to the bearer. The other options might happen though, there are precedents, for example gold is sometimes treated different than other commodities from legal point of view.

[Epoch]

The tax wiki page says

it is possible that the taxing authority will treat the receipt of a Bitcoin through a mining pool, or from an individual mining operation, as a taxable event.

I would not be so sure about it.

Based on published articles and papers, for tax purposes, Bitcoin seems to be a commodity rather than security or currency. This seems to be the case both in the US (one article and one research paper) and EU (an article by a German lawyer). While this classification might change in the future, for the time being, it looks like it's a commodity.

...

So, I think that you should only pay income tax on the Bitcoins you mine if you either sell them or trade them for something else. If you just hoard them, there should be no income tax implication. It might become different if the legal classification changes and Bitcoins are treated as a security or currency (or an entirely new category). The first one, security, seems unlikely, since the miner is under no obligation to the bearer. The other options might happen though, there are precedents, for example gold is sometimes treated different than other commodities from legal point of view.

Agreed. Treating bitcoins as a commodity ('sweaters' in my example) is the correct approach in the US and European Union; there has already been precedents set  in those regions. It is not yet clear in Canada (which is where I assume the OP is located), and I am not aware of any published classification in other regions yet.

But until there is some legal classification set in Canada (I fully expect them to follow the US), I would treat bitcoins as commodities as well. That is, you pay income tax on your bitcoins at the point of sale, not at point of mining. In this case you can report an operating loss (if your income from selling bitcoins is less than your operating expenses), but you cannot claim a capital loss on the bitcoins if they lose value between the time they are mined and the time they are sold.

[mcdett]

Treating bitcoins as a commodity ('sweaters' in my example) is the correct approach in the US and European Union;

I agree completely.  We need more attention given to promoting btc as a commodity to be traded rather then currency.  btc to me are the same as old baseball cards that I buy/trade for usd.

When you start using the term currency you start falling into deep dirty areas of federal government regulation and compliance.  Places that should be avoided for now.

[twobitcoins]

There is still a question of whether bitcoins obtained via mining are created by the miner, and thus similar to manufactured goods, or are received as payment for performing a service, and thus similar to barter income.

The portion of mined coins coming from transaction fees in particular seems like payment for a service, but even the new 50 BTC may be seen as a payment.  A miner can't simply do a million times as many hashes and create 50 million bitcoins.  Miners only get what the other network participants are willing to grant.  In the US, payment for a service would be taxable regardless of whether the payment is in gold, Beanie Babies, or bitcoins.

[Epoch]

There is still a question of whether bitcoins obtained via mining are created by the miner, and thus similar to manufactured goods, or are received as payment for performing a service, and thus similar to barter income.

The portion of mined coins coming from transaction fees in particular seems like payment for a service, but even the new 50 BTC may be seen as a payment.  A miner can't simply do a million times as many hashes and create 50 million bitcoins.  Miners only get what the other network participants are willing to grant.  In the US, payment for a service would be taxable regardless of whether the payment is in gold, Beanie Babies, or bitcoins.

Taxation laws in Canada (relevant for OP) make no distinction between income obtained by providing a service or by providing goods. But even in jurisdictions where there is a distinction, it is irrelevant to bitcoin.

The reason is that BTC itself is treated as a commodity (US and EU have set precedent), not as currency or other financial vehicle. Commodities are not considered as income, and thus not taxable, regardless of how they have been obtained. What is taxable is when BTC is actually exchanged for fiat currency (USD or CDN, for example). The USD/CDN then represents taxable income (obtained by exchanging your BTC commodity for cash).

Thus if you want to argue that your miners are providing a service (and are rewarded with BTC for that service), or are actually producing a good (BTC), it doesn't matter. Being a commodity, BTC itself is not directly taxable.

The question of transaction fees is academically interesting, but at this point mostly irrelevant. Currently, transaction fees represent only a tiny fraction (typically less than 0.1%) of the 50BTC reward. When bitcoin was originally designed Satoshi envisioned that, as the block reward is reduced towards 0 in the years/decades to come, transaction fees would represent a greater and greater proportion of the 'reward'. Right now, and in the foreseeable future (at least 5 years, after which the block reward drops to 12.5BTC/block), the contribution of transaction fees can be safely ignored. Unless you are solo mining, you never see any transaction fees anyway (the pool operators keep them. I'm not aware of one that doesn't).

[twobitcoins]

Commodities are not considered as income, and thus not taxable, regardless of how they have been obtained.

Interesting.  So you are saying that in Canada if a store sells someone a T-shirt and accepts payment in the form a gold coins (or a barrel of oil or whatever), no income tax would be due?  And similarly if a plumber repairs someone's leaky sink and accepts gold coins, no income tax would be due?  I'm not aware of anything that would cause such treatment in the US, hence the questions about whether the bitcoins are created vs. received as payment.  It may not matter in Canada.

Unless you are solo mining, you never see any transaction fees anyway (the pool operators keep them. I'm not aware of one that doesn't).

In a mining pool, you are not necessarily receiving (a portion of) the 50 BTC reward either.  In a PPS pool for example, you are receiving a fixed payment for submitting a fixed number of shares, regardless of how many blocks the pool finds, so it's more like you are being paid in bitcoins for hashing work.  Even if the pool operator is seen as "manufacturing" new coins that are not taxed at the time of manufacture, it's not clear that such treatment would extend to workers in the pool.  (Again, this is based on my understanding that bitcoin income is taxable in the US.  Maybe it is off topic for this thread.)

[paraipan]

Commodities are not considered as income, and thus not taxable, regardless of how they have been obtained.

Interesting.  So you are saying that in Canada if a store sells someone a T-shirt and accepts payment in the form a gold coins (or a barrel of oil or whatever), no income tax would be due?  And similarly if a plumber repairs someone's leaky sink and accepts gold coins, no income tax would be due?  I'm not aware of anything that would cause such treatment in the US, hence the questions about whether the bitcoins are created vs. received as payment.  It may not matter in Canada.

.....

interesting indeed, so it means that if you and i engage in a barter transaction, without even touching fiat, we are exempt from paying income taxes. I could exchange with you a mobile phone for 100 magic cards then without taxes. Cool

[Epoch]

Commodities are not considered as income, and thus not taxable, regardless of how they have been obtained.

Interesting.  So you are saying that in Canada if a store sells someone a T-shirt and accepts payment in the form a gold coins (or a barrel of oil or whatever), no income tax would be due?  And similarly if a plumber repairs someone's leaky sink and accepts gold coins, no income tax would be due?  I'm not aware of anything that would cause such treatment in the US, hence the questions about whether the bitcoins are created vs. received as payment.  It may not matter in Canada.

.....

interesting indeed, so it means that if you and i engage in a barter transaction, without even touching fiat, we are exempt from paying income taxes. I could exchange with you a mobile phone for 100 magic cards then without taxes. Cool

Yes, that is my understanding. Pure commodities are not 'income' from Revenue Canada's point of view and receipt of any commodity does not need to be reported for income tax purposes. But if you decide to sell them at some point, the cash you get does. Bitcoins are, at least in the US and EU, considered as a pure commodity. Canada hasn't said anything one way or another so, until they do, it is not unreasonable to go along with the US and EU classification.

Regarding @twobitcoins' examples, gold and other precious metals are a special case in that they are legally categorized as both a commodity and a currency, so receiving payment in those forms would be considered income. I'm not sure about crude oil ... ... but I've never been offered payment in the form of a barrel of oil so I won't worry about it too much.

Consider this: if a plumber fixes your sink and charges $100, he must report it as income. Similarly if he accepted payment in gold he would be required to report it (gold is treated as currency). But if he accepts payment in the form of 100kg of salt, he would not have to report it. Similary, if he charged 20BTC for his work, he would not have to report it. What he would have to report is the $ he gets when he eventually sells the salt or sells the BTC for $.

One more thing (perhaps this is going into too much detail): for business purposes the plumber has the option of reporting the current value of the salt/BTC when he receives it; the benefit being that he can take business deductions off of that income and, if he sells it in the future at a loss, it is considered as a capital loss which could be used to reduce his future tax. Conversely if he sells it at a profit, that profit (not the full value, just the profit) would be considered as a capital gain and would be taxable.

@Paraipan, yes, we could trade a phone for 100 magic cards without tax (technically, there could be PST/GST/HST involved, depending on whether or not it is considered a business transaction, but I'm not going to go there). 100 magic cards won't help me with my mortgage payments or grocery shopping, so eventually I'd have to convert them into cash. And that's where the tax man steps in.

[niko]

...
Consider this: if a plumber fixes your sink and charges $100, he must report it as income. Similarly if he accepted payment in gold he would be required to report it (gold is treated as currency). But if he accepts payment in the form of 100kg of salt, he would not have to report it. Similary, if he charged 20BTC for his work, he would not have to report it. What he would have to report is the $ he gets when he eventually sells the salt or sells the BTC for $.
...

I thought so, until I saw some UK regulations where, if I understood correctly, this would be considered a barter, and subject to  tax. Can't remember how exactly this tax was categorized (sales? VAT?).

Either way, currently my understanding is that "creation" (mining) of bitcoins as a commodity is not subject to tax per se.

[Epoch]

...
Consider this: if a plumber fixes your sink and charges $100, he must report it as income. Similarly if he accepted payment in gold he would be required to report it (gold is treated as currency). But if he accepts payment in the form of 100kg of salt, he would not have to report it. Similary, if he charged 20BTC for his work, he would not have to report it. What he would have to report is the $ he gets when he eventually sells the salt or sells the BTC for $.
...

I thought so, until I saw some UK regulations where, if I understood correctly, this would be considered a barter, and subject to  tax. Can't remember how exactly this tax was categorized (sales? VAT?).

Either way, currently my understanding is that "creation" (mining) of bitcoins as a commodity is not subject to tax per se.

Correct; the creation of bitcoins as a commodity is not subject to tax; only when you sell them for cash. It would not be considered bartering.

FYI: On the topic of 'barter', I've researched this with the Canada Revenue Agency; my initial explanation of 'bartering commodities' is wrong. According to CRA's Interpretation Bulletin IT-490, there is going to be a tax implication when you barter. According to the CRA, a barter transaction should be treated as though you have received a payment for whatever good/service you have traded. The value of this payment is the fair market value of the good/service you have provided to the other party.

One caveat is that barter transactions are only taxable when the goods or services you're giving up are of the kind generally provided by you in the course of earning income from a business or a profession carried on by you. As a 'hobbyist', as long as you barter only occasionally, you won't face tax.

Again, bartering does not apply to bitcoin miners exchanging bitcoin for $. It does, however, apply to our ficticious plumber providing a service in exchange for a bag of salt (he is exchanging his plumbing services for a good), or @paraipan providing 100 magic coins for a phone (if this was only occassional, and @paraipan is not in the business of selling phones, this transaction would not be taxed).

[lonelyminer (Peter Šurda)]

I thought so, until I saw some UK regulations where, if I understood correctly, this would be considered a barter, and subject to  tax. Can't remember how exactly this tax was categorized (sales? VAT?).

It's VAT, from what I remember. That of course only affects parties that are registered for VAT purposes: if you're a private person paying for, say, services of a plumber, you do not need to charge him VAT. The plumber, however, does have to if he would have to charge in pounds as well.

However, when you receive Bitcoins as an employee, from their employer, other rules may apply and it still might be taxable as personal income, just like, say, fringe benefits.

[twobitcoins]

Correct; the creation of bitcoins as a commodity is not subject to tax; only when you sell them for cash. It would not be considered bartering.

Again, bartering does not apply to bitcoin miners exchanging bitcoin for $. It does, however, apply to our ficticious plumber providing a service in exchange for a bag of salt (he is exchanging his plumbing services for a good), or @paraipan providing 100 magic coins for a phone (if this was only occassional, and @paraipan is not in the business of selling phones, this transaction would not be taxed).

Suppose I offer the service of password cracking using a cluster of GPUs in exchange for bitcoins (and I am in the business of doing so).  Would you now consider that to be a taxable barter transaction?

If so, how is it different if I offer the service of block generation and transaction processing in exchange for bitcoins?  Does it not come down to the question of whether I am creating the mined bitcoins or receiving them in exchange for a service?

I still think there is a significant chance that mining bitcoins amounts to barter -- certainly in the case of solo mined transaction fees, likely in the case of payments received from pool operators, and quite possibly even in the case of solo mined 50 BTC block rewards granted by the other network participants in exchange for helping to secure the network.

[Epoch]

Correct; the creation of bitcoins as a commodity is not subject to tax; only when you sell them for cash. It would not be considered bartering.

Again, bartering does not apply to bitcoin miners exchanging bitcoin for $. It does, however, apply to our ficticious plumber providing a service in exchange for a bag of salt (he is exchanging his plumbing services for a good), or @paraipan providing 100 magic coins for a phone (if this was only occassional, and @paraipan is not in the business of selling phones, this transaction would not be taxed).

Suppose I offer the service of password cracking using a cluster of GPUs in exchange for bitcoins (and I am in the business of doing so).  Would you now consider that to be a taxable barter transaction?

If so, how is it different if I offer the service of block generation and transaction processing in exchange for bitcoins?  Does it not come down to the question of whether I am creating the mined bitcoins or receiving them in exchange for a service?

I still think there is a significant chance that mining bitcoins amounts to barter -- certainly in the case of solo mined transaction fees, likely in the case of payments received from pool operators, and quite possibly even in the case of solo mined 50 BTC block rewards granted by the other network participants in exchange for helping to secure the network.

I think these are some of the questions to which we all would like definitive answers to. Unfortunately, at least for now, there is no clear (or any) legal/official answer yet. None that I am currently aware of, at least. The whole ecosystem surrounding bitcoin is very much still a grey area. Bitcoin is a virtual construct; it is created out of 'thin air'. It has no intrinsic value other than that which people decide to give it.

The only concrete guidance is that a 'bitcoin' has been classified as a commodity by US and EU regulatory bodies. Other countries/regions have not published anything yet. So, at least in the US and EU, obtaining bitcoin by way of trade constitutes barter. Whether that is taxable depends on the situation (i.e. business/regular transaction, or occasional transaction).

How bitcoin mining itself is classified is still nebulous, because there are several different aspects of it. But I think we're splitting hairs here. In solo mining, your own miner actually generates the 50BTC block itself; it is not 'granted' by the network participants. I would not consider this as a barter situation; you are clearly generating the BTC commodity yourself.

In pooled mining you occasionally [a] generate 50BTC yourself and 'gift' it to the pool (this could be argued as being a barter); and more often you are rewarded by the pool with BTC in exchange for submitting shares (again, possibly argued as being a barter). But taking a macroscopic view of the situation, one can argue that their miner is generating (i.e. helping to create) xyz amount of BTC per day. It is not a barter; it is the creation of a commodity.

Until a jurisdiction rules definitively on the subject of bitcoin mining, it is reasonable to use whatever definition works best for your personal situation. Clearly there are logical arguments to be made for more than one point of view. The taxation departments of Canada, or the US, or the UK, should be happy that you are at least not trying to hide income. Whether you want to report your mined BTC earning at time of mining, or at the time of selling, is up to you.

I think most people would opt for 'report at time of selling', if for no other reason than it being simpler to deal with. Non-casual miners may want to report it at time of mining so that they can claim deductions.

[twobitcoins]

You are right -- these issues are far from clear.

For my personal tax situation I have come to the conclusion that the 50 BTC awards for solo mining are not in fact created by the miner.  (Consider that you may create a perfectly valid block but another miner wins the race and your block becomes orphaned.  You have created the block, but the reward only exists if the network accepts the block.)  Granted it is a counterintuitive and controversial position.

I don't view my business as creating and selling bitcoins, but rather performing computations in exchange for bitcoins.  The bitcoins are taxable as business income and expenses are deductible as business expenses.  Anything I do with the bitcoins after that, say holding them for 20 years and then selling them, is a personal investment activity, not a business activity.  It's one perspective to consider anyway.

[Stephen Gornick]

holding them for 20 years and then selling them, is a personal investment activity, not a business activity.

So you would book as revenue the bitcoins valued at the current exchange rate at the time they were received (earned) but not actually sell them then?

[twobitcoins]

holding them for 20 years and then selling them, is a personal investment activity, not a business activity.

So you would book as revenue the bitcoins valued at the current exchange rate at the time they were received (earned) but not actually sell them then?

Yes.  That value would become the cost basis, and any price change from then until you sell would be a capital gain or loss.  Bitcoins held for over a year would be eligible for the more favorable long term capital gains tax rates (in the US).

It is risky to generate bitcoins and incur a tax liability without selling, because if the price later collapses you may owe more tax than the value of the bitcoins.  You can sell and take a capital loss, but capital losses can only offset $3000 of ordinary income per year (in the US), so a large mining operation may take many years to recover the funds.  It would be safer to sell at least enough to cover expenses and taxes.

[Epoch]

You are right -- these issues are far from clear.

For my personal tax situation I have come to the conclusion that the 50 BTC awards for solo mining are not in fact created by the miner.  (Consider that you may create a perfectly valid block but another miner wins the race and your block becomes orphaned.  You have created the block, but the reward only exists if the network accepts the block.)  Granted it is a counterintuitive and controversial position.

I don't view my business as creating and selling bitcoins, but rather performing computations in exchange for bitcoins.  The bitcoins are taxable as business income and expenses are deductible as business expenses.  Anything I do with the bitcoins after that, say holding them for 20 years and then selling them, is a personal investment activity, not a business activity.  It's one perspective to consider anyway.

You have obviously thought about this and have reached a defendable position. I do not disagree with your decision; in fact, it is refreshing to see people who have put serious thought into the issues and reached their own conclusions, whatever they may be!

If there is one thing this discussion makes clear, is that there are many ways of interpreting the same bitcoin concepts.

[kjj]

I keep waiting for someone to post an actual official decision letter from the IRS.

[lonelyminer (Peter Šurda)]

For my personal tax situation I have come to the conclusion that the 50 BTC awards for solo mining are not in fact created by the miner.  (Consider that you may create a perfectly valid block but another miner wins the race and your block becomes orphaned.  You have created the block, but the reward only exists if the network accepts the block.)  Granted it is a counterintuitive and controversial position.

The block will be created regardless of whether the network accepts it, it is just valued differently. Say you produce a sweater than noone wants, and compare it to producing a sweater that you'd be able to sell. Why should they be taxed differently?

I guess you could argue either way, since Bitcoin is completely virtual and distributed, there's no single point for a decisive argument.

[Epoch]

I keep waiting for someone to post an actual official decision letter from the IRS.

That would certainly be nice; I'm not sure the IRS has published anything specifically on bitcoin yet. Perhaps @lonelyminer can dig up something specific.

I am aware of a few articles published by US lawyers, however. While not law, they can help set precendent. I have read a few over the past year, though only with mild interest. At the moment I can track down one, an article by John Nelson, a lawyer practicing in Georgia, who in June 2011 wrote this:

http://www.lextechnologiae.com/2011/06/26/why-bitcoin-isnt-a-security-under-federal-securities-law/

The article explains why bitcoin cannot be considered a security or currency under Federal (US) law. It is an interesting read, as are the public comments (and Nelson's responses). It stops short of saying what bitcoin actually is; it is a different article I have read (I'll do some more digging for an actual source) that made a clear legal case for bitcoin as a commodity in the US.

[kjj]

I keep waiting for someone to post an actual official decision letter from the IRS.

That would certainly be nice; I'm not sure the IRS has published anything specifically on bitcoin yet. Perhaps @lonelyminer can dig up something specific.

I assume that we'll all know about it when it happens.  I don't expect the IRS to do anything until either they audit someone that happens to be a trader or a miner, or a trader or a miner specifically asks them for a written ruling.  Either way, it will very likely be a member of the community, and they'd let us know.

[matonis]

I keep waiting for someone to post an actual official decision letter from the IRS.

I wouldn't hold my breath too long waiting for this. A specific decision on bitcoin would give greater legitimacy to bitcoin and the US govt does not want to do that. They would prefer to diminish its credibility.

[matonis]

KPMG LLP gave some guidance for virtual currencies generally in this Nov 2011 study;

"Virtual Currency in Virtual Economies: Implications for Income Tax"
http://themonetaryfuture.blogspot.com/2012/01/virtual-currency-in-virtual-economies.html

[kjj]

I keep waiting for someone to post an actual official decision letter from the IRS.

I wouldn't hold my breath too long waiting for this. A specific decision on bitcoin would give greater legitimacy to bitcoin and the US govt does not want to do that. They would prefer to diminish its credibility.

Meh.  I don't think the government really knows about or cares about bitcoin, at least not in any official way.  And the IRS doesn't care if you slice up babies for lunch meat as long as you pay taxes on the income, so quite likely the IRS is actually the part of the government most likely to embrace bitcoins, or at least taxes paid in dollars for bitcoin-based income.

[jjiimm_64]

I keep waiting for someone to post an actual official decision letter from the IRS.

I wouldn't hold my breath too long waiting for this. A specific decision on bitcoin would give greater legitimacy to bitcoin and the US govt does not want to do that. They would prefer to diminish its credibility.

we dont know that for sure. (They would prefer to diminish its credibility)

I plan on filing by april 15th, and I have mined probably a ~1k btc's since June. I will be declaring the selling of the bitcoins as 'something'.I am  not sure how I am going to do it, but I am definetely writing off the hardware and many kilowatts of power, and declaring the income as income.

[Epoch]

I plan on filing by april 15th, and I have mined probably a ~1k btc's since June. I will be declaring the selling of the bitcoins as 'something'.I am  not sure how I am going to do it, but I am definetely writing off the hardware and many kilowatts of power, and declaring the income as income.

@jjiimm_64, are you in the US or Canada?

[jjiimm_64]

I am in the US

[Epoch]

I am in the US

I ask because in Canada you can only write off 55% of the remaining value of computer equipment per year (termed 'depreciation'), not the full amount.

[jjiimm_64]

I am in the US

I ask because in Canada you can only write off 55% of the remaining value of computer equipment per year (termed 'depreciation'), not the full amount.

interesting.  I was undecided whether to do it all at once or over 3 years, us gives you a choice.

btw,  55% of remaining value? for how many years?  asymptotically

[Epoch]

I am in the US

I ask because in Canada you can only write off 55% of the remaining value of computer equipment per year (termed 'depreciation'), not the full amount.

interesting.  I was undecided whether to do it all at once or over 3 years, us gives you a choice.

btw,  55% of remaining value? for how many years?  asymptotically

Yup, Canada has silly rules for that. Deductions in Canada for computer equipment (55%) would look like this (taking an example of 2 5970's, or $800):
2011 -- $800 x 0.55 x 0.50 – the half-year rule
2012 -- $580 x 0.55
2013 -- $261 x 0.55
2014 -- $117 x 0.55
2015 -- $ 53 x 0.55
2016 -- $ 24 x 0.55
2017 -- $ 11 x 0.55
2018 -- $ 5 x 0.55
2019 -- $ 2 x 0.55
2020 -- $ 1 x 0.55

In the year you purchase the equipment (2011 in the above example) there is the so-called 'half-year rule', where you can only deduct half of the normal deduction. The 'reasoning' is that the government doesn't distinguish between items bought at the beginning of the year or the end ... so they average it and say that you've owned it for 1/2 year. Thus you can only deduct half of the 55% deduction.

Eventually (10 years later) you have deducted the full amount ($800). But 10 years is a long time! It is a stupid rule, but that's what Canadians have to deal with.

[the joint]

I went to H&R Block today to start working on my taxes.

My tax agent and I had to sit an discuss Bitcoin for about an hour.

End result:  She can see how Bitcoin mining/trading/selling is a business, how it is an investment, how it is both, and how it is neither.

She said she needs to do additional research, call the IRS, and get back to me in a week.

She did say, though, that she thinks it will likely be categorized as an investment.

[koin]

She did say, though, that she thinks it will likely be categorized as an investment.

and after seeing your gains will probably be talking about it at the next cocktail party?

[the joint]

She did say, though, that she thinks it will likely be categorized as an investment.

and after seeing your gains will probably be talking about it at the next cocktail party?

She actually said it was "fascinating" and asked me how quickly I made my profits.

[Boussac]

I posted in this thread which is more general (not focusing only on mining income): https://bitcointalk.org/index.php?topic=54645.20
It seems that in Europe, bitcoins earned thru mining coud be subject to an 8% tax on the amount sold (if and when they are sold for euros or dollars).
That's assuming bitcoins are treated as a digital commodity (like say prime numbers) similar to gold because of their limited supply (unlike prime numbers).
Bitcoins cannot be treated as securities imho because there is no identifiable issuer.

[sunnankar]

You have obviously thought about this and have reached a defendable position. I do not disagree with your decision; in fact, it is refreshing to see people who have put serious thought into the issues and reached their own conclusions, whatever they may be!

If there is one thing this discussion makes clear, is that there are many ways of interpreting the same bitcoin concepts.

There are actually a multiple legally defenseable positions that can be taken. Perhaps you should consider picking up a copy of A Lawyer's Take On BitCoins and Taxes; a 34 page report with about 60 legal footnotes by a CA attorney. It will at least give you a good overview of the legal landscape in this area.

[mrb]

the joint, any news from your accountant? I am curious about her having talked to the IRS about Bitcoin.

[the joint]

the joint, any news from your accountant? I am curious about her having talked to the IRS about Bitcoin.

Haven't heard a thing.

[jddebug]

the joint, any news from your accountant? I am curious about her having talked to the IRS about Bitcoin.

Haven't heard a thing.

I talked to my CPA today. He doesn't really know what to think. He is leaning towards business income/self employment income. (USA)

I don't like that at all. I was hoping for either rental income (The pools pay to rent my equipment) or short term capital gains (I'd prefer long term of course but I sell way too soon for that).

He said that if I could come up with a good way of describing using a pool as them renting my equipment then I could at least get away with rental equipment income and therefore not have to pay Social Security and Medicaid on top of income tax)

Thought? Comments?

[malevolent]

the joint, any news from your accountant? I am curious about her having talked to the IRS about Bitcoin.

Haven't heard a thing.

I talked to my CPA today. He doesn't really know what to think. He is leaning towards business income/self employment income. (USA)

I don't like that at all. I was hoping for either rental income (The pools pay to rent my equipment) or short term capital gains (I'd prefer long term of course but I sell way too soon for that).

He said that if I could come up with a good way of describing using a pool as them renting my equipment then I could at least get away with rental equipment income and therefore not have to pay Social Security and Medicaid on top of income tax)

Thought? Comments?

I am not from US, but wouldn't you need some kind agreement or a contract with the pool operator? If you use a US pool and he is willing to spend some time to sign such an agreement (it would be preferable if were a big miner maybe?) then perhaps someone it should work? The pool pays you in BTC (not sure about the block transaction fees in your pool) for processing shares and securing the Bitcoin network (contributing to the security of the network?) - but retains a fee for to cover operational costs (if applicable).
alternatively, you can find someone who would like to rent equipment from you for mining (remember how GPUMAX worked?)

If you do manage to solve this problem let us know so others (in US) may use the info.

[yocko06]

for me bitcoin is a hobby. in Australia you can earn $50000. from a hobby before you need to declare it on your tax return. hobby's are non taxable earning.
  

[jddebug]

for me bitcoin is a hobby. in Australia you can earn $50000. from a hobby before you need to declare it on your tax return. hobby's are non taxable earning.
  

$50k  !!!   WOW  Every business I have I would consider a hobby if  were in Australia.

[bitTax]

In the Notice from March 25, 2015, the IRS issued some pretty specific answers to FAQ on mining virtual currency:

Q-8: Does a taxpayer who “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?

A-8: Yes, when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. See Publication 525, Taxable and Nontaxable Income, for more information on taxable income.

Q-9: Is an individual who “mines” virtual currency as a trade or business subject to self-employment tax on the income derived from those activities?

A-9: If a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self- employment income and are subject to the self-employment tax. See Chapter 10 of Publication 334, Tax Guide for Small Business, for more information on self- employment tax and Publication 535, Business Expenses, for more information on determining whether expenses are from a business activity carried on to make a profit.

You can read additional answers here:
IRS Notice 2014-21

[ChainGang]

We do not have a definitive answer in the US and we won't have one for a while. The catalyst that is causing all of the confusion around taxation is that we do not have a definitive answer on how to classify the cryptocurrency or how to regulate it. The reality is that we are almost running on an honor system at the moment. In order to regulate the coins, every transaction would need to be reported to the government. Similar to PayPal reporting all the income that goes through your PayPal account. However, the basis for the currency is decentralization. The only way the government would be aware of any income generated is when you sell or convert the coin, unless they target you specifically for some reason. IE you buy a large home all cash and reported that you made minimum wage last year.

I own a few other business's and would recommend that you pay something and report something. The IRS is forgiving in this situation if any issues were to arise. What they are not willing to forgive is when you try to not pay any taxes.

I do not pay taxes on any coins that I hold because the coins are traded on markets and the US government does not consider it to be a currency. I am holding on to it for an investment like any other commodity and it is not generating US dollars until it is sold. At that point a loss or gain can be calculated. Coins are valued in comparison to currency. We recognize the value of the coin based on it's value in our perspective currency the same as we recognize 1 share of GE stock to be valued at $33.

Regarding income that I pay taxes on: I pay myself a set amount each month as a salary for compensation and to cover my business expenses. The coins I sell to cover my salary and expenses generates US dollars that I deposit into my bank account. This is the gross income for the year. The taxable amount used is the gross minus the deductions. The US has generous deductions for business owners. A home office is a deduction, a cell phone is a deduction, internet access, electricity, car payments, the computer I am using right now, and the list goes on. Anything that is needed to run the business is an expense and a deduction.

Many of the questions regarding deductions and how to get the best tax rate or the most beneficial deductions would not apply to any of us. We are running a business. You do set up a corporation, LLC, sole propritorship, ect.  However, we are not considered a "true company" in  the eyes of the IRS until we have three employees. If you have less than 3 employees you are simply considered self employed under the IRS. The good news is that you still receive the benefit of tax deductions associated with operating a company.

[ember.suc]

 Bitcoins and even digital currencies are so new, that there is little to no precedent for some aspects of bitcoin mining, from a tax perspective.Since Bitcoins are currently traded in various online marketplaces, when someone receives a Bitcoin, they can reasonably calculate it’s value in the local currency. Because of this, it is possible that the taxing authority will treat the receipt of a Bitcoin through a mining pool, or from an individual mining operation, as a taxable event.

[sindikat]

Lottery winnings are not taxed only if the lottery owned by the state. It's a way to make the state lottery more profitable. I'm not from Canada but I guess in your country the state monopoly on lottery business. Bitcoin has nothing to do with the lottery. This is a separate type of business and so it will be taxed like other businesses. Perhaps it will be at the maximum scale of taxes because the state is not interested in bitcoin.

[geekcryptogal]

I have a lot to learn about taxation of all this. Thanks for the thread.

[expert4knowledge]

You have to treat it like trading earning but you can take off the cost of your hardware and electricity as business expenses

[Dopert]

I did invest in a mining company in the USA. The miners are my property. For the operation i do no work, nor i have influence on max mining profit as i prefer. Therefore i see myself as an abroard private investor.

For the upcoming year i want to registrate myself by the IRS with a ITIN number and use that to declare longterm gaining (form 1099) over my investment. So no daily mining income, no shortterm gainging, no LLC, no self imployment, just a invester.

Does somebody know if this is the legal way for longterm mining investment?

Ps. Dont awnser to quickly like mining is ordanry income, so not possible. I like professional experencied awnser on declarance as any other raw material investment.