I want to be very clear this is not tax advice and I’m not asking for tax advice, just musing on the possibilities and hypotheticals, but my understanding is that the IRS considers bitcoin property, like a security.
This means it may be subject to capital gains tax, and have two taxable events, when you win a farming reward, and when you sell it.
I’m curious what people theorize the cost basis will be, how it will change once transactions start and prices are established. https://www.coinbase.com/learn/tips-and-tutorials/crypto-and-bitcoin-taxes-US
I’m reading that now you cannot write off any costs associated with it anymore either, but not sure if that’s true either.
Big consequences to the answers to this. Of course you will need to consult your own tax advisors but I figured I would see how people interpret this hypothetical.
Cost basis prior to transactions: I plan to follow the guidance they give in their FAQ. I am using the sum of all my expenses /# of Chia= Cost Basis. After 3 May, whatever market average is… [Q28. I received cryptocurrency that does not have a published value in exchange for property or services. How do I determine the cryptocurrency’s fair market value?]
A28. When you receive cryptocurrency in exchange for property or services, and that cryptocurrency is not traded on any cryptocurrency exchange and does not have a published value, then the fair market value of the cryptocurrency received is equal to the fair market value of the property or services exchanged for the cryptocurrency when the transaction occurs.
This is my first time mining(farming) crypto, so I guess I’ve got some research to do before I do my taxes next year. I don’t see anything in the documents I’ve read so far that help me figure out what the income is for mining something that isn’t on an exchange, only guidance to figure out the fair value if you make a transaction with something not on an exchange. It’s pretty clear that the income from mining an exchange traded coin is the market value on the day you mined it, but no guidance on mining before launch. Before now I had just assumed there would be a capital gain with a cost basis of 0 whenever I sold them.
When you gain money, it’s taxed indeed. Farming a cryptoasset cannot be taxed in my opinion. When you sell it and when they ask you how you obtained it then you can tell you mined it. You don’t need to hide it and be audited.
Imagine you’re an artist. You paint a nice painting. It cannot be taxed at that moment. Even though it can have an estimated monetary value. When you sell it and get actual money, you will be taxed.
You can choose to pay tax over such a volatile asset that might fail in a few months time and you can lose all your money. Will they pay you back if that’s the case?
Anyway, I don’t live in the US so I’ll leave it here, it doesn’t concern me really but sounded like an interesting topic. I just wanted to share opinion.
In the U.S., the IRS has mad it very clear that mined currency is income:
“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
My confusion here is just how to value coins that I generated before it was possible to assign a fair market value
Wow. I’m glad I’m not American. Imagine finding an old pack of MTG cards in your closet, opening it, finding a black lotus, and suddenly having a tax burden on something like $400k because you found it.
Is that intentional to disincentivize crypto mining in the USA?
I believe it’s only a tax burden if you actually sell it? Which would make it the same… as anything in the US? Since you in theory bought it at face value (not sure how th is works if you find something). Mining would be work done to get something. Or… pretty much like the lotto.
I cannot give tax advice all I can say is what I’ve done in the past and will do in the future. I was an early bitcoin miner before the IRS ever gave tax guidance and I’ve more recently mined Ethereum.
Early Days - Bitcoin
I set up a rather large(to me) bitcoin mining operation earning around 50k ish having sold coins back when they were worth $20 Imagine how I’d be doing if I held 'em. Blockchain.com Explorer | BTC | ETH | BCH. Anyway, because I had put in a large investment and was expecting these large returns I consulted a tax pro and I set up an LLC and opted to be taxed as an S Corporation. I gave myself a modest salary and took the rest of what I earned out as distributions which had a lower tax rate, because you avoid the employer portion of the social security taxes.
Ethereum - Because I am mostly using existing equipment.( Old GPU’s & Mobo’s out of the closet). I haven’t built a particularly large setup maybe 10k for the year if I’m lucky, between Ethereum, Storj, and Chia. At that level it wouldn’t be worth the hassle of the LLC, Unemployment Insurance and other incidentals of doing the old trick. I’m just reporting them direct to my normal taxes as Income.
Common - When I mine I take the market value of the coins as income and report on the IRS Schedule C (This is not the only form just the major one). For Chia I don’t have any coins, but should I earn any before there is a market for them I will count that as $0, because the coins had/have no market value until there is a market and I didn’t exchange anything for them, because the electricity and components are already accounted for as expenses. I would not do expenses as a cost basis( If you do, you are turning your expenses into claimed income). The equipment/electricity belong on schedule C under expenses to offset the income.
Ex. I will be taking the GPU I purchased this year which is used more than 50% of the time for mining Ethereum and claiming it as an equipment expense. I will also take advantage of the “Bonus Depreciation” option to write off the entire purchase price of it for this years taxes, something that I had to do over multiple years back in the Bitcoin days. I have a meter measuring electricity so I can claim that as an expense, and for chia any new storage purchases will get expensed as well because they also will be used greater than 50% of the time for Chia, Once I’m done plotting all the space on the storage drives I’ll fill up the plotting drives and just farm. Don’t for get the internet portion of you’re cable bill(easy for me since I only have internet).
P.S. for those talking about not claiming anything until you make a sale, keep in mind that the whole point of a blockchain is that all transactions are traceable. The bigger this gets the more invested the IRS will get into tools to crawl the blockchain and link accounts to people. And if they catch you hiding money the penalties are really gonna suck. They’ll certainly have to make some examples of people in the future.