Taxes - Clearing up some Questions (USA ONLY)

[3Moose]

Some people were posting on Taxes so I thought would answer the question:

This is not meant to cover every possible aspect of taxes, just to clear up some general questions. You should consult your CPA / tax attorney for further information. This post is not legal advice and no attorney client privilege is created.

Please do not send me e-mails about your specific tax questions. I will not answer them.

Now.....

Rules:


Per the IRS guidance of 2014, all coins are treated as property and are TAXABLE at the point of MINING.

Taxable means it MUST be included in your gross income. No exceptions.

This means that AS YOU MINE COINS on PH (or any site), you have your FIRST TAXABLE EVENT.

-------> I can't stress enough that It does not matter if you sell the coins <---------


Next:

Once you mine the coin, you have the "basis" for that coin.

As the price rises or falls, AND you sell your coin, you then have a SECOND TAXABLE EVENT known as Capital Gains or Capital Loss.

The capital gain / loss is the change in price AFTER you mine the coin post sale.

Capital gains and losses DO NOT offset the taxes originally owned from the initial taxable event.


Additionally:

If you mine coins, you are also likely subject to self employment tax. This is however very fact specific BUT know that the IRS will likely err on the side of saying you OWE the tax.

If you have 5+ machines .... and you plan on writing off the cost of electric and equipment ... you better be paying the self employment tax. If you plan on arguing you get to write off your expenses as a business then it will be very difficult (near impossible) to argue that you do not need to pay the self employment tax.

Deductions:

You can not deduct 100% of the machines from your business income as a business expense. Let's say your bought 10 machines in 2017. Machines and other capital equipment MUST be deducted over their useful life.

Unless you want to argue that the machines have no value after Jan 1, 2018, you can no take 100% of the purchase cost in 2017. Maybe you want to deduct 75% in 2017 and save 25% for 2018? That's your decision... but it must be justifiable in an audit.


Edit:

******* Example deleted as it appears to be causing more confusion than help **********




Here is the famous IRS guidance:

https://www.irs.gov/pub/irs-drop/n-14-21.pdf

[Aura89]

Do tax people in general understand this? As you just completely confused me.

[Steve Sokolowski]

We plan to post more about this issue on Tuesday, so if you're confused, that might help out a little.

[lemarc723]

Do tax people in general understand this? As you just completely confused me.

U.S. taxes: A number of these calculations need some more explanation. SE Tax is on NET - not gross for one thing. Another area is depreciation. If the equipment is new then you have the option of taking all the depreciation in year 1, and there is bonus depreciation. Capital gains are separate than mining revenue. But with taxes keep in mind there are general principles for business taxes and there are thousands of opinions on actual application. I'll try to keep it general - and I know enough to know ask 100 CPA's a tax question and get 100 different answers.

First think to keep in mind that the IRS does not consider cyber currency to be "currency" but "property". So it's treated as a capital asset like stocks when it comes to short-term and long-term capital gains. You can read books on capital-gains taxation. My advise if you are holding for any period of time is to treat the sale of cyber currency as a stock sale and you will be ok. If you are mining and immediately (I don't know the specific rule on timing when it becomes "holding") are selling into fiat currency - then you would just report ordinary gains or losses from the exchange as part of revenue, and you would NOT be paying capital gain taxes.

Think about revenue - there is "gross" (before expenses) and there is "net" after expenses. Once you take away all expenses from revenue (electricity, isp, office space, utilities, fees, marketing, automobile used for business, supplies, all the legitimate expenses and that can be a long list), you minus depreciation (property) and amortization (software) for the year. That becomes your taxable revenue (net profit or loss). You never pay taxes on gross revenue.

Depreciation is simply a deduction based on the asset life (typically computers are 5 years). In the most simplest of terms - think of an asset being placed in service as having a useful life - like a cutting machine on a shop floor. Let's say it's 5 years until you the business owner have to replace it. Depreciation is representing the loss of value of the asset over it's life. So 5 years would be 20% per year of it's initial cost. If you purchased a $3,000 Antminer, then at the end of 5 years (according to the IRS) it has reached end-of-life and you've taken (if using a straight line example) - $600 per year in Section 179 deduction on your tax return. If/when you sell the antminer you have to claim the salvage or sold for price back into the revenue equation and at that point all future depreciation stops because you no longer possess the asset. Think of it another way - you've taken the business "loss" between what you paid for the asset and the end of life salvage value in depreciation deductions over time.

There is a MACRS asset life table that is used. If the asset doesn't fit into one of these categories it gets a general 7 years. There's also Section 179 rules for a 50% bonus depreciation in year 1. There is no way to cover all of Section 179 rules etc here - but you get the general ideal I hope. Everyone's situation is different your tax situation will determine your depreciation strategy. Depreciation can be a very complex topic - There's also recapturing and disposition of capital assets but that's a topic for a later time.

Section 179 rules DO allow you to take 100% depreciation in year 1. But that's it - there will be nothing left for remaining years. It's called "first year expensing". So yes, you can 100% deduct your antminers on year 1. I don't really recommend it, because I'd rather use the bonus depreciation of 50% + the first year % and still have years 2..5 with 20% deductions each year. There is no "justification" needed - but you also can't just make up your asset life either if it fits in one of the categories. If you don't understand very well the MACRS and the rulings then my advise is just to follow it and not try and make up your own asset life and then defend it to the IRS. I'm not sure that's a good approach or even worth the trouble. Hundreds of thousands of businesses purchase and depreciate much more specialized and exotic equipment than mining gear and they use the MACRS for depreciation like everyone else. An antminer is a computer "Information Systems" - that's 5 years. It's a table - look it up - find the one that best fits or use "general" life of 7 years. *** NOTE: Moose has better info on self selecting useful life for mining equipment (like 2 years) but the principles of depreciation described here should still apply.

Taxcut for Business software (I have no relationship - just a user) does a pretty good job figuring section 179 depreciation out for you and keeping track of it year after year. You just answer the questions and it does the calculations. I highly recommend it instead of trying to read all the rules and fill out IRS Form 4562 by hand. In fact it will do all your business tax return as part of your individual return, including figuring out any SE tax, etc.

So with all that said there are two steps:

1. Mining and you didn't "sell any currency" (you held it for the year)
So you have "gross revenue (all that you mined at the basis when you were paid)" - "operating expenses" - "depreciation" and this result is "net revenue (net profit or loss)" --- you pay tax on this net profit. You also would pay Self Employment tax on this net (if a profit). IRS Form 1040, Schedule C, 4562, and Schedule SE. Take a look at a schedule C form and you will get an idea of what it's looking for.

2. For the currency you sold (regardless if you had any mining revenue that year or not) - if you held it (which you most likely did) - you have to then pay capital gain (or loss). IRS Form 8949 for small business. Capital gains tax would not come into play until you "sold" your currency (think of this like selling stocks) - you then would take a capital gain (or loss) - on whatever that fair market value when it was mined vs. what you sold the currency for. Just like stocks --- if you just "hold" currency - you aren't paying taxes on it while you "hold" it - just when you "sell it". And if it is sold for a loss you don't pay any tax on it - just on the gains. You can use the "carry forward" on losses to get deductions next tax year(s)...but that's an advanced topic for another time.

If you are C incorporated and you are an employee of the corp or/and receiving compensation rather than a salary, or stock, this is a different discussion... but for a individual 1040, sole-proprietor, non incorporated or LLC, this should give a rough idea. I won't even talk about claiming this activity as a "hobby" because you buying yourself much larger problems. It takes very little effort to be a sole-proprietor business for tax purposes. That's another topic.

Let me know if this is helpful - I can also PM on any of these topics although I really can't dive into anyone's tax situation - just help clarify topics here.

Note I am not an attorney or tax attorney and this is not legal advise. Nor do I work for the IRS. I would rather not disclose my background but it's extensive in business.

[3Moose]

See additional IRS language below:

[3Moose]

IRS WEBSITE Guidance:

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.

[3Moose]

I have been told you do no need to use the MACRS asset life table. I have been told by a CPA and Tax attorney that you can use a self selected justifiable useful life provided it is rational and defensible.

If you are a miner of any decent size, this will drastically change your profit.

[3Moose]

On a side note -- if the new tax legislation passes for pass through entities -- you would really want to consider organizing as such.

[3Moose]

Do tax people in general understand this? As you just completely confused me.

I'll try to keep it general - and I know enough to know ask 100 CPA's a tax question and get 100 different answers.
.

This is the most important internet post of the day. #Truth.

[lemarc723]

Moose - ok, well I've never heard of that for business- but to clear, I probably will edit my post as I was just trying to be helpful and not debate your points. If what I posted contradicts then let's edit it out so my post doesn't give out "bad info". I am concerned when I hear you can self select useful life. I would be concerned about an auditor not buying it and then having to defend yourself perhaps all the way up to tax court. Of course, lots of businesses would love to make their equipment 2 or 3 years instead of 5 or 7! MACRS are rules as you know.

I don't dispute what you say you were told - but can you get any documentation or tax ruling on "self selected useful life"? I have a colleague who is a CPA and deals with tax - I'll send the question out to him as well. Again, not debating your point, just looking for something I could use to support it.