It’s not a popular subject but we have to talk about it. The IRS are the last people in the world you want in you business.
But, if you fill out the right paperwork truthfully, you got nothing to worry about. I’ll post useful links. Its been edited much now.
(Newer)
This is general overview
This one discusses option for Traders who lost greater than $3k and try to attempt to claim greater than that by declaration of normal loss. There’s a capital loss limitation of $3K, the section in question does not mention intangible items and again is a giant if.
this one discusses like kind exchanges, it’s a way to defer gains or losses on trades made before 2017 MAYBE if it meets certain requirements, filing for like kind exchange deferment requires a record to be submitted of acquisition and sales
(General information)
(This one discusses your liability for claimed hard fork coins, sort of. Theres less guidance for it but should be claimed just like mining Rewards or capital gains)
Tax&Crypto: Expert Blog
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(This one, and below discuss an amnesty for past unreported income, steep fines but no prosecution)
https://www.irs.gov/forms-pubs/about-publication-525
https://www.irs.gov/forms-pubs/about-schedule-d-form-1040-capital-gains-and-losses
https://www.bitcointaxsolutions.com/bitcoin-losses/
http://theminersunion.com/2017/09/11/what-you-need-to-know-about-bitcoin-mining-taxes/
I mine a little zcash so this is pertinent for me. IRS form 525 discusses miscellaneous income. Form N-14-21 discusses cryptocurrency income tax info (coinbase link).
General tax laws concerning property transfers apply to virtual currency transfers.
If you mine, you must claim the amount rewarded at its fair market value which correlates to the timestamp. Fair market value is the amount you would expect to pay at that given time. You can use the historical chart data on coinmarketcap to get a close value, probably almost to the minute.
In IRS form 525, under the section Other Income (pg28), you’ll find the following sections that pertain to mining cryptocurrency,
(Pg31) Found property. If you find and keep property
that doesn’t belong to you that has been lost or
abandoned (treasure trove), it is taxable to you
at its fair market value in the first year it is your
undisputed possession.
[(Pg32) Prizes and awards. If you win a prize in a
lucky number drawing, television or radio quiz
program, beauty contest, or other event, you
must include it in your income. For example, if
you win a $50 prize in a photography contest,
you must report this income on Form 1040,
line 21. If you refuse to accept a prize, don’t include its value in your income.
Prizes and awards in goods or services
must be included in your income at their fair
market value.
(Pg33) Rewards. If you receive a reward for providing
information, include it in your income.]
Cryptocurrencies are classified as property, not currency. Awards and prizes may not pertain exactly but claimed in the same way as a property reward for providing information would be.
It appears you MAY be able to deduct your electrical costs, rig depreciation and so on but only If your mining constitutes a business. Otherwise no. You cannot deduct the amount spent mining for the DEV fee as they are a 501c charity. You would be able to deduct monetary contributions but any amount spent providing a service to them cant be deducted, so could be tricky (might be just -10%?).
Pg13 discusses restricted property. Cryptocurrency would be considered substantially vested (so not actually restricted) because it is transferable so non substantially vested would not apply here. If you bought zcash in the trust fund, it would be not substantially vested as you would not be able to immediately transfer it, you could claim it but would be considered restricted, different rules.
[Pg13) Restricted Property
In most cases, if you receive property for your
services, you must include its fair market value
in your income in the year you receive the property. However, if you receive stock or other
property that has certain restrictions that affect
its value, you don’t include the value of the
property in your income until it has been substantially vested. (You can choose to include
the value of the property in your income in the
year it is transferred to you, as discussed later,
rather than the year it is substantially vested.)
Until the property becomes substantially
vested, it is owned by the person who makes
the transfer to you, usually your employer. However, any income from the property, or the right
to use the property, is included in your income
as additional compensation in the year you receive the income or have the right to use the
property.
When the property becomes substantially
vested, you must include its fair market value,
minus any amount you paid for it, in your income for that year. Your holding period for this
property begins when the property becomes
substantially vested.]
So, when you receive the reward the substantially vested holding period begins, you must claim it as additional income. So, correlate the fair market value of all your mining rewards for the year with their timestamp, multiply it, add it all up, then add that to your gross income claimed as a mining reward. Example, one reward of 0.0112 with a value of $553.26 at the time its recieved = 6.196 or $6.20.
If you do sell it you are liable for claiming capital gain/loss.
Exchanging and capital gains/losses
Virtual currencies are considered capital assets and as such you must claim capital gains and losses. The definition of a capital asset is a little grey so in some situations it may not be considered so, but to avoid legal ramifications it best to consider them as such.
Wiki defines as
[In financial economics, capital refers to any asset used to make money, as opposed to assets used for personal enjoyment or consumption. This is an important distinction because two people can disagree sharply about the value of personal assets, one person might think a sports car is more valuable than a pickup truck, another person might have the opposite taste. But if an asset is held for the purpose of making money, taste has nothing to do with it, only differences of opinion about how much money the asset will produce. ]
And-
[In some income tax systems (for example, in the United States), gains and losses from capital assets are treated differently than other income. Sale of non-capital assets, such as inventory or stock of goods held for sale, generally is taxed in the same manner as other income. Capital assets generally include those assets outside the daily scope of business operations, such as investment or personal assets. The United States system defines a capital asset by exclusion.[3] Capital assets include all assets except inventory of supplies or property held for sale (including subdivided real estate), depreciable property used in a business, accounts or notes receivable, certain commodities derivatives and hedging items, and certain copyrights and similar property held by the creator of the property. The United Kingdom has an even broader definition.]
There are 4 kinds of claims- short term gain and loss, and long term gain and loss. Short term is 1year and less, long term is greater than 1year. They are subject to different taxable percentages.
Short term gains and losses are added for your short term net gain/loss. Same for long term. Then those totals are combined to produce your year net gain/loss. (There are potentially reduced taxes on long term gains as well, depending on your tax bracket as low as 0% ,so HODL is right) You may deduct up to maximum $3000 loss per year, though it does carry only forward. Example, you lost 5000 this year. This year you claim 3k, next year 2k.
Capital gains and losses are claimable on IRS schedule D form 1040.
If you essentially “cash out” any cryptocurrencies you held less than a year for dollar, you can claim it on IRS form 1099 as miscellaneous income but will probably be subject to the short term capital gain taxes regardless. 1099s are mainly for self contractors and in this case would apply to a payment recieved for a service i.e. i fix your car for 1 electric coin. Capital gains that haven’t been “cashed out” would go on 1040 (D).
So, if you mine cryptocurrency and later exchange it, either for a gain or loss, its fair market value at the time it recieved is the basis for your gain/loss. Calculating fractional values must be done using first in, first out (coinbase link, this applies to buying as well) Example, you mined 1.0 electric coin over a year in fractions of 0.01, each fraction has a slightly different value due to the fair market value fluctuating. Now you send 0.5 out to exchange. The values correlating to the first 50 fractions you find (0.01×50=0.5) would equal the basis.
According to this article some people are averaging values but emphasis on records to prove as such. In the overall scheme of things it would result in the same amount claimed but may result in different totals. Example, if you average the fractional values, the capital gains on that 0.5 would actually be less because the average value would be greater than the actual value (assuming the value has increased over the time it was acquired). But your capital gains will be more when the average value is less than the actual value i.e. that other 0.5 you mined later when the value was higher. So in the end, it all evens out.
The important thing is accuracy in accordance with your records to prove what you owe and paying what you owe.
It also makes a good point in that the IRS tends to be much more lenient on people who at least try to file correctly even if it there are mistakes versus people who dont bother.
Crypto Tax Tips To Start 2018 Right
via Blockfolio: FTX | Buy, sell & track your Bitcoin, Ethereum, & more
BTW, portfolio programs such as Blockfolio are excellent ways to keep track of you position.
So to summarize,
If you mined cryptocurrency
you must claim its fair market value as additional income.
If you mined cryptocurrency and
If you sold it within the taxable year you also claim the capital gain or loss from the sale (short term)
If you hold cryptocurrency for longer than a year and sell it you must claim capital gain or loss from the sale (long term)
If you bought cryptocurrency
If you sold it within the taxable year you also claim the capital gain or loss from the sale (short term)
If you hold cryptocurrency for longer than a year and sell it you must claim capital gain or loss from the sale (long term)
It should be noted, personal reporting is not required at the time of purchase or while you hold capital assets (certain few exceptions). You will only be charged with capital gains once your property is sold.
Property taxes themselves pertain to real estate assets and such, sorry for any confusion!
Concerning transaction fees, just goona copy paste-
[The IRS does not allow you to write off transactions fees, such as brokerage fees and commissions, when you buy or sell stocks. Instead, you can add the amount of those fees to the purchase price of your stock. The purchase price plus the cost to acquire your stock equals your cost basis. For example, if you bought 100 shares of XYZ stock at $10 per share, your purchase price would be $1,000. Add in commissions and transaction fees of $10 to get your cost basis of $1,010 or $10.10 per share. You can also reduce the amount you received from selling your stock by the amount of your transaction fees. Even though you can’t deduct your transaction fees, you can reduce your taxable gain, or increase your taxable loss, by properly figuring your cost basis.]
Discussing like kind exchange tax deferment, this applies to certain exchanges made before end of year 2017, and says that you do not have to immediately report gain or loss on exchanges granted that they meet certain requirements of being a like-kind. For example if you traded gold bullion for gold coins, that is a like-kind exchange. If you trade gold bullion for silver coins that is not a like-kind Exchange, there is no guidance regarding crypto like kind exchanges so good luck. If you file for a like-kind exchange tax deferment you must submit records of acquisition and sale. Its worth noting that -
“The code specifically excludes certain intangible assets from Section 1031 like-kind exchange treatment, including stocks, bonds, notes, partnership interests, certificates of trust, and “other securities.” There is no authority treating cryptocurrencies as “securities” for purposes of Section 1031.
But, because issuance of crypto coins may be treated as an issuance of securities under federal securities law, it is possible the IRS could argue that coin exchanges are “securities” excluded from 1031 treatment.”
Lastly, this is all very serious. The IRS doesn’t play games. Tax evasion could lead to imprisonment, its how they got Capone. This article talks about the US financial stability oversight committee’s new cryptocurrency work group and you can be about damned sure that the bad people doing bad things he’s referring to are tax evaders not paying taxes. (How do we know? They’re not a law enforcement agency)
US Finance Regulators Form Crypto Working Group, Says Mnuchin
via Blockfolio: FTX | Buy, sell & track your Bitcoin, Ethereum, & more
Update - so I did my taxes, by far the hardest part was correlating the fair market values off of coinmarketcap just because it was so time consuming. Here’s a tip, use a spreadsheet and create a multiplication equation for the totals and value columns, then highlight the results column for a summation, saves so much time.
Other than that i claimed my mining earnings on 1099 miscellaneous as other income, it took a second to find (when selecting the business type, turbotax refers to it as “something else” option, applicable to thine since it is only a “hobby” (deducted no expenses, not actively participating)
I also claimed my capital gains from exchanging this way because they were realized and I did not receive a 1099 b (not nearly enough made to necessitate one).
I think i lost $100 off my return.
