For US Tax purposes, is Bitcoin mining more like property, “work to solve a puzzle” or “winning a lottery”?

Question

From a taxation perspective, I think it's important to clarify if running a Bitcoin mining operation is more like property exchange, labor to solve a puzzle, vs winning a lottery that runs every 10 minutes.

I'm looking from someone to answer who is familiar with accounting rules regarding lotteries, gambling, and similar operations. As it stands, lottery earnings are taxed at enormous rates. (50%)

Although I'm interested in US based operations, anyone with experience in other countries would be of interest as well.

Answer 1

In the USA, Bitcoin earnings are treated like property. The full announcement is here:

Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply IR-2014-36,

March. 25, 2014 WASHINGTON —

The Internal Revenue Service today issued a notice providing answers to frequently asked questions (FAQs) on virtual currency, such as bitcoin. These FAQs provide basic information on the U.S. federal tax implications of transactions in, or transactions that use, virtual currency.

In some environments, virtual currency operates like “real” currency -- i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction.

The notice provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:

• Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.

• Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.

• The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

• A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

  Further details, including a set of 16 questions and answers, are in Notice 2014-21, posted today on IRS.gov.

Answer 2

I recommend this article:

http://www.coindesk.com/bitcoin-law-what-us-businesses-need-to-know/

It says:

Individual bitcoin miners who convert their “created” coins to fiat are money transmitters, even though they never act “as a business,” nor accept value from one person to transfer it to a third person.

So, assuming that you aim to convert some of your mined bits, you are taxed as a money transmitter along with the regulations for transmitters, FinCen compliance etc.

Answer 3

Please take all these answers with a grain of salt and consider talking to either a tax professional or a tax attorney to get advice on how to report profits/losses from Bitcoin, especially if you are either a business or are reporting a substantial amount.

The Internet is great and StackExchange is wonderful, but when it comes to taxes, err on the side of caution and speak to a professional in your country who knows the laws and regulations in question or can research them if necessary.

If you're ever audited (or worse, in Court) the difference between "per my tax attorney's advice" and "per the advice I got on the Internet by RandomCommenter69" could be huge.

Answer 4

I am no lawyer. Specially not American Lawyer.

But I know American definition of solving puzzle and winning lottery. Found out gambling with Americans. :-) They mean human effort and skill to solution.

Competition among people, with clues and people work from clues to answers, is "puzzle", or "game of skill."

No clues has Bitcoin mining. Just guess, guess, guess. No skill involved; only speed. Also, not human effort. Without you can computer win or lose. You not can make computer win more. Nothing you do can help. American law says more like "Lottery" is this.

Not sure "lottery or puzzle" right question is though. Lottery run many times, possible positive return, not chance to lose money, is, maybe, funny random payment schedule for work. Winning computer closes block, produces something others value.

Produced bitcoins dilute bitcoin same others hold. Could argue, maybe, paying you for service are they. Seems fair. But not something gambling with Americans taught me. About this just guessing.

Answer 5

IANAL but I think Bitcoin mining falls under none of those. Bitcoin mining is the act of creating currency from base materials (in this case, cryptography), so in reality it's more like running a mint.

Answer 6

The Canadian answer is more confusing with new regulations. It works out that you can mine all you want, it's when it is converted to/from things it is ' income '.

The basics is like the barter system and can follow the analogy of a farmer with a cow. Your cow, born on your farm, ( for this analogy, the cow is a child of one of your own cows or one you paid taxes already on several years ago and the butcher paid Revenue Canada for you when it was slaughtered for meat ) has no Revenue Canada Value until you sell the milk. It is then you are libel on the tax portion on the estimated value of the milk sold, no matter what it was traded for, the remainder of the cow and unsold milk/butter ( manure if you want to get the whole potential income from a cow ) is not taxable until it too is traded. The not fun part is finding the value of eggs ( insert Litecoin for analogy purposes ) and the current market value and the volume of milk to eggs in the trade, even IF you got the short end of the stick.

Just as with the cow analogy, trading Bitcoin ( milk in the analogy ) for LuckyCoin (bread for the analogy with the added bonus of a dying currency ) you need to have some reference for the value of both in real world currency and as such are taxable on the exchange.

Just don't trade it for a stereo with a ' used 50K value ' and keep good records for tax season.