Bitcoin Mining as Business? Know its Tax Implications

Bitcoin Mining as Business.Slowly yet steadily virtual currencies are making their way into our lives. It has garnered a lot of interest amongst investors. While some feel that virtual or crypto currency is the future of money, others believe these are good investment instruments.

You must be naïve to think these do not come with inherent risks, but that’s what makes them potential game changers as well. Take the most famous ones, for example, Bitcoin, Ethereum, and Litecoin. The valuation of these three virtual currencies has gone up several times through the year 2017. The likes of Litecoin has gone up by 75 times this year alone.

A lot of us are not very clear on how to get our hands on these virtual currencies should we want to. Well, there are two primary ways in which you can do so. Firstly, you can reach out to one of the exchanges, Coin base for an example, and set up an account with them. You can then link different modes of payment such as credit or debit card or wire transfer. The exchange would then hand over the virtual currency to your account.

The second way of acquiring virtual currencies is to mine them. Mining is a process by which you solve complex algorithms, usually known as Blocks. In exchange for solving these algorithms, you receive a certain quantity of virtual currencies. Well, you do not have to literally sit down and solve equations, you can use computing resources to do the same. Once you make enough of these virtual currencies, you can sell them at their exchanges in return for real currency. And that is how you make money.

Is bitcoin mining treated as Business?

If the mining done by a taxpayer comprises of any trading or business entities and are not undertaken by someone who is employed, then the same qualifies as a business unit. All the earnings from mining, in this case, would then qualify for the self-employment taxes. All the earnings from self-employment, which is usually the net earning minus the deductions, is liable for taxes.

Thus, all earnings from virtual currency must be added to your total income.

It is crucial to note that earnings in the form of virtual currency must be converted to the fair dollar value for that specific day and added to your income.

Self-employment taxes are also applicable if you carry out mining individually as a contractor.

As a rule, any income that is an outcome of trades or business carried out by an individual unless he or she is an employee qualifies as self-employment taxes. So even if you are an independent contractor who does mining and receives virtual currencies, you are liable to pay taxes.

Capital Gain

Investors are slowly mustering the courage to invest in virtual currencies for the long term. If you hold on to your virtual currencies for the long term, they will be treated as other capital assets. Assets such as stocks, real estate, bonds etc. attract capital tax gain or loss. Virtual currencies are also subject to capital tax, should you want to hold on to them for a long term horizon as the IRS considers them as property.

Virtual currencies are also subject to employment taxes if your employer pays you in virtual currency as remuneration. The same rule is applicable here as well, wherein the fair dollar value of the respective virtual currency is taken into consideration.

Since the laws on virtual currency system are in its nascent stages, chances of amendments to the law are high. It is recommended to keep a close eye on the taxation of virtual currency.

Check out more about Taxing in Virtual Currency.