Yesterday the IRS decided on a tax treatment for bitcoin. This seems to have left a lot of people scratching their heads. There’s one decent synopsis here. Now, lets get to their ruling, and why I don’t think this can possibly stand.
Bitcoin miners are just like many businesses the IRS has seen before. It’s a fairly simple value add model. Miners spend a fixed amount of money on a shiny metal box that helps them produce revenue while incuring other variable costs, most notably HVAC and power. Every major miner knows his or her cost per coin or at the very least should be able to calculate it. In the early days my cost per coin was around $5.
Now comes the tricky part of hoarding mined coins vs. liquidating quickly. This is actually pretty simple, let’s apply another well known tax treatment here. Continuing with the example above my cost basis per coin was $5, when I sell that coin, in less than a year it would logically follow that I would pay regular income and, depending on your situation, self employment tax. If I sell that coin beyond one year those earnings would only be subject to capital gains. Profits are the final value less any fees, operating expenses, and relevant depreciation.
Let’s make a solid real world comparison. A towing service puts hard miles on vehicles and goes through them quickly. This is roughly equivilent to a bitcoin miner. It’s good for only one thing and once you blow the engine up or the gas mileage gets too poor it’s good for absolutely nothing. There’s maintence on a tow truck, like filling up on gas and replacing tires; this is our electricity. At the end of the day they both do a small, albiet financially motivated, service for the community. Your local wrecker will pull you out of a ditch, while your local miner processes the transaction transaction.