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Hey, Bitcoin Miners! The Taxman Wants A Cut

Are you a bitcoin miner in the United States? Congratulations! You are making self-employment income.

The Internal Revenue Service ruled Tuesday that Bitcoin is not a currency, but actually a taxable property. The ruling takes effect immediately and covers all past and future bitcoins mined as well as any capital gains realized by spending coins or converting them to real-world currencies.

For Bitcoin miners, this means any of your “self-employment income” is now taxable. So if you have mined Bitcoins in the past or plan to in the future, be prepared to report your Bitcoin earnings during the tax season—and don’t forget about Social Security and Medicare withholding. 

Bitcoin was chosen by the IRS, among other digital currencies during Tuesday’s ruling, as a property asset for U.S. federal tax purposes. Concurrently, the organization released a Q&A for taxpayers. 

Here is the relevant section regarding Bitcoin mining:

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.

At least some members of the Bitcoin community saw the writing on the wall a while ago. In December 2013, an unknown individual or group launched Bitcoin Taxes launched to help users calculate their bitcoin capital gains. (Despite which Bitcoin Taxes features a disclaimer noting that its site is for “informational purposes only” and that it doesn’t constitute “financial, tax or legal advice.”)

As a result, members of the /r/bitcoin subreddit are mostly taking the IRS requirement in stride. Paying taxes on your mining gains should be just like paying any other type of capital gains tax. For heavy users, the real news isn’t that Bitcoin is taxable. It’s that the IRS finally recognized its existence. 

However, for casual users, the changes could be more significant. As it stands, the IRS ruling requests users to report every single Bitcoin gain. However, according to Steve Brecher, a senior adviser at accounting firm WeiserMazars, the IRS may relax that ruling over time. 

“When we’re talking about property, we’re talking about [how the IRS already handles] barter,” he said. “If you have acquired a piece of property, theoretically you have a gain. Are you going to report it? Does everyone report $5 gains? The answer is no. But with $5,000 gains you can see the answer a little more clearly.”

Now that Bitcoin is taxable just like stocks and bonds, Tuesday’s ruling means Bitcoin may never have the chance to become a black market outside the lines of the law. Perhaps now, alarmists can stop worrying about the future of Bitcoin and help it grow up.

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