‘Forget bitcoin, invest in bitcoin infrastructure,’ savvy investors say
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As more people participate in bitcoin transactions, it is important for accountants and tax preparers to understand the various transactions and their appropriate taxation. Bitcoin mining is the use of specialized computers to solve hashes algorithmic equations on a blockchain. The miners people who own the computersare investing in bitcoin mining for solving the hash and if they are part of a pool they get a share of the reward when the pool solves a hash.
Miners also receive a share of the transaction fees paid to process a bitcoin transaction. There are other digital currencies cryptocurrencies besides bitcoin and these are referred to as altcoins. The various altcoins also use a mining process. For an individual, this income is taxed as ordinary income on a Schedule C. The amount of income is determined based on the exchange rate from bitcoin to U.
In investing in bitcoin mining to the miners who have earned bitcoin or an altcointhere are also investors who buy various cryptocurrencies to either trade or hold for their appreciation. I recently spoke to one investor who day-trades in cryptocurrencies and even takes advantage of variances in prices between investing in bitcoin mining.
An exchange is an online software platform where traders can buy or sell cryptocurrency in exchange for dollars or another cryptocurrency. The exchange is the intermediary between the buyers and sellers. There has been talk among investors that this is a like-kind exchange. Based on prior tax court rulings for coins and precious metals, it does not seem likely that like-kind exchange treatment will succeed on examination by the IRS.
Yes, using bitcoin that is worth more on the date it is spent than when it was purchased or earned creates income. Holders of appreciated bitcoin not converted to dollars do not pay tax on the increase in value. Taxation only occurs when bitcoin is spent, converted to an altcoin or dollars.
The IRS is clearly going after those who have not reported their gains. She is a Certified Bitcoin Professional and is the accountant and business advisor for a cryptocurrency mining operation.
Nancy specializes in accounting software and related investing in bitcoin mining improvement consulting for various industries including manufacturing, construction and non-profits. Tax Reform Center Tax Updates: Resources [ Hot Topic].