Tax On Unsold Mined Bitcoin
Based on my research, the answer is both. You would pay taxes on the bitcoin you mine as income, and then capital gains tax when you sell them for a profit (or capital loss if you lose value on the sale).  You can write off a portion of your electricity bill and hardware purchased for the use of mining as a business expense, but it's recommended that you consult a tax professional for determining the proper amount that is eligible for a deduction.  From Forbes: New Bitcoin are being issued by the system roughly every 10 minutes by   a process called mining. In mining, computers running the Bitcoin   software around the world attempt to solve math problems and the first   computer to come up with the solution adds the most recent   transactions to the ledger of all Bitcoin transactions, plus receives   the new bitcoins created by the system, called the block reward. If you are a miner and win the block reward, you must record the fair   market value of Bitcoin that day and mark that as an addition to your   personal or business income. Also note the date and timestamp at which   your coins were mined. Later, when you dispose of those Bitcoin, you   will subtract the date of acquisition from the date of disposal, and   you will be taxed a long-term capital gains rate on any Bitcoin you   held for more than a year, and a short-term capital gains rate on any   Bitcoin you held for a year or less. (The timestamp isn’t absolutely   necessary, but is helpful to validate the order of multiple   acquisitions or disposals within a day.) The amount you pay in taxes on a long-term capital gain will depend on   your income-tax bracket, while short-term capital gains are taxed the   same as ordinary income. From bitcoin.tax:  Another clarification in the IRS's March notice was how mining should   be treated. Mining is income, on the day of receipt of any coins and   at the fair value of those coins. This means that if you mined any   Bitcoins or alt-coins either solo, as part of a pool, or through a   cloud provider, you need to report any coins you received as income. Where it is less clear, is what that dollar value might be, since the   fair value is not always as easy to determine.  Bitcoins, Litecoins,   Dogecoins, are all examples of where there is a direct USD market and   so you can easily find out their value of any given day. However, a   newly created alt-coin that was mined in its early days has no direct   market and so how do you determine its value? Or for any alt-coin,   e.g. ABC coin, that has no direct USD market but does have a BTC   market. Does it have a value? Do you have to make a conversion from   ABC to BTC to USD?  Since there is no clarification yet from the IRS on   this issue you should discuss how to proceed with your own tax   professional. BitcoinTaxes has taken a prudent approach and calculates   value where a fiat or BTC market exists, converting an alt-coin to BTC   to USD as necessary. And from Bitcoin magazine: The IRS also stated mined bitcoins are treated as immediate income at   the market value of those mined coins on their date of mining. “Most don’t know they can write off any losses they have,” said Libra   founder Jake Benson. “The IRS allows you to offset income by up to   $3,000 per year on capital losses.  If you have losses and you aren’t   writing them off, then it’s like throwing money away. Nobody likes   doing taxes, but if you can owe less or increase your return, then   doing your Bitcoin taxes often results in a benefit. In fact, the   majority of our users are filing a capital loss, which means they’ve   actually saved money by using our tool.”  Benson also gives insight for miners.  “Mining is considered income, so know the price of Bitcoin at the time   you mined it,” he said. “If you make money on Bitcoin trading, the IRS   requires that you report gains with line level detail.”  The   appropriate form for that is 8949, a sub-form of schedule D. Gains and   losses, as outlined above, are treated like every other capital asset. And directly from IRS notice 2014-21 FAQ: Q-1: How is virtual currency treated for federal tax purposes? A-1: For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property? A-6: Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.… Q-8: Does a taxpayer who “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities? A-8: Yes, when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. See Publication 525, Taxable and Nontaxable Income, for more information on taxable income.
The answer to this question requires looking at the mathematics of the Qualified Dividends and Capital Gains Worksheet (QDCGW). Start with Taxable Income which is the number that appears on Line 43 of Form 1040.  This is after the Adjusted Gross Income has been reduced by the Standard Deduction or Itemized Deductions as the case may be, as well as the exemptions claimed.   Then, subtract off the Qualified Dividends and the Net Long-Term Capital Gains (reduced by Net Short-Term  Capital Losses, if any) to get the non-cap-gains part of the Taxable Income. Assigning somewhat different meanings to the numbers in the OPs' question, let's say that the Taxable Income is $74K of which $10K is Long-Term Capital Gains leaving $64K as the the non-cap-gains taxable income on Line 7 of the QDCGW.   Since $64K is smaller than $72.5K (not $73.8K as stated by the OP) and this is a MFJ return, $72.5K - $64K = $8.5K of the long-term capital gains are taxed at 0%. The balance $1.5K is taxed at 15% giving $225 as the tax due on that part.   The 64K of non-cap-gains taxable income has a tax of $8711 if I am reading the Tax Tables correctly, and so the total tax due is $8711+225 = $8936.  This is as it should be; the non-gains income of $64K was assessed the tax due on it, $8.5K of the cap gains were taxed at 0%, and $1.5K at 15%. There are more complications to be worked out on the QDCGW for high earners who attract the 20% capital gains rate but those are not relevant here. It's important to note that the US is also the country that taxes its expats when they live abroad, and forces foreign banks to disclose assets of US citizens.  Americans are literally the property of their government. America is a tax farm and its citizens can't leave the farm. Wherever you go, you are owned.  And that now appears to be true of your Bitcoin as well. Even if you spend 50 years outside the USA, your masters want a piece of what you earn.  Land of the Free. You can't    Your problem is that no one will value you new currency call it bytecoin. People will ask why is the bytecoin worth anything and you don't have an answer. You employees will have worthless currency and be effectively making under minimum wage.   Its the same as if you printed Charles dollars with your face instead of George Washington, no one would take them for real money or be willing to trade them for services or food. Bitcoin's basis of value is that many people will trade real services or other currencies for it, but it took decades for this willingness to use bitcoin to build, and mostly because of the useful features of bitcoin, it can protect anonymity is easy to transfer world wide and many more. Even with those features the value of bitcoin is very volatile and unreliablie because it lacks backing. How many decades are your employees willing to wait, what amazing new features will you nontechnical staff add that bitcoin lacks? What I am saying is that the IRS is not going to shut down Coinbase along with the thousands of busineses and services built around bitcoin and take away $40 billion in wealth from its citizens and financial institutions without massive public and legal blackash. No Tax would have been deducted at the time of purchase/sale of shares. You would yourself be required to compute your tax liability and then pay taxes to the govt. In case the shares sold were held for less than 1 year - 15% tax on capital gains would be levied. In case the shares sold were held for more than 1 year - No Tax would be levied and the income earned would be tax free. PS: No Tax is levied at the time of purchase of shares and Tax is only applicable at the time of sale of shares. "While this does fall under the ""All-inclusive income"" segment of GI (gross income), there are two questions that come up.  I invested in a decentralized bitcoin business and earned about $230 this year in interest from it Your wording is confusing here only due to how bitcoin works." "Legally speaking, when you convert that bit-coin onto something else, the Israeli Tax Authority will look into the value of that something else, compare it to the original value of the previous something else you used to buy bit-coins (USD, in your example), and charge you capital gain taxes for the difference. According to the Israeli law you're supposed to pay taxes when selling (converting the bit-coin to something else), and since you're not using any formal bank or stock broker which will automatically deduct the taxes, you have to pay the taxes yourself. By not doing so you're committing a tax fraud. The real question you're asking is whether they'll come after you. Well, that depends on the amounts. They might. Pay attention: there's no statute of limitation for tax fraud in Israel. They may come after you in 50 years from now. Another thing to keep in mind: if you used bit-coins to buy something (services or products of any kind), you probably didn't pay the VAT (מע""מ) - which is another case of tax fraud on your behalf. PS: I'm not a lawyer or accountant, so get a professional advice, but I have been dealing with the Tax Authority in Israel, so I've got a pretty good idea of what the rules are." So you're saying it doesn't make economic sense to mine? That is very much already the common consensus within the Bitcoin community, it is too late for most to get into the mining game at this point. It is still a necessary process though because the proof of work is what secures the network against attacks. That said, Bitcoin is not the only cryptocurrency, and there are other coins are mined in more efficient manners. I don't know how taxes work in Israel, but I imagine it is relatively similar to taxes in the US. In the US you need to pay taxes on investment earnings when you sell them or in this case trade them for something of value. The amount that would typically would be taxed on would be the difference between how much you paid for the currency and the value of the item you traded it for.  In theory there shouldn't be any difference in trading bitcoins versus dollars or euros. Reality is that they are rather weird and I don't know what category they would fall into. Are they a currency or a collectors item? I think this is all rather hypothetical because there is no way for any government to track digital currencies and any taxes paid would be based on the honor system.  I am not an account and the preceding was not tax advice... "This is the best tl;dr I could make, [original](http://www.dnsassociates.co.uk/blog/bitcoins-tax-implications-uk) reduced by 92%. (I'm a bot) ***** &gt; Tax practices of bitcoin activities in UK The HMRC guidelines on the tax treatment of transactions relating to the sale or use of bitcoins and other similar cryptocurrencies are applicable for bitcoin.  &gt; Different taxes and their activities concerning bitcoins In the case of activities concerning bitcoins and other cryptocurrencies, the taxes like income tax, corporation tax and capital gains tax transactions will hinge on the very activities taking place and the parties involved, in the similar way as transactions involving a normal currency, such as sterling, are decided.  &gt; No special instructions are there for income tax, corporation tax and capital gain tax for the transactions relating to bitcoins.   ***** [**Extended Summary**](http://np.reddit.com/r/autotldr/comments/72z5sg/bitcoin_tax_in_the_uk_explained/) | [FAQ](http://np.reddit.com/r/autotldr/comments/31b9fm/faq_autotldr_bot/ ""Version 1.65, ~218069 tl;drs so far."") | [Feedback](http://np.reddit.com/message/compose?to=%23autotldr ""PM's and comments are monitored, constructive feedback is welcome."") | *Top* *keywords*: **bitcoin**^#1 **tax**^#2 **activity**^#3 **currency**^#4 **transaction**^#5" I guess Bitcoin are not that popular yet and hence there are no specific regulations. If currently it gets debated, it would be treated more like a Pre-Paid card or your Paypal account. As you have already paid taxes on the $$ you used to buy the Bitcoins there is no tax obligation as long as you keep using it to buy something else. The other way to look at it is as a commodity. If you have purchased a commodity and it has appreciated in value in future you may be liable to pay tax on the appreciated value. Think of it as a if you bought a house with the $$ and sold it later.   Once more serious trade starts happening, the governments around the world would bring in regulations. Till then there is nothing to worry about. I don't care for this solution. I would prefer a tiny tax per transactions. Should keep the churn down, be almost unnoticeable to aggregate returns and still allow people with legitimate reason to split trades to do so and still liquidate quickly "In June 2016 the American Institute of CPAs sent a letter to the IRS requesting guidance on this question.   Quoting from section 4 of this letter, which is available at https://www.aicpa.org/advocacy/tax/downloadabledocuments/aicpa-comment-letter-on-notice-2014-21-virtual-currency-6-10-16.pdf If the IRS believes any property transaction rules should apply differently to virtual currency than to other types of property, taxpayers will need additional guidance in order to properly distinguish the rules and regulations. Section 4, Q&A-1 of Notice 2014-21 states that “general tax principles applicable to property transactions apply to transactions using virtual currency,” which is guidance that is generally helpful in determining the tax consequences of most virtual currency transactions. However, if there are particular factors that distinguish one virtual currency as like-kind to another virtual currency for section 1031 purposes, the IRS should clarify these details (e.g., allowing the treatment of virtual currency held for investment or business as like-kind to another virtual currency) in the form of published guidance. Similarly, taxpayers need specific guidance of special rules or statutory interpretations if the IRS determines that the installment method of section 453 is applied differently for virtual currency than for other types of property. So, at the very least, a peer-reviewed committee of CPAs finds like-kind treatment to have possible grounds for allowance.   I would disagree with calling this a ""loophole,"" however (edit: at least from the viewpoint of the taxpayer.)  At a base technological level, a virtual currency-to-virtual currency exchange consists of exchanging knowledge of one sequence of binary digits (private key) for another.  What could be more ""like-kind"" than this?" Could you not just say that you had bought it when it was pennies on the dollar and made the millions that way? There isn't much of a transaction record, is there? I also just realized that I don't understand how taxes work in that situation. If you have a different currency from the U.S. Dollar, and it increases in value greatly, do you have to pay tax on that increased value relative to the U.S. dollar? They don't when it's minimal increases. Say for example a trade totals $10,000.  A flat tax of 0.2% would be $20.  This is not much for the Buy &amp; Holder b/c he only makes a few trades a year, say 10 transactions a year.  So their tax is only about $200 per year. (heck we could even drop it to 0.1%).  But DayTraders will routinely do 10 trades a day, or over 3000 trades a year.  So using that same 10K trade above, that could hypothetically be 3000x20 = $60,000 per year in taxes.  Computer Traders will do hundreds of trades per day.  Say 30,000 trades per year.  So that is $600,000.  So you can see how iit hardly affects legitimate investors, while making the HF traders control themselves a bit.  This is what we want.  The exchanges charge the flat tax with the transaction like a Sales tax.  It avoids excess regulation (the SEC already monitors trades, or is supposed to), and it hurts the gamblers (HFTs), while not hindering the good guys (investors).