Case Study 3: Taxation of Cryptocurrency - Mining

Introduction
To help facilitate a better understanding of the taxation of cryptocurrency, I've decided to put together a series of examples which increase in complexity to demonstrate the potential tax implications of investing in cryptocurrency. I'll break each example out to include the tax impact of the various transactions occurring in 2017 and the tax impact if the scenario occurred in 2018 to demonstrate the effects of the new tax law.

Notice in this first example that there is no difference between 2017 & 2018 tax treatment. This will change in future examples. Also notice that this example was developed using the First In First Out (FIFO) methodology.

Scenario
(1) Taxpayer A decides to invest in Bitcoin. In January, Taxpayer A buys 100 coins at the price of $9 a coin with a transaction fee of $1 a coin spending a total of $1,000 to acquire the coins. (2) In February, Taxpayer A mines 50 Bitcoins when the market price of Bitcoins is $12 a coin and incurs $300 of utilities to do so. (3) In March, Taxpayer A panics at a drop in the price of Bitcoin and sells off 10 coins for $6 a coin with a transaction cost of $1 a coin making a total of $50 off the sale. (4) In October, Taxpayer A decides to sell off 20 coins when the price of Bitcoin spikes to $16 at a transaction cost of $1 a coin making a total of $300. (5) In February of the next year, Taxpayer A decides to sell off some of their Bitcoin at $21 a coin with a transaction fee of $1 a coin receiving $1,400. (6) In March of the next year, Taxpayer A sells off their remaining Bitcoin (50) at $23 a coin with a transaction cost of $1 a coin receiving a total of $1,100.

2017 Tax Treatment

In year 1, Taxpayer A would recognize $600 of ordinary income as well as $300 of operating expense related to their mining activities. Additionally, Taxpayer A would recognize $50 of short term capital gain related to their sales in March (loss of $50) and October (gain of $100).

In Year 2, Taxpayer A would recognize long term capital gain of $1,200 on their 2018 individual income tax return. This gain would be attributed to their sales in February ($700) and March ($500).

2018 Tax Treatment

In year 1, Taxpayer A would recognize $600 of ordinary income as well as $300 of operating expense related to their mining activities. Additionally, Taxpayer A would recognize $50 of short term capital gain related to their sales in March (loss of $50) and October (gain of $100).

In Year 2, Taxpayer A would recognize long term capital gain of $1,200 on their 2019 individual income tax return. This gain would be attributed to their sales in February ($700) and March ($500).

Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.