Let’s applaud the Internal Revenue Service for issuing fresh guidance on the agency’s application of the tax law to virtual currencies.
I was nodding along until reaching the discussion of “mining” virtual currency:
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.
You’ll be taxed upon the creation of bitcoin, says the IRS. Mining bitcoins is a reward in exchange for providing services required to operate the bitcoin payment network.
Taxing fiat currency when received in exchange for providing services is a fundamental principle of U.S. taxation. But here, the IRS has explicitly said that bitcoin is property, and not foreign currency, under the tax code.
If I receive property, such as a car, in exchange for providing legal services, I have to pay tax on the fair market value of the car upon receipt.
But what if I build a car for people to drive? When would I have to pay tax on that? Not until I sell or exchange it.
The sale or exchange moment is formally known as a “realization” event under the tax code. There is no taxable income without a realization event.
There is no realization event when I merely produce a car for resale. And I’d argue that there may be no realization event when I produce bitcoins from mining.
That’s why I think the IRS may have gotten it wrong: Mined bitcoins shouldn’t be taxable until they are traded on an exchange or exchanged for other property or services.
According to blockchain.info, approximately 1,371,425 bitcoins have been mined within the last year. Assume a conservative average exchange rate of $250 per bitcoin over the past year. If all mined bitcoins are subject to U.S. income tax (they’re not), that’s $342 million of potentially taxable income.
A big win for the U.S. Treasury this round.
(Thanks to William Lewis for bringing this to my attention.)