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Tremendous demand for cryptocurrency is one of the leading factors driving the growth of Bitcoin mining across the globe. Amid the boom, Bitcoin mining has become a lucrative venture for many, and without surprise, a focal point for IRS enforcement and scrutiny. In this article, Benzinga provides guidance on Bitcoin mining tax implications for foreign investors.
Overview of Bitcoin Mining Unlike the traditional banking system, for most cryptocurrencies, the issuance of new coins is not in the hands of centralized entities. Instead, new cryptocurrencies are generated through the process of mining, which adheres to a predefined set of rules established by the underlying protocol.
In broad terms, mining refers to the process through which cryptocurrency transactions are verified, gathered and recorded in a digital public ledger known as the blockchain, with Bitcoin being the most prominent example. Bitcoin mining is a resource-intensive activity that results in the issuance of new coins and plays a critical role in maintaining the integrity of the blockchain network.
By racing to complete cryptographic puzzles under a proof-of-work consensus mechanism, miners propose the blocks that make up the Bitcoin blockchain and that store the history of network transactions.The greater the computing power of a miner, the more likely it is to solve the cryptographic puzzle. When a puzzle is solved, a miner proposes a block, with the potential to receive a block reward if the block is verified and accepted by other nodes. In exchange for solving problems and adding blocks to the blockchain, new Bitcoins are sent to the winning miners.
Tax Implications of Mining for Foreign Investors Generally speaking, crypto miners will face tax consequences when the following occurs:
In the first situation, the IRS has issued Notice 2014-21 that directly addresses the tax implications of crypto mining on page four in question nine. Under the notice, the reward cryptocurrency that taxpayers receive in exchange for performing mining activities is taxed as ordinary income upon receipt. Cryptocurrency received by a taxpayer is subject to self-employment or payroll taxes, depending on whether the taxpayer is mining as a business, trade, independent contractor or employee.
In the second instance, a taxpayer will trigger another taxable event when they sell the reward cryptocurrency, which is subject to short-term or long-term capital gains rates, depending on the holding period of the cryptocurrency. The cost basis is the value of the crypto at the time it was mined. If the value of the crypto is higher at the time of sale then the cost basis, there is a capital gain.
Overall, as an investor, it is important to understand the tax implications for the business entity in which you have an equity stake. You and your tax professional need to be aware of tax implications and taxable events pertaining to stakeholders involved in Bitcoin mining within the business entity.
How Excess Returns Can be Shared With Token Holders Excess returns can be shared to token holders through revenue sharing tokens (RSTs). In broad terms, RSTs are a type of token that confer their owners a right to a portion of revenues or fees generated on or by the host platform. In other words, they resemble company equity.
RSTs are best described as an exotic investment instrument. Each issuing company creates a blockchain with smart contracts, which delivers an income stream to token holders based on the revenue of the company. The portion of the company’s revenue received is in return for having invested in that token. The issuing company is obliged to allocate a predetermined percentage of its revenue to its RST token holders. Effectively, these distributions are a cost to the company and exist between the gross profit and EBITDA lines of its account.
Currently, RSTs are useful for early-stage companies that require expansion capital. However, looking forward, RSTs have the potential to disrupt dividends as they could suit larger organizations that still require capital to grow.
Digital securities such as RSTs can be traded on alternative trading platforms (ATSs). INX claims to be among the best of the leading ATSs – an ATS that brings about financing potential beyond traditional markets and unlocks secondary liquidity and value for investors. Unlike many other ATSs such as Tradeweb, Liquidnet and Virtu, INX provides crypto trading in a fully regulated platform. The INX trading platform is open 24/7/365 and allows investors anywhere in the world to easily and efficiently transfer, list and trade a variety of digital securities.
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