Capital gains? That is what happens when a person or company buys bitcoins, holds them for a while, then sells them at a profit. Mining is different.
Coins are a virtual good that person or company is manufacturing as a miner. This is business activity, which should be organized under a business entity, like and LLC or corporation. Without such an entity set-up, most jurisdictions would be defaulted to a sole proprietorship.
Costs at least include electricity + hardware for mining. Subtract the costs from the revenues to get profit. Profits are taxed differently based on business structure and jurisdiction. Business profits get taxed, but remember that money a person pays himself as an employee of his own business is salary, so that would be taxed as income.
Thanks for sharing this. I'm no lawyer, but I've thought a lot about tax treatment of bitcoin mining and come to some different conclusions. I'd love to hear your thoughts.
Assume we're talking about someone mining bitcoins directly (no pools, mining contracts, etc.). Mined bitcoins come from two different sources: the block reward (currently 50 BTC) and transaction fees.
Transaction fees are not new bitcoins at all. They were paid by someone performing a transaction and can be claimed by the miner who generates the block that includes that transaction. I think you'd be hard pressed to say they were manufactured. It seems more accurate to consider them as payment for the service of processing the transaction. As such, I believe they would be taxable based on fair market value in the same way that a payment in USD for the same service would be taxed, and the FMV would become the cost basis.
The 50 BTC block reward is a different story. They are newly issued coins, and it seems logical to consider them as having been manufactured, but even that does not seem 100% clear cut. For example, I can easily change one line of code from 50 to 100 and let my computer look for blocks of 100 coins. When it succeeds, I still won't end up with 100 coins because the rest of the network will reject it. Or I could do all the correct work to generate 50 coins, but someone else finds a block at about the same time and the network chooses to accept that block and reject mine. I think you could make the case that bitcoins are not being created by the efforts of the miners at all, but are being granted to the miners by the rest of the network as payment for doing computations that the network deems acceptable. You might even say that all 21 million coins already exist, and they are just being distributed. It's not physically possible to repeat the block solving work 1 million times and end up with 50 million coins, which would be the case with any normal manufacturing process.
The latter argument is much less clear than the transaction fees, but I've become somewhat convinced. I'd love to hear your thoughts on both.