Approach1:
a) at the time of mining any bitcoins acquired should be tax as income at the fair price for those coins at the end of business day (or week - depending on the accuracy of the coins)
b) at the time of selling, any appreciation of the bitcoin capital should be taxed as a capital asset with regular short-/long-term rules applied. This also would apply with any bitcoin that we purchased/sold for a profit
> any equipment costs can be subtracted from the overall profit, I believe this only applies to (1)
I'm inclined to follow approach1 but it's going to be a huge problem accurately tracking what was made at the time of mining given the fluctuating prices.
Also an interesting side question is how do we declare taxes on items that we purchased with BTC that were acquired with (1b) ??
In general, the approach you describe sounds reasonable to me. I do not think the problem of tracking is quite so "huge". Eventually when you sell or exchange the coin you will have paid tax on 100% of your realized amount, so the amount recognized at the mining date is just a matter of timing. Adopt a method that is reasonable and simple to apply and be consistent. For example you trade primarily on one exchange during a period you might use published trades from that exchange if available to value mined coins in that period (last, w. avg, (high+low)/2 - any would probably be considered reasonable). Whichever method and periods are appropriate for your situation and volume, write it down and be consistent. By paying some tax at time of mining you are demonstrating good faith effort to comply in a grey area of tax law. Where people get in trouble is when they exhibit the attitudes like "I will pay zero tax" or "I will arbitrarily change my methods from day to day or using hindsight to pay the absolutely least amount of tax possible". Don't do that. These are the people tax authorities tend to select for enforcement and to set precedents.
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