Quote from: the joint on April 17, 2012, 04:16:43 AM

No, seriously. H&R block said don't even bother coming in, that I have NO income.

Once again just because you are broke it doesn't mean that Bitcoin ventures being considered a hobby are a good thing. It isn't surprising, the IRS is generally very conservative and often requires "convincing" to see non-traditional ventures as businesses.

However "a hobby" doesn't erase your tax liability. If you made $100K from this "hobby" the IRS would want a cut (a very big cut) and the bad news is the hobby declaration would limit your ability to reduce the liability (things like carry forward prior year losses, use losses from your Bitcoin ventures to reduce taxes on other income, depreciate hardware, etc).

That being said I would take H&R Blocks universal proclamation with a grain of salt.

There is no universal rule. The IRS considers hobby vs business on a case by case basis.
http://www.irs.gov/newsroom/article/0,,id=169490,00.html

One person's hobby is another persons business.

Someone who uses gaming computer to mine some coins part time, has no records of expenses, and uses the same hardware, building, and internet connection for non Bitcoin uses = likely a hobby.

Someone who invested $100K in mining hardware has them in a dedicated building, has filed as a LLC to limit personal liability, runs the rigs 24/7 in a dedicated fashion, keeps detailed profit and loss statements, and has a seperate business checking account = likely a business.

Note the above two are intended to be extreme examples there are not "hard lines".

Quote

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayers trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

In order to make this determination, taxpayers should consider the following factors:

Does the time and effort put into the activity indicate an intention to make a profit?
Does the taxpayer depend on income from the activity?
If there are losses, are they due to circumstances beyond the taxpayers control or did they occur in the start-up phase of the business?
Has the taxpayer changed methods of operation to improve profitability?
Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
Has the taxpayer made a profit in similar activities in the past?
Does the activity make a profit in some years?
Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

If someone has a token amount of Bitcoin "income" (common definition not IRS definition) then it likely doesn't matter. However if you have a significant amount it would be a good idea to consult with an accountant and tax professional.

The above post should be considered informational and not relied upon as tax advice.