How to Set Up a Bitcoin Miner
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Posted by Ryan Lazanis on May 15, Tax season came and went and those involved with bitcoins in had the frustration of having to interpret just how they will include their bitcoin related activities on their tax returns, especially those with bitcoin mining activities. We at Xen Accounting have seen first hand just how frustrating this can be for taxpayers due to the almost complete lack of guidance from the Canada Revenue Agency in bitcoin mining rig 2016 tax forms to how a lot of this bitcoin activity should be treated bitcoin mining rig 2016 tax forms tax purposes.
The last, and only, time that the CRA commented on digital currencies, such as bitcoins, bitcoin mining rig 2016 tax forms back in November. It was only a matter of time before we would receive a bit more guidance, and that came recently in a new CRA technical interpretation regarding the tax consequences of mining bitcoins.
The concept of mining was briefly explained in a previous article. Simply put, upon successful mining on the bitcoin network, one is rewarded with a certain amount of bitcoins. But just how these mined bitcoins should be treated for tax purposes is one of the causes for confusion at the moment as mining is a completely new concept with no tax legislation to support it. Does it need to be included in our income? All of these questions were unanswered and open to interpretation.
Recently a new technical interpretation released by the CRA attempts to respond to a similarly confused Canadian resident regarding some of the taxation implications of bitcoins, largely relating to mining. Does the new tax interpretation help give a bit bitcoin mining rig 2016 tax forms clarity? Unfortunately, things are still wishy-washy.
The tax interpretation starts off by saying that mining activities can either be be classified as a hobby or as a commercial activity. They point to case law in regards to how one could make this determination.
Generally, in commercial activities, you can deduct business expenses. This is not true with a hobby. In most instances, I would expect that if you are getting rewarded with bitcoins for mining, this would be considered a business activity for the reasons explained in this article I wrote back in December. The CRA says that if your bitcoin mining rig 2016 tax forms mining activities are considered to be a commercial activity, then you need to value your bitcoins at year-end using an accepted inventory valuation method in order to compute your income for tax purposes.
Typically, this would mean you would value your inventory at either the lower of:. This all suggests that you have the option to determine how you want to value your inventory, which are essentially your bitcoins from mined activities, even though they stop short of calling all your mined bitcoins inventory whether mined as a hobby or commercial activity.
The method you choose to value your bitcoins will have direct tax implications. In most instances, the cost method of valuing inventory is preferable for tax minimization purposes. Whatever method you choose, you need to remain consistent. The IRS recently put out a publication which states that mined coins need to bitcoin mining rig 2016 tax forms included as income in your tax return at their fair market value at the time they are mined.
Although the IRS and the CRA are two different organizations with two completely different sets of tax legislation, I would have actually expected the CRA to say something more along these lines. Instead, we get a wishy-washy response saying that mined coins need to be valued for inventory purposes at year-end. Technical interpretations are nice to have but only if they can actually guide us.
This technical interpretation does none of that in regards to bitcoin mining. Instead, it simply bitcoin mining rig 2016 tax forms us part of the picture and leaves us to interpret an illogical explanation with many inconsistencies. Xen Accounting is a completely virtual Canadian Chartered Accountant firm which combines online accredited accountants with innovative software.
Designed for modern day business owners who are always connected and always on the move, Xen Accounting uses cutting edge cloud and mobile accounting technology in order to make your accounting as easy and as convenient as possible. For questions, contact us at info xenaccounting.
Classification of mining activities The tax interpretation starts off by saying that mining activities can either be be classified as bitcoin mining rig 2016 tax forms hobby or as a commercial activity. Inventory valuation for mined bitcoins The CRA says that if your bitcoin mining activities are considered to be a commercial activity, then you need to value your bitcoins at year-end using an accepted inventory valuation method in order to compute your income for tax purposes.
Typically, this would mean you would value your inventory at either the lower of: The cost at which they were acquired ie. IRS guidance a lot more clear The IRS recently put out a publication which states that mined coins need to be included as income in your tax return at their fair market value at the time they are mined.
Questions that still need to be answered include: The interpretation talks about classifying the mining activities between hobby and commercial. It says what you should do if the activities are considered commercial but makes no mention of what should happen if the activities are a hobby.
Many sell them and the CRA has spoken about as either treating them as capital gains ie.
