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How can the IRS know how long you have held onto cryptocurrency if you mine it and let it sit?

Go to solution Solved by badreg,
43 minutes ago, skaughtz said:

the fair market value of the virtual currency as of the date of receipt is includible in gross income.

A reasonable interpretation of this would be the daily "closing" price of the asset on the date that it was mined. Even though cryptocurrencies trade 24 hours a day, the "closing" price is the price as of 23:59:59 UTC, and you can find historical data on this fairly easily. The IRS would likely use a similar method to verify your basis claims.

I've recently been mining ETH and have been storing it away, hoping for the price to rise again.  I have also been reading about how the IRS plans to come down harder on crypto profits through capital gains taxes.  What I don't understand is how can they know/verify how long you have held onto the coin if you store it in a non-exchange wallet?  It would be the difference between short- and long-term capital gains rates.  Would they only go by when it was transferred into/out of an exchange wallet and when it was sold/traded? What if you mined it and have held it for over a year in a Trezor on your desk or hot wallet that doesn't know your identity?

 

I imagine there is a catch somewhere but I'm not able to piece this all together yet.

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If there is not date to trace it back to there is no way they can know.

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If you mine it is considered standard federal income. If you buy and sell it is considered capital gains. It is probably pretty easy to commit tax fraud on this, but they can audit you if they want to, which might not work.

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9 minutes ago, curiousmind34 said:

If you mine it is considered standard federal income. If you buy and sell it is considered capital gains. It is probably pretty easy to commit tax fraud on this, but they can audit you if they want to, which might not work.

Hm.  This seems to be something of a shitshow.  Some Googling came up with

 

"Pursuant to IRS Notice 2014-21, when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. This means that successfully mining cryptocurrency creates a taxable event and the value of the mined coins must be included in the taxpayer’s gross income at the time it is received."

 

That isn't feasible in the least, lest you sit at the mining computer every second of the day and record the time/date/value of the coin every share you mine.  You can also apparently write off equipment and electricity costs, but with the latter having the same issue.

 

It appears it is more or less an honor system at this point until you sell it, but then there is the question of how you obtained it, which I suppose you have to answer... but how can they prove you are lying if you said you mined it when it was worth $20 in 2016?

 

 

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3 minutes ago, skaughtz said:

Hm.  This seems to be something of a shitshow.  Some Googling came up with

 

"Pursuant to IRS Notice 2014-21, when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. This means that successfully mining cryptocurrency creates a taxable event and the value of the mined coins must be included in the taxpayer’s gross income at the time it is received."

 

That isn't feasible in the least, lest you sit at the mining computer every second of the day and record the time/date/value of the coin every share you mine.  You can also apparently write off equipment and electricity costs, but with the latter having the same issue.

 

It appears it is more or less an honor system at this point until you sell it, but then there is the question of how you obtained it, which I suppose you have to answer... but how can they prove you are lying if you said you mined it when it was worth $20 in 2016?

 

 

They realistically won’t pursue you unless it’s your full time job managing a massive farm doing thousands of dollars a month.

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12 minutes ago, curiousmind34 said:

They realistically won’t pursue you unless it’s your full time job managing a massive farm doing thousands of dollars a month.

I'm not worried about me.  They have far bigger fish to fry than me and my laundry room rig.  But I do like to know the ins and outs of things that I am involved in and this just seems silly that the best tactic that they can employ is only fear of audit... which anyone with some sense should be able to get out of at this point, for the reasons I mentioned above.

 

Uncle Sam always gets his in the end, but I see why crypto pisses off the government so much.

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43 minutes ago, skaughtz said:

the fair market value of the virtual currency as of the date of receipt is includible in gross income.

A reasonable interpretation of this would be the daily "closing" price of the asset on the date that it was mined. Even though cryptocurrencies trade 24 hours a day, the "closing" price is the price as of 23:59:59 UTC, and you can find historical data on this fairly easily. The IRS would likely use a similar method to verify your basis claims.

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2 minutes ago, badreg said:

A reasonable interpretation of this would be the daily "closing" price of the asset on the date that it was mined. Even though cryptocurrencies trade 24 hours a day, the "closing" price is the price as of 23:59:59 UTC, and you can find historical data on this fairly easily. The IRS would likely use a similar method to verify your basis claims.

But how would they know if you mined it on April 7, 2016 or April 7, 2021?  Pretty big difference in what you would owe them.  And while you might not be able to prove it, neither could they (I imagine without expending WAY more resources than they have available for your average home miner), and you aren't guilty until proven innocent.

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1 hour ago, skaughtz said:

I've recently been mining ETH and have been storing it away, hoping for the price to rise again.  I have also been reading about how the IRS plans to come down harder on crypto profits through capital gains taxes.  What I don't understand is how can they know/verify how long you have held onto the coin if you store it in a non-exchange wallet?  It would be the difference between short- and long-term capital gains rates.  Would they only go by when it was transferred into/out of an exchange wallet and when it was sold/traded? What if you mined it and have held it for over a year in a Trezor on your desk or hot wallet that doesn't know your identity?

 

I imagine there is a catch somewhere but I'm not able to piece this all together yet.

It's easily traced because all information is publicly available on the blockchain. All they need to do is to check your wallet address and the history of incoming and outgoing transactions. The two main points are 1) will they bother and 2) they'll need to obtain your wallet address, which if you used it on an exchange should also be easy for them as well should they want to get it. You have to go through KYC when signing up, so the exchange can link it to you and they have laws to abide by. Thus mostly it'll be the question will they bother.

 

The best thing to do is to read up on you local tax laws. Over here for example they don't care how long you hold it for. Mining is seen as additional income and for tax purpose you just report the fiat value of what you had on january 1st of that tax year.

Just now, skaughtz said:

But how would they know if you mined it on April 7, 2016 or April 7, 2021?  Pretty big difference in what you would owe them.  And while you might not be able to prove it, neither could they (I imagine without expending WAY more resources than they have available for your average home miner), and you aren't guilty until proven innocent.

The blockchain knows. As to what you owe them, see the above paragraph.

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1 minute ago, skaughtz said:

But how would they know if you mined it on April 7, 2016 or April 7, 2021?  Pretty big difference in what you would owe them.  And while you might not be able to prove it, neither could they (I imagine without expending WAY more resources than they have available for your average home miner), and you aren't guilty until proven innocent.

They would not know unless they were able to prove it. When you declare income, the burden of proof is on the IRS to prove otherwise. If it were me, I would keep good records regardless, just as you might if you were running a cash business.

 

Deductions and credit claims are the other way around. You must prove that your claims are valid if you were audited.

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1 minute ago, tikker said:

It's easily traced because all information is publicly available on the blockchain. All they need to do is to check your wallet address and the history of incoming and outgoing transactions. The two main points are 1) will they bother and 2) they'll need to obtain your wallet address, which if you used it on an exchange should also be easy for them as well should they want to get it. You have to go through KYC when signing up, so the exchange can link it to you and they have laws to abide by. Thus mostly it'll be the question will they bother.

 

The best thing to do is to read up on you local tax laws. Over here for example they don't care how long you hold it for. Mining is seen as additional income and for tax purpose you just report the fiat value of what you had on january 1st of that tax year.

The blockchain knows. As to what you owe them, see the above paragraph.

Okay. This is what I was after.  Hypothetically for the sake of argument, outside of storing it in an exchange wallet, they could not track it back to you though, correct? Cold wallets can be lost.  Hot wallets don't collect identifying information.  I'm sure with the latter they could figure it out if they really, really tried, but that isn't happening for your average citizen.

 

I'm not trying to skirt paying my taxes... only they and death... I am just curious as to the ins and outs of this whole thing being relatively new to it.  There seem to be some gray areas here.

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11 minutes ago, skaughtz said:

Okay. This is what I was after.  Hypothetically for the sake of argument, outside of storing it in an exchange wallet, they could not track it back to you though, correct? Cold wallets can be lost.  Hot wallets don't collect identifying information.  I'm sure with the latter they could figure it out if they really, really tried, but that isn't happening for your average citizen.

 

I'm not trying to skirt paying my taxes... only they and death... I am just curious as to the ins and outs of this whole thing being relatively new to it.  There seem to be some gray areas here.

Not really unless you compromise yourself and give them a way of tying the wallet address to you. The problem of course occurs when you decide you want to use that delicious crypto to either buy something or exchange it for fiat. The issues flowing from that are the same ones as from if you'd (as a figure of speech) rob a bank for a million bucks: you're stuck with money you can't use. If you use your crypto stash, you'll suddenly have more fiat on your bank account adding up over time, or buying things that given your income should not fit your net worth etc. That's why it's advantageous to just be honest and admit you have it lest you in a year suddenly have to explain how you magically got $1M worth of ETH. Either you did something not so legal, or you apparently never reported your earnings/possessions, which is tax fraud and also illegal.

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3 hours ago, badreg said:

They would not know unless they were able to prove it. When you declare income, the burden of proof is on the IRS to prove otherwise. If it were me, I would keep good records regardless, just as you might if you were running a cash business.

 

Deductions and credit claims are the other way around. You must prove that your claims are valid if you were audited.

Just playing Devil's Advocate here, but I would put it on them to put the manpower towards pouring through the blockchain with my wallet address (when they found it... probably through IP connections or something) to confirm that I received X share on X date.  That is probably a pretty solid roll of the dice on the part of the basement miner.  They don't have enough resources to deal with people filing normal taxes.

 

It seems silly to me that they would even attempt to collect on the income when there are so many barriers in the way to it being at all accurate.

 

Anyway, fun conversation.  I learned something.

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6 minutes ago, skaughtz said:

Just playing Devil's Advocate here, but I would put it on them to put the manpower towards pouring through the blockchain with my wallet address (when they found it... probably through IP connections or something) to confirm that I received X share on X date.  That is probably a pretty solid roll of the dice on the part of the basement miner.  They don't have enough resources to deal with people filing normal taxes.

I believe blockchain analysis is or is becoming fairly straight forward now. Look at e.g. the Chainalysis reports each year on how crypto is used. I do think it's safe to say they won't go after a random citizen aside from a random experiment or suspicious activity.

9 minutes ago, skaughtz said:

It seems silly to me that they would even attempt to collect on the income when there are so many barriers in the way to it being at all accurate.

The blockchain will tell you exactly how much you owned when, because you can trace back all your transactions, so it's accurate in that regard. The difficulty will be on the IRS' side on what fiat value to use in order to deal with it.

Crystal: CPU: i7 7700K | Motherboard: Asus ROG Strix Z270F | RAM: GSkill 16 GB@3200MHz | GPU: Nvidia GTX 1080 Ti FE | Case: Corsair Crystal 570X (black) | Storage: 250 GB Crucial BX100 SSD + 2 TB Seagate HDD + 1TB WD Green + 3TB WD Red | PSU: EVGA Supernova G2 1000W | Monitor: Asus VG248QE 24"

Laptop: Dell XPS 13 9370 | CPU: i5 10510U | RAM: 16 GB

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