How will Sch C and D look like for this single person (Crypto)

[Pacun]

How will this single tax payer report these transactions that happened in 2022:

1.- Client had his computer mining bitcoin and sold one bit coin for $16,000 at the very moment he had dominion and control of his 6.25 coins he mined in 2022. He is not going to get more coins this year for our example. For his mining operation he has utilities cost of $10k and depreciation expenses for $2k. 

2.- at the beginning of 2022, he purchased 4 ETH coins at $3,500 each for a grand total of $14,000. In November 2022 he sold his 4 coins at $1,200 each for a grand total of $4,800.

3.- in 2020, he purchased 10 Yfi coins at $10,000 each for a grand total of $100,000 and sold them in 2022 at $25,000 each for a grand total of $250,000. 

4.- In January 2022, he opened a crypto debit card and funded it with 100 Solana coins he purchased at $10 each for a total of $1,000. In March 2022, he used his crypto debit card to purchase a computer for his in-laws and paid $2,000 using all his Solana coins which had doubled in price.

5.- For using his crypto debit card to purchase the computer he was rewarded $200 in fiat which he pocketed. 

Could you please let me know the net income on Sch C, amount Short term gain/loses and any carry over and Long Term Gains?

 Thank you. 

[Margaret CPA in OH]

And this is why I will have zero clients who have had any dealings with virtual currency.  It is waaay too complicated for me and, apparently, for at least a few others.  Pacun, I assume you have taken some courses in how to report these things.  At least you can ask what appear to be real questions.  It will be an interesting exercise to read the replies and answers and see how this works out.  For me, an exercise in reading, only!  Good luck to all who venture into this land.

[TexTaxToo]

I think you are going to get opinions mostly.  Of course, you must determine whether the mining activity rises to the level of a business (do they have a separate meter to track the electricity usage?)

Regardless, I don't think you have enough information for #1.  From Notice 2014-21:

Quote

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.

 

[Lee B]

37 minutes ago, TexTaxToo said:

I think you are going to get opinions mostly.  Of course, you must determine whether the mining activity rises to the level of a business (do they have a separate meter to track the electricity usage?)

Regardless, I don't think you have enough information for #1.  From Notice 2014-21:

 

Excellent points. The IRS considers Crypto to be capital assets so 2 thru 5 are various capital gains and losses.

[Pacun]

Mining bitcoin is schedule C income per definition since so far no one has a hobby of mining bitcoin. 

The reason for the exercise is to help at least one of our colleagues. Also, since we are the professionals helping people to report their earnings/loses, we need to practice crypto because later on we won't have time to read about this subject.

The exercise seems to be easy because it doesn't include harder/divided subjects such as NFTs, staking, hard forks, liquid pools, wrapped coins/tokens, validators rewards, P2E, and many other ways of making money from Crypto. 

[Lee B]

41 minutes ago, Pacun said:

Mining bitcoin is schedule C income per definition since so far no one has a hobby of mining bitcoin. 

I wasn't aware of that.  Information I have read says it can be a hobby or a business depending on facts and circumstances.

I would appreciate if you have a cite?

[Max W]

Client has to pay tax on the mined bitcoins as ordinary income at FMV, which would be $16000 * 6.25 = $100,000

Items 2 and 4 STCG.  Item 3,  LTCG

Item 5, Other income.

[Pacun]

I guess we have to understand how bitcoin is mined and I wish I had an example of someone who has mined 6.25 bitcoins as a hobby but I don't.  The definition that you have a choice between schedule C and hobby is for other coins that you can mine with hard drives and a home computer, but if you want to try to answer the problem as a hobby, please go ahead. Some other people might do it on schedule C as suggested. Nothing wrong with either approach.

 

[Pacun]

3 minutes ago, Max W said:

Client has to pay tax on the mined bitcoins as ordinary income at FMV, which would be $16000 * 6.25 = $100,000

Items 2 and 4 STCG.  Item 3,  LTCG

Item 5, Other income.

Item 5 is a freebie. Reduction in purchasing price of the computer. 

[Catherine]

I had a client who mined bitcoin (briefly, for one year) some time ago. He did not track electric usage, and only got a few coins. Basically ran his computer overnight on it. So yes, bitcoin mining can be a hobby.

[Pacun]

2 hours ago, Catherine said:

I had a client who mined bitcoin (briefly, for one year) some time ago. He did not track electric usage, and only got a few coins. Basically ran his computer overnight on it. So yes, bitcoin mining can be a hobby.

Excellent, but based on hash difficulty, it will be hard to find someone doing it as a hobby who has mined any bitcoin in 2022.

[Pacun]

Sch C income $88,000

Sch D 141,800. For simplicity:
1a $4,800 $14,000 = -$9,200
1b $2,000 $1000 = $1,000
8a $250,000 $100,000 = $150,000

If short term loses were larger than long term gains, we would use $3,000 loses and carry the remainder to future years, correct?
 

[Terry D EA]

Mining Bitcoin may not always be reported on Sch C. If it is a small operation using a personal computer, the miner has the choice of business or hobby. If business, then Sch C. Larger operations can be considered a business and can deduct the associated expenses. An LLC can also be established that as we all know, can deduct the expenses against the income and may be a disregarded entity. Could be a partnership so there goes the Sch C. For your reporting in the original post, the transactions are reported on form 8949, especially if there is a 1099B issued. Of course, the associated expenses are not included in the 1099B or the cost amount on the 8949. A lot of good stuff here to learn. Pacun, I agree, the complexity gets worse with forks, splits, stakes; etc. Determining the cost basis and FMV is key. Cryotio is still very iffy in my opinion, so I choose to learn about it but personally stay away from it at this time.

[Pacun]

I just want to say that mining bit coin with a personal computer is like running Daytona 500 on a bicycle. With the bit coin hash rate difficulty, you will never mine any bitcoin. 

I agree crypto is new but in about 5 years more than half of our clients will have crypto transactions and we might have to reconsider if we want to turn them away. Fidelity, paypal and some banks are now offering crypto to their clients and soon other institutions will follow suit. So the sooner we help our clients the better.

[Lee B]

I had two clients that got in and out of crypto in 2021.  Fortunately they had all of the necessary reports.

Curious, if your client hasn't done a good job of keeping track of their transactions and they don't have the reports you need then what?

[Pacun]

"Curious, if your client hasn't done a good job of keeping track of their transactions and they don't have the reports you need then what?"

They can log on to their exchange and get an Excel Report. It is tricky to find the information but it is there. Binance.us has a pdf version also which is a lot of pages, but it is easier to find what you need. To give you an idea, if you purchase $10K in a coin, you would think that you will have an entry in excel showing the 10K and the amount of coins. Most of the time yes, but sometimes 100 people have $20 to sell and the computer has to buy from them. So you end up with hundreds of purchases with different prices. 

Most people will tell you, I started with 20K and ended up the year with only 14K... that means nothing. A person with that information could perfectly need to report $25K in short term gains even though he is loosing money. 

Luckily you will get a client that started last year, that's easy to find cost and proceeds but if they have been cryptoing for 4 years, you will have 4 years to dig in to find the cost of the sales.  I am keeping a log for 2023... last year I only logged sales and went to look for cost on line. That's becoming hard, so this month, I am entering a line with cost for every coin I have so that when I sell in 10 years (I wish) it is easy to enter the date, proceeds and amount of coins/token sold. 

Bottom line, ask your people to purchase a crypto trading journal an enter every transaction as they occur.  If not, you will spend a lot of time trying to make sense from excel files.