Tax Implications of Bitcoin Mining for Foreign Investors


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The huge demand for cryptocurrency is one of the main growth factors of Bitcoin mining around the world. Amid the boom, Bitcoin mining has become a lucrative business for many, and unsurprisingly a focal point for IRS enforcement and scrutiny. In this article, Benzinga provides advice on the tax implications of Bitcoin mining for foreign investors.

Bitcoin Mining Overview

Unlike the traditional banking system, for most cryptocurrencies, the issuance of new coins is not in the hands of centralized entities. Instead, new cryptocurrencies are generated by the mining process, which adheres to a predefined set of rules established by the underlying protocol.

In broad terms, mining refers to the process by which cryptocurrency transactions are verified, collated, and recorded in a digital public ledger known as a blockchain, with Bitcoin being the most prominent example. Bitcoin mining is a resource-intensive activity that results in the issuance of new coins and plays a vital role in maintaining the integrity of the blockchain network.

By racing to solve cryptographic puzzles under a proof of work consensus mechanism, miners offer the blocks that make up the Bitcoin blockchain and store the network’s transaction history. The greater the computing power of a miner, the more likely they are to solve the cryptographic puzzle. When a puzzle is solved, a miner offers a block, with the possibility of receiving a block reward if the block is verified and accepted by other nodes. In exchange for fixing problems and adding blocks to the blockchain, new Bitcoins are sent to winning miners.

Tax Implications of Mining for Foreign Investors

Generally speaking, crypto miners will face tax consequences when the following events occur:

  1. When rewarded with cryptocurrency for performing mining activities
  2. When selling or exchanging the reward cryptocurrency

In the first situation, the IRS issued Notice 2014-21 which directly addresses the tax implications of crypto mining on page four of question nine. Under the notice, reward cryptocurrency that taxpayers receive in exchange for performing mining activities is taxed as ordinary income upon receipt. Cryptocurrency received by a taxpayer is subject to payroll taxes or self-employment, depending on whether the taxpayer operates a business, trade, independent contractor, or employee.

In the second case, a taxpayer will trigger another taxable event when selling the reward cryptocurrency, which is subject to short-term or long-term appreciation rates, depending on the holding period of the crypto. -change. The cost basis is the value of the crypto at the time it was mined. If the value of the crypto is higher at the time of sale than the cost base, there is a capital gain.

Overall, as an investor, it is important to understand the tax implications for the business entity in which you hold an interest. You and your tax professional should be aware of tax implications and taxable events for stakeholders involved in Bitcoin mining within the business entity.

How excess returns can be shared with token holders

Excess returns can be shared with token holders via Revenue Sharing Tokens (RST). In general terms, RSTs are a type of token that entitle their owners to a portion of the revenue or fees generated on or by the host platform. In other words, they resemble the company’s equity.

RSTs are best described as an exotic investment vehicle. Each issuing company creates a blockchain with smart contracts, which provides a revenue stream to token holders based on the company’s earnings. The portion of the company’s revenue received is in exchange for investing in this token. The issuing company is required to allocate a predetermined percentage of its revenue to its RST token holders. In effect, these distributions are a cost to the business and exist between the gross margin and EBITDA lines of its account.

Currently, RSTs are useful for start-up businesses that need expansion capital. However, in the future, RSTs have the potential to disrupt dividends, as they could suit large organizations that still need capital to grow.

Digital securities such as RSTs can be traded on alternative trading platforms (ATS). INX claims to be among the best of the major ATSs – an ATS that brings funding potential beyond traditional markets and unlocks secondary liquidity and value for investors. Unlike many other ATSs such as Tradeweb, Liquidnet, and Virtu, INX provides crypto trading on a fully regulated platform. The INX The trading platform is open 24/7/365 and allows investors around the world to easily and efficiently transfer, list and trade a variety of digital securities.

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investment advice.


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