The coins received from mining are treated as income by calculating the dollar value at the time they were received by the miner.
If they are later sold, the change in value is treated as a capital gain (or loss). The mining expenses would probably be somewhat deductible (but this isn't the same thing as a cost basis).
The thing that is probably going to catch people out is they are going to not pay self employment taxes on the mining income (it's going to be hard to defend as a hobby).
More importantly: losing actual money to save on taxes is hugely inefficient.
If he was doing this to save on taxes, he would have taken a paper loss via depreciation -- meaning, not actually selling it, just changing the book value of it -- with the intent of paying capital gains tax at some future date (well, more likely, borrowing against its "true" value indefinitely).
There's now a business loss of $12M on their books, so they're getting benefits on their next tax filing. That's where the real monetary value comes from.
That's not the transaction for which you would be taxed. But if you're paying your workers something that you claim is worth $50, for which you spent $950, that $900 difference is money that would be an expense if you paid them normally. Instead, it's profit, and you owe $300 in taxes on it -- even though you have the negative cash flow from your $950 coin.
That's what's missing from the story. Either we're reading it wrong, or what he committed was a conventional tax fraud with a gold-bug spin.
Either its an expense counted against his profit, and he never expected to make a profit (since he was already in the hole if it was exactly funded) - or it doesn't count as an expense and he made $20k. That's over 30% profit, as opposed to the 9% he's claiming.
I’d love to count profits and losses relative to the best possible outcome in hindsight rather than the difference between what was spent to obtain an asset vs. what I got for it, but generally that’s not how the IRS sees things. A loss is not relative like that.
That's a good question. You never realized the gain. What tax would you owe if you bought a diamond for $1, it went up to $10, and then got stolen. My guess would be nothing -- but I am not an accountant.
I don't think it is that simple as claiming a 50% loss for the business you have things like inflation and depreciation of the business assets (such as the drilling equipment) which makes it a lot more murky.
this is really hard to quantify independently, and they can use this figure to inflate their losses to claim more taxation benefit than otherwise deserved.
Why can't i say that I "lost" 12million developing my indie game, and therefore, claim some taxes off my casual contract work?
Uh, yeah, but if all he did was place a low value on the coins, then his business is going to have artificially high profits, so the net result is that he goes to court over paying corporate income taxes instead of payroll taxes plus paying his people enough for their Federal taxes.
For example, if he earns $60, and his expense is paying someone $50, either:
a) He pays them $50, they pay taxes on that $50, and he pays taxes on the $10, or
b) He does his coin trick, they pay taxes on, say, $5, and he pays taxes on $55 (because he gives the coins a low value).
If all he's doing is buying something at one price, writing down its value, and giving it away, then anyone can do this. Try it with shares of a privately-held company, or golf club memberships, or anything that doesn't freely trade.
If the losses cannot be written off, then you have this weird situation, where let's say in California you have a top tax rate of 52.9% combined, a person could've spent $500,000 on lotto tickets or raffle to win a $1 million and still end up with a loss.
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