The U.S. Internal Revenue Service (IRS) announced on Tuesday that, for tax purposes, Bitcoins will be treated as a property instead of a currency. This will have big consequences for those mining Bitcoins, as they will have to pay income taxes over their mined coins.
Bitcoin miners will have to add the fair market value of their mined coins to their gross income on the date of receipt. This causes an immediate practical problem, as many will have to check the value of their coins at the time they were mined. For those that don’t have this information readily available, this will turn out to be a tedious task.
Blow to profitability
The second obvious result of treating mined coins as gross income, is that income taxes will significantly reduce mining profitability. Even worse is that utility bills are generally not tax deductible. The IRS statement makes no reference to this, so it can be assumed that mining costs (mainly electricity) won’t be deductible either. Another reason why this isn’t likely to be the case is that it’s difficult to allocate exact utility costs to mining operations.
The previous combined can easily make mining unprofitable for the average miner. It could also cause an imbalance between individual miners and companies. Companies already had an advantage in terms of technology that could be afforded, but they are also allowed to deduct any operating costs from their income. Overall, cryptocurrency mining could end up centralizing at only a handful of companies. This is exactly the opposite of what Bitcoin was meant to achieve. A separate ruling will be required to clarify the matter of tax deductibility. But for now, concerned parties are left with a lot of uncertainty.
Last but not least, reduced profitability will result in lower hashrates (calculation power) in the network. Many miners will decide or be forced to give up mining an unprofitable currency. This directly causes the network to lose hashrate. As the hashrate determines the security of the network, it will also lose some of its security.