This is Part Five in a Seven Part Series Covering Taxation of Bitcoin for US Citizens
Written by Tyson Cross a Tax Attorney based in San Diego
Part One – Tax Realization of Bitcoin Gains
Part Two – Tax Recognition of Bitcoin Gains
Part Three- Tax Character of Bitcoin Gains
Part Four – Tax Losses and Bitcoin
Part Five- Tax Deductions Related to Bitcoin You are Here
Part Six- Tax Record Keeping related to Bitcoin
Part Seven- Bitcoin Foreign Account Reporting Requirements
#23: What kind of expenses can I deduct as an investor?
You are permitted to deduct investment related expenses as an “itemized deduction.” However, this deduction is fairly meaningless for most investors. This is because you must actually itemize your deductions instead of taking the standard deduction, which many taxpayers do not. Additionally, such expenses fall within the category of “miscellaneous itemized deduction,” which are only deductible to the extent they exceed 2% of your Adjusted Gross Income. The 2% floor is particularly troublesome because most “miscellaneous itemized deductions” are pretty insignificant, particularly investment related expenses. Recall that you’ve already accounted for commissions and wire transfer fees in determining “amount realized” and “basis.” Your remaining expenses might include:
- Interest paid on funds that you borrowed in order to invest (limited to the amount of your net gains),
- Rent expense for a safety deposit box (this could arguably be extended to include the cost USB drives for cold storage),
- Consulting fees for the tax treatment of bitcoin,
- Depreciation on equipment used in your investment activity, such as your computer (however, you’ll have to allocate the cost of the equipment between personal use and investment use, which is likely to reduce this deduction substantially in most cases).
In most cases, these deductions will be quite small. Other expenses may or may not be available to you, depending on your specific situation, though. Note that the IRS will not allow you to take a home office deduction nor can you deduct the costs of attending bitcoin seminars. You should consult with your tax advisor to be certain of your deductible expenses. There are also a myriad of resources online about this topic.
#24: What kind of expenses can I deduct as a miner?
If your mining operation is substantial and continuous enough to be considered an actual business, then you can deduct all of your ordinary and necessary expenses. This would include the cost of electricity and depreciation on your mining rig, among others. If your mining operation is not substantial or continuous, you would deduct expenses like an ordinary investor.
As mentioned above, the tax treatment of bitcoin miners is exceptionally uncertain. So, it’s important that you obtain the advice of a tax professional with regards to whether or not your activity rises to the level of a trade or business.
Continue to Part 6 Tax Record Keeping Related to Bitcoin