How To Report Cryptocurrency Earnings?

Question

I invested in a decentralized bitcoin business and earned about BTC 0.4 this year in interest from it, but there is no official business - it's purely autonomous (very hard to explain). I also "mined" another cryptocurrency and have earned various amounts of these cryptocurrencies, but have not swapped back to any government fiat (if I did, the estimate would be about $180).

When reporting this on taxes, there is no official business for either of these. How do I report this additional income? I'm trying to figure out how to report this income since there is no business behind it and there's no way to prove I made this money in an audit (in the case of bitcoin, they can see the receiving address, but that's it).

Update:

1. I don't sell my bitcoin or other cryptocurrency earnings back to any government fiat. So if I earn 0.4 BTC for a year, it stays in BTC forever.
2. Investing in a bitcoin business like owning a portion of mining. So I invested like 2 bitcoins and I earn some bitcoins each year. Again, I don't swap back to government fiat. Since the IRS says that bitcoin is "property", I have no idea how this works, as property is only taxed when sold, as I understand it.
3. Hard to explain other cryptocurrencies, but there are ways to mine them and earn them, but I don't swap them back either. I do keep a record of the cost basis, so that if I ever sell, I can say, "I mined and received this at the value of $0.01 and sold it later at the value of $100" but if I keep these as they are, I haven't officially made any US dollars or other government fiat.

Answer 1

While this does fall under the "All-inclusive income" segment of GI (gross income), there are two questions that come up.

I invested in a decentralized bitcoin business and earned about $230 this year in interest from it

Your wording is confusing here only due to how bitcoin works.

1. Have you capitalized on this investment (converting it from bitcoin to currency)?
   If not, then it would be treated as a stock and thus an unrealized gain.
2. The mining would be considered a service charge, in which you may be required to file as a sole proprietor. Furthermore, have you converted the bitcoins mined?
   If not, then it would be converted to the exchange rate at year-end.
   
   *Everything should be reported in USD, but also consult a CPA about this preparation.

Answer 2

As cryptocurrencies are rather new compared to most assets, there hasn't been a lot of specific guidance for a lot of situation, but in 2014 the IRS announced that it published guidance in Notice 2014-21. I'm not aware of further guidance that has been published beyond that, though it wouldn't surprise me if treatments changed over time.

In that notice, the answer to the first question describes the general treatment:

For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.

Your specific questions (about what constitutes a "business", and when you're considered to be "selling" the cryptoproperty) are likely to be considered on a case by case basis by the IRS. As the amounts involved here are so small (relatively speaking), my recommendation would be to read through what the IRS has published carefully, make reasonable assumptions about what scenarios that are described are closest to what you're doing, and document doing so clearly as part of your tax preparations. And when in doubt, erring on the side of whichever option incurs more tax is unlikely to be objected to by them.

Of course, I'm not a lawyer or tax advisor, I'm a stranger on the Internet, so for "real" advice you should contact somebody qualified. I doubt you'd be faulted too much for not doing so given the amounts involved. You could also attempt contacting a local IRS office or calling them with your specific questions, and they may be able to provide more specific guidance tailored to you, though doing so may not save you from an auditor deciding something differently if they were to examine your return later. There are also phone numbers to contact specific people listed at the end of Notice 2014-21; you could try calling them as well.