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This question already has an answer here:

Lets say I created a new coin and mined 1 trillion of them. It isn't on any exchange to get its true value.

But someone on a forum pays me $100 for 100 coins. Now these coins value is at $1 and shows up on exchanges for $1 for each coin. Then I mine another 1 trillion. Am I liable to pay $1 trillion in taxes? How would that work?

marked as duplicate by Hart CO, JoeTaxpayer taxes Feb 24 '18 at 17:36

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  • My guess is that you would recognize income on your initial coin supply as soon as a value is established, so that after your sale you would have $100 in cash and 999,999,999,900 coins valued at $1/coin. It's not much different from the situation of mining 1 trillion coins that already have a value of $1, and then you sell 100 of them (realizing a capital gain of $0 in the process). – chepner Feb 23 '18 at 21:26
  • Practically speaking, the coin would probably remain effectively valueless until a more stable market (with more than 2 participants) is established, and you would simply have $100 of taxable income (or maybe a gift). – chepner Feb 23 '18 at 21:29
  • If the coin was really valued at $1 a coin, then yes I think you would owe taxes on that. HOWEVER, I think your valuation method may be flawed. Just because you sold someone 100 coins for $100 doesn't mean the fair market value would be established and remain at that level. What if you you turned around the next day and sold someone 1 coin for $.01? – Keith Feb 23 '18 at 21:30
  • From the help page “Focus on questions about an actual problem you have faced. Include details about what you have tried and exactly what you are trying to do.” are you facing this “problem”, or is this hypothetical? – JoeTaxpayer Feb 23 '18 at 21:43
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    @jamesqf It's important to understand that even if they find out you had mined the cryptocurrency years after you mined it, they can still prosecute you for failing to report and pay taxes on it years ago when you mined it. That the IRS won't find out about something until much later is not a good reason not to report it when it happens! – David Schwartz Feb 24 '18 at 19:18
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Mining is not a taxable event. Similarly, making goods, growing crops, and watching valuables appreciate aren't taxable events. For income tax purposes, you'll owe nothing in tax until you sell the asset.

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    The IRS does not agree with this position. The IRS specifically says, "[W]hen a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. See Publication 525, Taxable and Nontaxable Income, for more information on taxable income." – David Schwartz Feb 24 '18 at 5:22
  • @David Schwartz: IANAL, but I'd think that position would be very unlikely to withstand a legal challenge. It's like other kinds of mining, where the stuff one digs out of the ground doesn't have any value until it's sold. Or again, like other kinds of software development: if I write an app, how do I know in advance if it's going to be the next Angry Birds, or sell 4 copies at 99 cents each? – jamesqf Feb 24 '18 at 18:45
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    @jamesqf It's fine to think that the IRS has a legal issue wrong, but to state the opposing view as if it was obviously true without even hinting that the taxing authority has publicly taken the opposite view is not cool. – David Schwartz Feb 24 '18 at 19:10

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