Proof of work (PoW)—one of the consensus methodologies through which blockchain (digital ledger) transactions can be validated—relies on data miners whose mining activities involve solving complex mathematical calculations. This article discusses key tax issues for miners and the IRS’s preliminary views involving taxation of Bitcoin PoW mining activities.
All blockchain (digital ledger) transactions require some type of consensus mechanism by which the transactions can be validated through distributed consensus. The two popular consensus methodologies are proof of work (PoW) and proof of stake (PoS). PoW relies on “miners” who conduct mining activities by solving complex mathematical calculations. Virtual currencies such as Bitcoin rely on PoW. PoS is a consensus validation mechanism where “stakers” validate virtual currency being confirmed on the blockchain. Virtual currencies such as Tezos rely on a PoS blockchain. Both PoW and PoS are subject to the terms of the respective protocol in place for the particular virtual currency transactions being confirmed.
This article discusses the tax issues—as of the date of publication—of income and expenses associated with virtual currency PoW mining activities. For a discussion of PoS staking activities, see McDermott’s article, “Taxation of Virtual Currency Staking Activities.”
Virtual Currency Mining
Miners confirm virtual currency transactions by sophisticated and high-powered computer processes to solve complex mathematical problems. When a miner validates the addition of a new block (group of transactions), that participant (node) is paid for its services in pre-specified units of a pre-specified virtual currency.
There are no Internal Revenue