According the article this is not true. The tax event is turning the bitcoins into currency or spending them.
So, the issue could be you have $1,000,000 of bitcoin, and you spend it. You now owe capital gains on the difference in price between when you bought and sold. Now, even if you have the $x00,000 in bitcoin to cover this, you better convert it fast (like simultaneously).
Or, never spend bitcoin directly -- convert enough to dollars to buy and pay tax, then spend the dollars.
Strange. Why don't they treat the cost basis as your cost of production? That is, if you spend $X to mine the bitcoins, and sell them for $Y, why not tax you on $(Y-X) rather than Y minus "whatever the market said they were worth then"? $(Y-X) is your true dollar-denominated realized gain.
It seems pretty backwards compared to any other sort of creation. If I build a house, my basis is how much I spent building it, not how much my neighbor's house is worth.
I don't think this has anything to do with basis. The difference is that mining the coin is considered a tax event -- so you pay tax on the mined value -- with the cost being deductible. This makes sense because the coin is liquid and can be sold in part without reducing the utility of the remainder.
That is not true of a house. It isn't as liquid and it's hard to sell part of the house to cover tax.
How does this work when mining in a pool is nearly continuous? You earn 0.000000x btc per share in a pool, and you might earn a share every few seconds.
What exchange do I use to determine the value of the btc?
It's likely that the taxable event would occur when you can control the bitcoins. For instance, many pools have a minimum payout and you can't withdraw any until you meet that minimum. Based on other IRS rules, the taxable event would occur when you reach that withdrawal minimum.
As for the exchange to use for the value, it would probably be legitimate to use an average of a few exchanges, if the prices are wildly divergent.
Should emphasize that whatever valuation will be expected to be reasonable and done consistently (so don't pick different exchanges for different payments or whatever, and probably don't pick Mt. Gox, and so on).
Well in the limit it would tend to an integral, and, assuming you have fixed hash power, approach the time and inverse network difficulty weighted average price.
So, the issue could be you have $1,000,000 of bitcoin, and you spend it. You now owe capital gains on the difference in price between when you bought and sold. Now, even if you have the $x00,000 in bitcoin to cover this, you better convert it fast (like simultaneously).
Or, never spend bitcoin directly -- convert enough to dollars to buy and pay tax, then spend the dollars.