This seems insane. If I build 3 chairs I do not include the market price of 3 chairs on that day in my gross income, I sell the chairs and recognize the income generated by the sales.
That's not true. If you build 3 chairs and don't sell them by the end of the year, you pay inventory tax on the 3 chairs, i.e. you pay taxes on them without selling them.
This is why stores that sell physical goods to a blowout sale at the end of the year.
If I haven't sold the chairs then I haven't recognized any income. Even if I had to value my inventory then I would value it at the lower of cost or market and in the case of Bitcoin that would be cost which would be computer depreciation and electricity, much less than the market value on the day of mining.
Should I file a Schedule F (income from farming) for my herb garden? I actually looked through the instructions for schedule F and I don't find any clear basis to allow me to not file it.
In practical terms, I'm not worried, as I suspect that I'd have a net loss, but assuming a net gain (that the fair market value of the parsley and sage I got from the herb garden exceeded my out-of-pocket costs to run the garden), I think I have to file a Schedule F per the regs.
For the record, it seems perfectly consistent to treat BTC as capital property; it doesn't seem reasonable to treat them as ordinary income.
You should ask a tax lawyer or an accountant. But a "garden" is unlikely to be a "farm" within the meaning of the federal code, especially if it's just a hobby activity rather than a bona fide business intended to make money. (See http://www.irs.gov/pub/irs-pdf/p225.pdf, which notes that a farming business requires a profit intent.)
As for treating BTC as capital property--they are, under IRS decree--capital property for all US FIT. However, like all other capital property when received as compensation they are also income and get taxed like income. BTC doesn't get special rules just because it's digital.
If I spend $10 buying a disposable planter and herbs, and over the course of the year, I harvest $20 FMV of herbs, I have made a profit. Profits from a hobby activity must be reported as income. Time permitting, I will ask my CPA/EA when we go over my taxes. (I'm quite certain that I spent more gardening than the value of the food I extracted, and hobby losses are not deductible, so I'm quite sure I'm clean...)
I'm not suggesting that BTC should have special rules because it's digital, but rather questioning whether mining BTC should be treated as compensation for personal labor (ordinary, active income), treated similarly to a dividend or interest payment, or treated as an outcome of a business activity (like raising beef cattle, food crops, or extracting energy from wind/solar). To my mind, the activity seems more closely aligned with the last group, and pretty far removed from compensation for personal efforts.
(None of this applies to me personally, as I've never owned a BTC, but these topics strike
It is possible for compensation to also be business activity income. Compensation, tax-wise, simply refers to getting paid to provide labor or a service. Whether that service is a business activity of the service provider is a separate question. (Labor is generally not a business activity, and generally employees are treated as providing labor to their employer).
IOW, mining is compensation, but if it is a business activity of the miner, then they can deduct their losses/expenses against their mining gains. Someone who only mines as a hobby (i.e., they don't put much effort into it or attempt to maximize profits or minimize losses) doesn't get to do that even though they are also providing a service.
