bitcoin mining investor tax treatment

A client invested in a bitcoin mining company. He paid 10k to the mining company as subscription fee (fee for mining company to do mining work for him on annual basis). In return, the mining company returns bitcoins/other coins to him as return investment via a 3rd party mining platform. In this case, should we treat the return as capital gain or loss event or self employed income. Client did not involve or operate the mining company. Client has no ownership on the business either. He is a like passive investor. I am leaning toward capital gain/loss as tax treatment. Any input?

Probably need to get the subscription docs and read them to better understand what's going on.

Did he invest in a C Corp, S Corp, pship? Foreign company?

Probably need to get the subscription docs and read them to better understand what's going on.. Agree for sure.

Does mining co. just sell "shares" (not securities, just, part ownership in what they mine) in the resultsof their mining, or do they mine specifically for him, keeping a separate account? Are they his agent? Does he provide rules and limits or do they decide everything? Do I have the slightest idea what I'm talking about? Nope.

I did not read the agreement. Mining company does ETH or bitcoin in return. It does not provide any option to sell shares or equity. Simple investment and reward investor with coins, that is all. I searched across the web related to mining activities, nothing specific regarding a situation like this. I am gonna advise client as capital gain treatment, but want to hear your thoughts.

What is the capital asset?
Does he get a payment (or several) and the deal is done, or is it ongoing, with no further investment?
When is the sale or exchange?

Investor paid this non refundable fee to miner on annual basis. He only gets coins in return. The deal last one year only. He can choose to stop after one year or continue to pay fee for miner with the same return method. The coins will be rewarded from time to time during one year deal.

I cannot stress the need to read the contract or agreement in this situation.

Not really sure why that's not a priority (or doesn't seem to be).

I did not read the agreement.

There's nothing you or any of us can assist with until you do. Anything we share would be pure conjecture.

A little conjecture may be helpful. I would think the activity more closely resembles a business, like a working interest in oil and gas. If you have nothing to go off at a minimum I would think schedule C subject to SE, would be more appropriate than an investment subject to capital gain.

I would think the activity more closely resembles a business, like a working interest in oil and gas.. Took the words out of my mouth.

Except it’s a virtual currency, which no one (it seems) really understands

More like gold prospecting IMO... too bad there wasn’t any income tax guidance in ‘49

https://www.irs.gov/pub/irs-mssp/placer.pdf

Typically if you are depleting a natural resource, you get to recover your cost for the purchase of the deposit / property. Perhaps your client should be treating found “coins” as a return of basis, with income/gain recognized once it exceeds his investment?

Nice article on placer mining.
But bitcoin creation is not an extractive process, only grinding an algorithm on a computer.
The electric bills are extreme. https://digiconomist.net/bitcoin-energy-consumption/
This is the reason "miners" relocate to the cheapest power sources.
I think you need to read the contract to properly classify this transaction - loan? joint venture? - for tax purposes.

I requested the doc from client, will update you guys later.

This sounds like a common variety of crypto scam. It works just like any fake investment scam or ponzi.

They may be getting nothing, or they may in fact be getting "real", theoretically useable crypto, but the coin they are getting is worthless and the founders of the coin are the ones collecting these "mining" investments.

If they are getting something actually worthwhile, like bitcoin that is in his own wallet controlled by himself (not the "investment company"), it may be legit or it may still be a ponzi.

Yes, possibly a ponzi scheme or simple fraud.
Advice on tax treatment of loss: https://www.irs.gov/newsroom/help-for-v ... nt-schemes