Notice 2014-21 applied tax rules to mining in a logical but mechanically difficult way. Cryptocurrency miners are supposed to pay tax on their gain when they receive it. The gain recognized is the tax basis for the later sale of the cryptocurrency. This makes sense, because it is taxed when the business earns its income. However, applying the rule becomes impossible for those mining coins which do not have a fair market value. You are not obligated to use an unfair market value (so to speak) for tax purposes. But eventually those coins are used in transactions and eventually they do have identifiable value. So, is that the moment where they become business income? Or does the IRS expect miners to get professional non-market valuation services for altcoins worth pennies? Or is there no income at all (because the coins have “negligible” value when mined) but the later sale is realized entirely as capital gain with zero basis?
These are still open questions and U.S. miners have some of the most expensive cryptocurrency tax issues out there.
Canada has issued guidance today which provides a much more sensible solution. Instead of treating the gain as realized on receipt, mined coins are held as inventory and sold as ordinary income assets. Of course, the valuation question still arises. Canada requires that income is recognized at year-end, and offers two reasonable valuation methods. One is the fair market value, and the other is the cost. The cost of mining coins without a fair market value is readily determinable. And of course, the income that is recognized is coextensive with business expenses, resulting in zero tax until the coins are sold.
Canada appears to be a good place to conduct mining activities given the tax result. That and the hydro!