Bitcoins that you mine are immediately taxable as ordinary income at that day's conversion rate, regardless of whether you immediately take them out as dollars, or leave them in your wallet.  That conversion value that you pay tax on becomes your cost basis -- functionally the same as if you bought it at that price.  Then, when you take them out of your wallet as dollars, you have a second taxable transaction, either a capital gain or a capital loss, depending on whether the coins went up or down in value since you mined them--and either long term or short term gain or loss depending on how long you held the coins.  (By the way, keep excellent records of each coin, because when you sell one out of your wallet, you will need to prove your cost basis.  If you are audited and can't prove your basis, the IRS can assign you a basis of zero and make the entire amount taxable again.)

Now, the concern is that you bought the contract with BTC.  Every BTC you mine will be taxable income, but you have no way to deduct the value of the "input" BTC as a business expense unless you report your mining activities as self-employment on schedule C.  And that will mean that you will pay an extra 15% self employment tax on the value of each coin when created.    If you do use a schedule C, then the amount you report as a business expense to buy the mining contract is the original purchase price of the BTC (your basis), not the increased value.  Reporting the input coin as a business expense will reduce your net profit subject to SE tax that you get from the daily value of mined coins.  But any profit from mining after that deduction will be taxed both as ordinary income tax rates and as self-employment tax.

If you don't use schedule C and don't report mining as a business activity,, then you won't pay SE tax on your profits, but I don't see how you can get a deduction for the BTC you invested to get the contract.

Thanks for the reply. I understand that the Bitcoin I mine is income. I'm keeping a daily spreadsheet on the USD value of the Bitcoin mined and the fees associated with it as well as the reinvestment price. I'm not necessarily doing it as a business, but as passive side income. I do have an LLC, however, for other types of work.

I suppose the question was, to be clear, whether the Bitcoin I purchased originally to pay for the mining contract would be considered a taxable event. I've heard from another CPA that it would be considered a reinvestment since I didn't cash out and still using the Bitcoin to further invest.

I don't know.  There is a lot that is still unclear.  

If you used the bitcoin to get cash, then that's a taxable event (a $12,000 capital gain, based on your numbers.)

Likewise, if you used the bitcoin to buy a car, gold coins, or any other tangible asset, you have a $12,000 capital gain, because you have converted the virtual currency into something real.  The sales price of the bitcoin for capital gains purposes would be treated as being the value of whatever real thing you acquired for it.  (Such as, if you bought a $15,000 car because the deal discounted the bitcoin, your capital gain would be $10,000 even though the value on a currency exchange might have been higher.)

If you used $US to buy shares in a gold mine, that would be treated as an investment, and if you took your gold mining share dividend and bought more shares that's a reinvestment.   

The issue here is that you are using something virtual to buy something else that is virtual.  And the IRS only taxes virtual things when they become real.  So I don't know whether you really have a capital gain that you have to realize and pay taxes on, but my guess is that you don't report a capital gain. But you do report the mining income, and if you sell the contract to someone else for more than your $5000 original investment, then you have a capital gain on the contract.

But I am not a CPA so if you find an expert in cryptocurrency you should probably rely on them.  (Well, rely on them if you hire them for advice and they have errors and omissions insurance if they are wrong.  I would not necessarily rely on someone I knew socially who happens to be a CPA, unless you actually pay for their advice.)