I purchased a bitcoin cloud mining contract as a hobby/investment and not as a self employed business. Let's say cost is $5,000. I understand that each daily bitcoin payout has to be counted as income for tax purposes. I have not sold any of the earned bitcoin yet but i understand when i do it is a taxable capital gain or loss. Questions: (1) Am I correct in that the $5,000 expense can be included as an itemized deduction subject to 2% of my adjusted gross income? (2) I read that the amount that can be claimed as an expense cannot be greater than the income from the hobby. In my situation, I purchased or incurred the $5,000 expense near the end of December 2017 so there was only ~ $800 of income generated by the end of 2017. Does the bulk of the $5,000 expense deduction get "wasted" since most of the income from my $5,000 purchase will be generated in 2018? Finally, (3) what are the tax implications (if any) regarding the fact that I chose to automatically re-invest my daily earnings to purchase additional hashrate? Would that be considered a "sale" and therefore a short term capital gain or loss? Or is the re-investment amount an expense like the original $5,000 amount? Basically I used my earned bitcoin to purchase additional hashrate which means that bitcoin is "spent". Thanks for any opinions!!
