How would one operate a Cryptocurrency Mining Pool and comply with IRS n-14-21.pdf?

[miningpool]

I want to operate a Cryptocurrency mining pool. There are many operating in the US, but I can't seem to figure out how they handle taxes. I understand the cryptocurrency mining and trading rules, but the issue is - How do mining pools handle paying users for shares of work they do? Nearly all pools have no miner identification.

The n-14-21.pdf IRS document says any payments of $600 or more would be reportable and require a TIN (tax ID number) for the payee. How would any mining pool comply with that since their miners are just a Wallet address and IP address?

It feels like the pool would be taxed on the blocks they mine with their coin base address, and then have expenses when they pay miners. Is that right? What is very unclear is how the pool could possibly comply with international psudo-anonymous miners and requiring a TIN.

Thank you for any help or insight you can provide.

[DanielV01 · Accepted solution]

Please notice questions 12 through 14 in the FAQs of the notice.  Of particular note are questions 13 and 14:  

Q-12: Is a payment made using virtual currency subject to information reporting?

A-12: A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. For example, a person who in the course of a trade or business makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee. Examples of payments of fixed and determinable income include rent, salaries, wages, premiums, annuities, and compensation.

Q-13: Is a person who in the course of a trade or business makes a payment using virtual currency worth $600 or more to an independent contractor for performing services required to file an information return with the IRS?

A-13: Generally, a person who in the course of a trade or business makes a payment of $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to the IRS and to the payee on Form 1099-MISC, Miscellaneous Income. Payments of virtual currency required to be reported on Form 1099-MISC should be reported using the fair market value of the virtual currency in U.S. dollars as of the date of payment. The payment recipient may have income even if the recipient does not receive a Form 1099-MISC. See the Instructions to Form 1099-MISC and the General Instructions for Certain Information Returns for more information. For payments to non-U.S. persons, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. (Bolding Added)

Q-14: Are payments made using virtual currency subject to backup withholding?

A-14: Payments made using virtual currency are subject to backup withholding to the same extent as other payments made in property. Therefore, payors making reportable payments using virtual currency must solicit a taxpayer identification number (TIN) from the payee. The payor must backup withhold from the payment if a TIN is not obtained prior to payment or if the payor receives notification from the IRS that backup withholding is required. See Publication 1281, Backup Withholding for Missing and Incorrect Name/TINs, for more information. (Bolding added)

If you are going to operate a mine pool, you will want to carefully review the publications mentioned above to make sure of reporting.  For any miners you will supply, you will want to get their SSN, ITIN, or EIN through a W-9.  If they are a foreign entity, see Pub 515 about those requirements.  If any individual/entity refuses to provide you with their information, take note of the Backup Withholding requirement mentioned in Publication 1281 because the IRS will hold you responsible for these taxes.  It is entirely possible that an individual/entity does not give you accurate information.  When this happens, the IRS will advise you that their reportable income amounts are subject to backup witholding (28% of their reportable income amounts).  

There's obviously more to this, but hopefully this overview provides guidance for you so you can plan your endeavor.

[miningpool]

Yes, that's was I was concluding from the IRS document. I've researched dozens of mining pools, and none of them do any sort of Miner-Identification at all. Thank you for confirming. That seems nearly impossible to accomplish due to the nature of international miners and general anonymous crypto culture. I'm certain this is something I won't peruse.

[DanielV01]

Obviously it's a legitimate income field, but there is a "word to the wise" to pay attention to.  And, given the sudden rise in the field, you can bet that the IRS will be very quick to ensure tax conformity (audits).  While I don't say don't do it I would say that if you do you want to do it right, and, given the nature you mention, it is likely that your clientele might not want to do it right, which can leave you "holding the bag" so to speak.

[DanielV01]

Cryptocurrency, while not brand new, is certainly one of the fastest-rising income-earning endeavors that is quickly becoming more mainstream.  As your question suggests, there are certain logistical questions surrounding cryptocurrency that can make tax reporting challenging.  Needless to say, the IRS will still insist on tax law conformity.  I'm providing you with three FAQ links which should be able to assist you with Bitcoin mining reporting.

The first FAQ covers general rules.  As a miner, you could have two separate tax transactions:  the amount you earn when you mine the cryptocurrency, followed by the capital gains you earn when you cash in your cryptocurrency and convert it to traditional money.  The production of the currency is self-employment:  you pay self-employment tax on your net gain of mining, in addition to Federal (and state and local) income tax at your marginal tax rate based on the dollar equivalent value of the currency on the day you produced it.  That same value becomes your basis in the currency, and when you cash it in, you then subtract your basis from your sale price to determine your capital gain (or loss).  This FAQ provides more detail:  https://ttlc.intuit.com/replies/6468300

The second FAQ deals specifically with mining taxation, as well as how to report your activities when you do not receive a 1099-MISC:  https://ttlc.intuit.com/replies/6467560

Finally, this last FAQ gives information as a "Help Center" for a number of other situations surrounding Cryptocurrency taxation issues:  https://ttlc.intuit.com/replies/6468764

[miningpool]

Thank you for the links and suggestions, but I don't think any of that answers my concerns about how the Mining Pool Operator would comply with n-14-21.pdf in regards to reportable payments and Tax ID Numbers for its payees. If you have any detail on that part of the issue, please comment.

[DanielV01]

Are you concerned with what is reported to you or what you must report to others?  Or some other combination?

[miningpool]

I'm interested in operating a mining pool, but I'm afraid that there's no way that any Pool Operation can comply with the n-14-21.pdf document's $600 reportable payments, potential withholding, and TIN collection. Is that something a Pool Operation must do? (The problem is the Pool gets the full mining value, and then has to payout shares to miners, which seems like a contractor payout. Maybe that's wrong.)

[DanielV01]

I'm giving you a second answer to share some of the n-14-21 and highlight key points

[maglib]

https://www.irs.gov/individuals/international-taxpayers/filing-forms-w-2-and-1042-s-without-payee-ti...  should be very helpful when you don't have ITIN AND SSN to report amounts paid...

[maglib]

@miningpool let me know if that helped.