Individual pension supplier Choice and Bitcoin mining / hosting company Compass Mining recently announced that they are offering an IRA that would allow miners to produce Bitcoin with special tax breaks.
Under normal circumstances, people who mine and then sell Bitcoin are taxed twice. Accounting today explains that Bitcoin miners pay income tax when digital currency comes into their possession. That means a tax only for Bitcoin mining. Now, if you are mining Bitcoin, and you want to pay tax on that mining event by selling a portion of Bitcoin with a profit, you will now have to pay another tax. This time it comes in the form of a capital gains tax on any increase in the value of bitcoin from the moment you dig it up (or come into possession) to the moment you sell it.
Choice and Compass Mining have joined forces to provide clients with a hole in these rules.
Their new IRA would allow investors to avoid double taxation by claiming that the machine itself is an IRA-owned asset. The investor would first purchase mining hardware using funds under his IRA. The equipment ranges from 5,000 to 10,000 dollars and more, CNBC reports. Compass then manages the logistics, from the delivery of these machines to the data centers to the configuration and monitoring of the actual equipment.
The hole is that if you own mining hardware, Bitcoin would be treated as a return on shares or income from a rented property owned by the IRA – it would be tax deductible and would not count towards limiting your contribution. Moreover, if you were to sell machine-generated bitcoin in your IRA, the capital gains tax would be deferred or eliminated altogether – if everything is done within the IRA.
Imagine a mutual fund or a stock exchange fund holding several different types of shares in it. Technically, you own each of the stocks within a larger pie of a particular fund in which you have invested. The same logic applies here, only instead of a mutual fund you buy mining hardware and instead of owning shares within the fund, you own Bitcoin mined using hardware.
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This article originally appeared on GOBankingRates.com: The new IRA allows bitcoin mining with deferred tax