the government will only tax you on the FIAT profit you make. EG when you cash out and put the funds into your bank account.
remember the rules of trading. you have not profited or lost until you sell.
If you mine bitcoins, you owe income tax based on the value of the coins you mine, when you mine them.
Then later, if you sell, you owe capital gains tax on the difference between the value of the coins when they were mined and the price you sell them for (if there is a gain).
Of course, this is a HUGE pain since for most people mining in a pool mining is a continuous process and the BTC exchange rate is constantly changing. Also, what even do you use for the current BTC rate! MTGox isn't realistic like it used to be since no one in the US sells there anymore.
I disagree. If I mine a nugget of gold from the ground I don't owe taxes on that until I sell it. Similarly If I build a chair in my workshop I don't have to pay taxes on that chair until I sell it.
I view bitcoin as a commodity. Until the IRS says explicitly otherwise I am perfectly comfortable not paying taxes on any bitcoins I mine until I sell them. I think you are safe doing so as long as you report capital gains when you sell them. The IRS has not issued firm guidance on this issue other then to say you "might" owe taxes on mined coins.
If you sell and then buy more coins with the profit on an exchange, however, and don't report taxes well then you are playing with fire. If you live in the US I think you are asking for trouble.
