Most of my earning have come from mining on two machines way back when the mtgox price was.... .20 cents a btc (early 2010). I generated quite a few coins. This to me is a taxable event because I now have something of value that far exceeds the costs of electricity and hardware.
Suppose the MtGox price had plummeted and your BTC had become worthless. Would you have been entitled to a tax deduction for your losses? If not, it hardly seems fair for you to be taxed on your gains.
In the US, you would.
You would be entitled to claim a capital loss to offset any capital gains made during the year (so if you made $1,000 profit from a sale of Google stock, you could then make a sale of BTC that loses $1,000 (provided that the BTC sale has the same long-term/short-term holding status as the Google shares) and wipe out the capital gains tax liability from the Google... this is known as Tax-loss harvesting and is quite common). Beyond that, you can use up to $3,000 of a net capital loss to offset personal income (I forget whether the AMT disallows that deduction...) a year. If the net capital loss is greater than $3,000, you would use $3,000 to reduce your income tax and then carry the loss forward to offset against any capital gains realized the next year. If your cumulative capital loss remains after that next year, then you can take another $3,000 to offset your regular income for that year and carry the remainder forward and so on.
Example:
year 1: net capital gain of $10k => you pay capital gains tax on that at whatever the appropriate rate is
year 2: net capital loss of $2k => deduct $2k from your taxable income
year 3: net capital loss of $5k => deduct $3k from your taxable income, carry the other $2k forward
year 4: net realized capital gain of $1k => use the $2k carry-forward to fully offset the $1k gain (so no capital gains tax is owed) and deduct $1k from your taxable income
year 5: net capital loss of $7k => deduct $3k from your taxable income, carry the other $4k forward
year 6: no net realized capital gain or loss => use the $4k carry-forward to deduct $3k, carry the remaining $1k forward
It is true that there is an element of "heads we win, tails you lose" at play here: tax on a net gain is immediately due, while a large capital loss may result in the entirety of the tax deduction not being claimed because you die before using up your $3k a year (to say nothing of opportunity and lost time-value of money considerations!). This is slightly ameliorated by the fact that the tax rate on regular income is generally markedly higher than that on long-term (held for at least a year) capital gains: at the moment, the long-term capital gains tax rate is capped at 15% (assuming that bitcoin is not classed as a collectible, as gold is...) while if your income is between roughly $35k and $80k (as a single person), the tax deduction effectively operates at a 25% rate... if you're making $200k a year or more (as a single person), then deducting against regular income saves you more than double what it saves you as a gain offset.
IANATA and IANAA, but I would suspect that (assuming bitcoin is not considered a collectible...) the tax-efficient strategy would be to use LIFO accounting (considering each sale to use the cost-basis of the earliest unsold transaction) and try to hold for a year before selling for USD (otherwise it becomes a short-term capital gain and is essentially treated as regular income).
The lower long-term capital-gains tax rate also makes it rather foolhardy, imo, to put a lot of your 401(k) or IRA into investments that realize most of their gain via long-term capital gains (as opposed to short-term trading or dividends/interest).
