The regulatory compliance of mining pools

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Steve Sokolowski
Posts: 3827
Joined: Wed Aug 27, 2014 3:27 pm
Location: State College, PA

The regulatory compliance of mining pools

Post by Steve Sokolowski » Mon Jul 15, 2019 5:55 pm

Recently, there have been quite a few comments about the 1099-MISC and W8-BEN forms that Prohashing and other mining pools are required to distribute to the highest earning customers. In this thread, I'll address two issues related to this requirement and will respond to some of the well-considered replies to my previous post (viewtopic.php?f=11&t=6444).

To bring those who are unfamiliar with the issue up to date, Prohashing is required by law to mail a form (1099-MISC) to customers who earn more than $600 and who are associated with the United States, such as by being citizens or by hosting miners in the country. The forms are mailed every January. While they have a standard format and things like name and address, the only useful piece of information on the form is the total dollar amount the miner earned during the year. While a common perception is that the forms are tax bills or that taxes are withheld, neither is the case. The recipient solely determines how much tax to pay, or if any is owed at all.

International customers who are not associated with the United States can fill out the alternate form (W8-BEN), which we simply need to retain. These forms are stored on a flash card in a deposit box because the data has no other use than this legal requirement.

The first issue with taxation that's worth clarifying is that while some believe that it might be questionable whether tax forms are necessary and that this is a new area, that assumption isn't accurate. The legal issue is very clear, has a lot of precedent, and has nothing to do with bitcoins. For decades, when a company gives something valued more than $600 to an individual in exchange for something, the law has mandated the sending of these forms to the customer. The IRS specifically stated that cryptocurrencies are a thing of value, as you can see in the form linked in the documentation (https://prohashing.com/help.html#settings-IRS). Answer A-13 applies directly to this situation, and it's hard to argue with the specific text in that document.

To expand even more, it is also necessary for foreign companies to send the forms. https://shieldgeo.com/foreign-companies ... reporting/ describes the conditions under which form mailing is required. The important part is that if a company generates revenue from people in the US, then mailing is required unless there is a treaty in place with the foreign government. Note that mailing is not required to non-US customers by either domestic or foreign companies. Thus, the law applies equally to all firms, no matter where they are located.

The bottom line is that these forms aren't a cryptocurrency thing. Any business that pays US customers more than $600 and does not send these forms is operating illegally. These forms are settled law and there is zero ambiguity about them. This is one of the many reasons why Nicehash is operating an illegal business (besides being insolvent for two years.) It is also likely why some legal exchanges choose not to serve US customers. If you consider a pool like litecoinpool.org, which may have revenue of $50m/yr, and which may have 30% US customers (as we do), and may have been operating at those revenue figures for three years, that implies they are currently subject to fines of $4.5m (https://payable.com/taxes/1099-penalties-and-fines)!

The second issue is that a few people have actually suggested that we don't comply with the law. While the forms are annoying for customers to submit mailing addresses, and cost us about $5000/yr to prepare, I'm not aware of many businesses where customers prefer that the business owners don't follow the law. Compliance is assumed; when one walks into a supermarket and buys some food, most customers assume that the meat has been handled in accordance with USDA regulations. If a customer found out that beef was stored above the USDA recommended temperatures, he would correctly assume that all of the products in the store, even the vegetables, are less likely to be safe.

Given that there are so many other pools operating illegally, we conducted a survey last year to determine what impact mailing these forms was having on the bottom line. The results were surprising at first, but in line with the previous paragraph. Some customers were dissatisfied with the changes or had left the pool. Because people who are dissatisfied with a product are more likely to post about it online than those who are satisfied with it, unmoderated social networks contain many complaints about the forms, many of which we determined are from duplicate accounts owned by the same person. But a larger number of people responded that compliance with the law made them have a more positive impression of Prohashing. Surprisingly, however, the largest customers were more likely to respond positively, even though small customers are not required to submit or receive any forms at all.

The results of this survey are why our documentation now includes "Proudly American" as one of the headers. That doesn't imply that we favor Americans, but that US laws are strict and imply trust. When "Awesome August" arrives, we'll be emphasizing our compliance with tough regulations in the month's promotions and marketing.

In cryptocurrency, the largest businesses are those that comply with regulations. Coinbase has the worst customer service in the world, but people use Coinbase because they are trusted to comply with the law. Other exchanges have questionable compliance, and none of those are as large as Coinbase. Coinbase undoubtedly hates the cost and trouble associated with mailing these forms just like we do, but like us, they are not responsible for actually determining or enforcing taxes owed, and their customers apparently appreciate dealing with an above-board company too.

In the earlier post asking for suggestions about why the number of miners had declined despite improved stability, we purposely didn't include regulatory compliance as an option. Not only did the compliance begin before the number of miners declined, but there isn't anything we can do about it anyway even if the surveys had indicated it was a direct cause of the decline. The law is clear that all businesses need to send the 1099-MISC forms to customers who are paid more than $600, and any pool that accepts US customers and does not send these forms is in serious danger of insolvency when the IRS finds out.
MinerLuver
Posts: 2
Joined: Thu Jul 11, 2019 2:29 pm

Re: The regulatory compliance of mining pools

Post by MinerLuver » Tue Jul 16, 2019 5:43 pm

The above only complies because you look at the mining pools as renting our hash. Miners are not your employees. Miners can choose what & where they will dedicate their hash.

WE THE MINERS dont look at it as renting. Sustaining blockchain technology & earning the digital reward has no "value" until sold. Only your business is applying it has value immediately & your basing that assumption off an asset we may or may not trade/sale for.

Why make that assumption? If I direct coin/blockchain mine everything in the reference above becomes inaccurate. Again the SEC said Bitcoin (the initial mined coin) is not taxable until "traded" the 1st time. Ripple totally different. If I direct mine on your pool something like ZCash & your pool gets a block & you reward me in exactly what I am mining ZEC.... you have not traded any thing for me. Your pool is just giving me what I was rewarded. It has no value until I sale it for something that then has value. I know it sounds crazy but I dont make the rules, I just play within them same as you ;)

If all these other pools are performing this "illegal action", after all this time, I think it would be made very clear in the media. You clearly state above "but like us, they are not responsible for actually determining or enforcing taxes owed,"... because the coin has no value until sold. You are not paying us, you are giving us what we earned as a reward. If anything, the pool is being paid by keeping a portion of our rewards.

At the end of the day, it cya's your company (nothing wrong with that) & it flags the US IRS of specific individuals involved with crypto.
Coinbase does not release anything to the IRS over $10k - $15k per year I believe.

In the 3 yrs of mining, 43 ASICS & dozens of pools I have mined, no one has ever asked me for anything to send me a 1099 MISC ever... except Prohashing

Sincerely
GLTA
ryguy
Posts: 53
Joined: Sun Apr 01, 2018 10:20 am

Re: The regulatory compliance of mining pools

Post by ryguy » Sun Jul 21, 2019 7:44 pm

MinerLuver wrote:
Tue Jul 16, 2019 5:43 pm

Sustaining blockchain technology & earning the digital reward has no "value" until sold. Only your business is applying it has value immediately & your basing that assumption off an asset we may or may not trade/sale for.

Why make that assumption? If I direct coin/blockchain mine everything in the reference above becomes inaccurate. Again the SEC said Bitcoin (the initial mined coin) is not taxable until "traded" the 1st time. Ripple totally different. If I direct mine on your pool something like ZCash & your pool gets a block & you reward me in exactly what I am mining ZEC.... you have not traded any thing for me. Your pool is just giving me what I was rewarded. It has no value until I sale it for something that then has value. I know it sounds crazy but I dont make the rules, I just play within them same as you ;)
A lot of this information is inaccurate. Firstly the SEC has nothing to do with whether anything is taxable. That's the IRS and they've said that crypto is taxable at the moment it is received because it is an item of value (property). Prohashing is following this.

It would be the same as if you performed services and you obtained any other property in return. The property contains value and is taxable. Just because you can later trade it for another item of value has no bearing on whether it is taxable now.

If this wasn't the case it would be easy to owe no taxes on any amount of income as everything could be paid in property and only taxable once disposed for something else, which could be never.
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