The regulatory compliance of mining pools

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 (Miners are centralizing into huge farms).

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/prohashing-legal-information#government-us). 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.