Thanks so much for this detailed breakdown! For the cost of production method, would I divide my total mining costs by the number of tokens received to get a per-token basis? Also, when you say "discount for time" for the first market value approach, how would I calculate that?

Yes, you would calculate a per-token basis by dividing total mining costs by the number of tokens received. This gives you a consistent cost basis across all your mined tokens. For the time discount with the first market value approach, you'd apply a reasonable discount rate to account for the time between mining and market listing. Many tax professionals use something like 15-30% annual discount rate to reflect the significant risk of pre-market assets. So if the token was first listed at $10 but you mined it a year before listing, you might use a basis of $7-8.50 per token. However, in your case, the cost of production method is likely the cleaner and more defensible approach since you have those records. Just make sure to include all legitimate costs: electricity, proportional equipment depreciation, and even a reasonable value for your time if you were actively managing the mining operation.

Dangerous thinking there my friend. The IRS might not know immediately, but blockchain is permanent. When you eventually sell on an exchange that reports to the IRS (which most do now), they can see the history. If you suddenly sell tokens you supposedly never had, that raises red flags. Plus, deliberately hiding income is tax evasion, which can mean serious penalties or worse. Not worth the risk just to save a bit on taxes. Better to report properly even with no market value at the time.

Wait, so there could be ANOTHER limitation beyond the basis issue? So even if I figure out the basis part and have enough basis to take the loss, I might still not be able to deduct it because of these passive activity rules? Does that mean the loss just disappears completely?

The loss doesn't disappear completely - it gets suspended and carried forward to future tax years. You can use these suspended passive losses when you either generate passive income from other sources or when you completely dispose of your interest in the partnership. The passive activity rules are separate from basis limitations, so you need to clear both hurdles to claim the losses in the current year. First, you need sufficient basis, and second, you need to have either passive income or qualify for the special allowance. If you don't meet these conditions, the losses get carried forward until you do.

TurboTax can handle the data entry part fine, but in my experience, it doesn't help much with calculating your adjusted basis or determining loss limitations. I ended up having to do those calculations separately and then just entering the final numbers. The software doesn't track your basis from year to year either, which becomes a real problem if you hold these investments long-term.

That's really helpful to know! So if I understand correctly, I can still use the 4868 payment option even though I've already filed? And the IRS will just apply it to my balance due without me needing to do anything else?

Yes, that's exactly right. When you make the payment, the IRS system is mainly concerned with getting your money and correctly identifying which taxpayer account to apply it to. They'll automatically apply any payment to your outstanding balance. The form number you select mainly helps their internal routing but has no impact on your already filed return. Just make sure you use the same SSN/name as your tax return so it gets matched to your account correctly.

Yeah good luck with "just call the IRS" - have you tried calling them recently? I spent 4 hours on hold last week and never got through. That's why services like Claimyr exist in the first place.

Oh man I didn't even think about state taxes! Does anyone know if I need to contact my state tax department proactively or wait to see if they send me something?

It depends on your state, but most states automatically receive information from the IRS about adjustments to federal returns. However, you usually need to be proactive and file an amended state return rather than waiting for them to contact you. In most states, you have a certain timeframe (often 60 or 90 days) after finalizing changes with the IRS to submit an amended state return without additional penalties. If you wait for them to notice and contact you, you'll likely end up paying more in interest and possibly penalties too.

Is it better to mail the response or use their online portal if available? I've heard horror stories about mailed documents getting lost.

Thank you for pointing this out! I was actually confused about which tax year to report the missed distribution in. So to clarify - we take the missed 2022 RMD amount now, report it on our 2023 taxes, but file the Form 5329 with our 2022 taxes (or separately if we already filed)? And we still need to take the full 2023 RMD by the end of this year? That means double distributions this year, right?

That's correct. The missed 2022 RMD that you take now will be reported on your 2023 tax return because that's when you actually received the money. The Form 5329 reporting the missed RMD goes with your 2022 return because that's the year you were supposed to take it. Yes, you'll need to take both distributions this year - the missed 2022 one and your regular 2023 RMD. This sometimes creates a slightly higher tax situation since you're bunching two distributions in one tax year. If the combined amount might push you into a higher tax bracket, you might want to talk to a tax professional about timing the distributions to minimize the impact.

Good point about the spousal vs non-spousal differences. My understanding is that spouse beneficiaries have more flexibility. Can you explain what documentation we should keep if we're trying to get a waiver? Did your father use a tax professional for the appeal?