IRS Guidance On Cryptocurrency Mining Taxes
Mining cryptocurrency can create multiple tax implications that must be reported on separate forms, and you'll need to distinguish whether you mine as a hobby or a business.
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Crypto mining is a complex process, and reporting mined crypto for tax purposes can be a complex process as well.
Mining cryptocurrency creates multiple tax implications that must be reported on separate forms. For instance, if you mine cryptocurrency, you’ll be taxed differently depending on whether you mine it as a hobby or a business.
In this article, we'll cover how cryptocurrency is taxed after you mine it, the deductions available to you as a crypto miner, and the way mined cryptocurrency is taxed once it’s sold.
Whether you get into mining recreationally or as a full-time job, you’ll need to consider the questions below when it comes to your crypto mining taxes.
Do I have to claim crypto mining on my taxes?
Yes, crypto miners have to pay taxes on the fair market value of the mined coins at the time of receipt. The IRS treats mined crypto as income. When you successfully mine cryptocurrency, you trigger a taxable event. The fair market value of the cryptocurrency will be added to your other taxable income received throughout the year.
The ordinary income tax rates range from 10% to 37% depending on your tax bracket.
To learn more about how you can add mining data to your TaxBit account, please see the article in our Help Center.
What are my tax liabilities when I sell mined cryptocurrency?
Any sale of crypto, mined or otherwise, creates a taxable event.
When you dispose of cryptocurrency, you incur either a capital gain or loss. Capital gains and losses are calculated by subtracting the asset’s cost basis from the sale price.
Your cost basis is the value of the cryptocurrency at the time it was mined (the amount included as ordinary income). Subtract this value from the amount you sold the mined tokens in order to determine your capital gain or loss.
If the value of the crypto is higher at the time of sale then your cost basis, you have a capital gain. The taxes on crypto gains vary depending on your income and holding period.
If the value is lower, you’ll have a capital loss which you can use to offset your gains through a strategy known as tax-loss harvesting.
Every sale or trade of mined crypto must be reported on Form 8949.
How do I report my crypto mining taxes?
Mining is a unique, taxable form of income: no employer issues a Form W-2 to report income tax, and most mining companies aren’t issuing Forms 1099 to report income received.
Be sure to keep detailed records of the date and fair market value of your mined crypto earnings to save you a headache when you need to file taxes.
How you report your mined virtual currency earnings depends on whether you were mining crypto as a hobby or as a business.
Can you claim crypto mining as a hobby?
If you’re only mining on a single computer for occasional passive income, you should report your earnings as a hobby. The IRS will treat your profits as ordinary income, and you’ll be taxed at the same rate as your other income streams. You’ll report this income on Form 1040 Schedule 1 as other income.
Almost none of the expenses you incur while mining crypto as a hobby are tax deductible.
Can you claim crypto mining as a business?
If crypto mining is your primary income, you own a crypto mining rack and are running multiple specialized mining computers, for instance, you should report your earnings as a business on Form 1040 Schedule C.
When mining as a business, you’ll also have to pay the self-employment tax. Though the tax rates are higher when you mine crypto as a business, you’re also eligible for tax deductions due to business expenses. Some deductions include:
Equipment
Electricity costs
Repairs
Rented space
You can also simplify reporting taxes on mined crypto with crypto tax software like TaxBit. TaxBit specializes in identifying mining receipts and allocating them in accordance with IRS regulations. If you mined cryptocurrency, you will be provided with an itemized ordinary income breakdown so you can accurately report your income. After itemizing the receipts, the final amount will be added to the other income you received throughout the year.
What mining deductions are available?
If you mine cryptocurrency as a trade or business—not as a hobby—you could be eligible for certain equipment, electricity, repair, and rented space deductions to lessen your tax liability.
Section 162 of the Internal Revenue Code (IRC) states “[t]here shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”
Equipment
Miners may deduct the cost of their mining equipment from their ordinary mining income. If the mining equipment exceeds $1 million in costs, the taxpayer may need to use the modified accelerated cost recovery system (MACRS) to determine how to depreciate equipment for tax purposes.
Electricity Costs
Electricity costs are an expense that, if properly documented, could be eligible for the trade or business deduction. To properly document your electricity costs, you should track the amount of electricity used solely for mining.
If you’re mining from your residence, you’ll need to track and allocate the amount attributable to mining; you should use a seperate meter to ensure you can properly allocate mining energy consumption.
Repairs
If your mining equipment needed repairs during the year, this expense could be eligible for the trade or business deduction. Save receipts to validate repair expenses in the event of an audit.
Rented Space
If you rent a space to hold and run your mining equipment, you could be eligible to deduct rental costs as an expense. If your mining equipment is located at your residence, this will be treated similar to a home office and may be more difficult to deduct the expenses.
See the rules applicable to the home office deduction to learn if you’re eligible to deduct costs for the business use of your home.
About TaxBit
Keeping up with all the paperwork and reporting regulations for digital asset transactions can be laborious and time-consuming. The more complex your crypto portfolio becomes, the more complicated your tax liabilities can get.
TaxBit helps track your crypto transactions and fills out your tax forms automatically.
We also recognize the need to support your DeFi activity, and each day we're actively working on expanding DeFi support to popular blockchains.
The initial version of our DeFi support allows you to sync in any transfers, trades, and approvals you’ve made on a DeFi platform involving ERC-20 tokens on the Ethereum network, or BEP-20 tokens on the Binance Smart Chain network.
Ready to try out the updates for yourself? Create an account or login to start.
To learn more about how you can add mining data to your TaxBit account, please see the article in our Help Center.
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