Mining cryptocurrency creates multiple tax implications that must be reported on separate forms. This can get complicated fast. In this post we'll break down how mined virtual currency is taxed, the additional tax implications when you sell mined cryptocurrency, and the deductions available for crypto miners.
In the crypto tax space, we frequently hear about taxpayers’ responsibilities to calculate and report their capital gains and losses on an IRS 8949 cryptocurrency tax form. However, the tax implications and potential deductions for mining cryptocurrency such as Bitcoin are often overlooked.
Mining cryptocurrency creates multiple tax implications that must be reported on separate forms. This can get complicated quickly, so it’s important to understand the ins and outs of crypto mining taxes.
In this post, we’ll refer to the IRS’s guidance on the taxation of cryptocurrency through Rev. Rul. 2019-24 and an FAQ. The IRS guidance brought cryptocurrency in even more alignment with the tax rules on equities. With increased enforcement on cryptocurrency tax evasion, proper reporting is more important than ever. Specifically, miners need to be aware of:
Crypto mining taxes are equivalent to that of ordinary income taxes. So, when you successfully mine virtual currency, you trigger a taxable event and must report the fair market value of the mined coins at the time of receipt as gross income.
The fair market value of the virtual currency will be added to your other taxable income received throughout the year. As of 2021, the ordinary income tax rates range from 10% to 37%.
Mining is a unique situation because unlike most forms of income, there is no employer to issue a W-2 reporting on gross income. And to complicate this even more, most mining companies are also not issuing 1099s reporting the 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.
Hobby: If mining crypto as a hobby, you will report this income on Form 1040 Schedule 1 as “other income.” Check out our guide on cryptocurrency tax forms to learn more.
Business: If mining crypto as a business, you will report the earnings on Schedule C and are eligible for deductions, which we discuss below. When mining as a business, you will also have to pay the self-employment tax.
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.
Selling mined cryptocurrency creates a second taxable event. When you dispose of cryptocurrency, such as through selling, you will incur either a capital gain or loss. Capital gains and losses can be calculated with this formula:
Capital Gains/Loss = Sale Price - Cost Basis
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 coins for 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 cryptocurrency gains vary depending on your income and holding period. If the value is lower than the taxpayer will have a capital loss. Every sale or trade of mined crypto must be reported on an IRS 8949 cryptocurrency tax form.
If you mine cryptocurrency as a trade or business (not a hobby), then you may be eligible for certain deductions to lessen your tax liability. § 162 of the Internal Revenue Code 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.” Miners may deduct certain expenses from their mining income.
Some estimates place the annualized global mining revenues at ~$5.6 billion and global mining expenses at $3.6 billion. These statistics show that expenses may account for more than 50% of the income received from mining.
Some frequent expenses that may be eligible for the trade or business expense deduction include: mining equipment; electricity costs; repairs; and rented space used to operate the 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 the equipment for tax purposes.
A large cost to mining cryptocurrency is the price of electricity. The energy used worldwide to mine cryptocurrency is equivalent to the energy consumption of the country of Australia.
Electricity costs are an expense that if properly documented may be eligible for the trade or business deduction. To properly document your electricity costs you should track the amount of electricity that is used solely for mining.
If you are mining from your residence then you will need to track and allocate the amount that is attributable to mining. Therefore, if you mine from your residence then you should use a seperate meter to ensure you can properly allocate the energy consumption from mining.
If your mining equipment needed repairs during the year then this expense may be eligible for the trade or business deduction. You should save receipts to validate the expenses in the event of an audit.
If you rent a space to hold and run your mining equipment then you may be eligible to deduct the rental costs as an expense. If your mining equipment is located at your residence then 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 see if you are eligible to deduct costs for the business use of your home.
Yes, crypto miners have to pay taxes on the fair market value of the mined coins at the time of receipt. Mined cryptocurrency is taxed as income, with rates that vary between 10% - 37%. The IRS classifies mining income as self-employment income, and taxpayers may be responsible for self-employment taxes on mined income.
Yes, Coinbase reports to the IRS. At this time, Coinbase issues the IRS Form 1099-MISC for mining or staking rewards greater than $600 and/or fees.
Yes, there are crypto mining deductions available when mining is classified as a business, not a hobby. Some frequent expenses that may be eligible for the trade or business expense deduction include: mining equipment; electricity costs; repairs; and rented space used to operate the equipment.
The cryptocurrency taxes are either the capital gains tax for any disposition of crypto or the income tax for any crypto earned as income through mining, staking, airdrops, or payment. Although buying cryptocurrency is not a taxable event, selling it is.
The IRS aggressively enforces tax reporting on mining and selling cryptocurrency. Fortunately, miners may be eligible for certain deductions to lessen their tax liability. TaxBit specializes in reporting mining income, accounting for selling mined crypto, and claiming applicable deductions.