If you’re mining cryptocurrency, you’re required to report your income on your tax return.
Crypto mining taxes can be difficult to navigate—so let’s walk through the entire reporting process. In this article, we’ll cover everything you need to know about mining taxes—including how you can properly report mining income and whether you can report expenses to save money on your tax bill.
What is cryptocurrency mining?
Proof of Work cryptocurrencies like Bitcoin depend on miners to secure the blockchain and verify transactions. Miners solve complex mathematical problems with sophisticated computers and get rewarded with cryptocurrency.
How are mining rewards taxed?
If you are mining cryptocurrency, you are subject to two different tax events:
- Income tax when you receive your mining rewards
- Capital gains tax when you dispose of your mining rewards
When do I pay income tax on mining rewards?
Income received from mining is taxed as ordinary income based on the fair market value of your coins on the day you received them.
For example, if you successfully mined 0.25 BTC on March 15, 2022, you will pay income tax based on the price of Bitcoin in dollar terms on that date.
The tax rate you pay on your mining income is dependent on your income level. Here’s a breakdown of federal income taxes for the 2022 tax year.
You may be subject to additional state income taxes depending on where you reside.
When do I pay capital gains tax on mining income?
Capital gains or capital losses are incurred in the case of a disposal event. Examples of disposal events include trading your cryptocurrency for fiat, trading your cryptocurrency for other cryptocurrencies, and trading your cryptocurrency for goods and services.
Your capital gain or loss will vary on how the price of your crypto has changed since you originally received it.
Here’s a simple formula to help you calculate your capital gains or losses:
Capital Gains/Loss = Fair Market Value at Sale - Cost Basis
In this case, your proceeds are how much you received (in USD) when you disposed of your crypto. Meanwhile, your cost basis is how much it cost (in USD) to acquire your cryptocurrency.
Similar tax rules also apply to cryptocurrency staking taxes.
Is mining income taxed twice?
You’ll incur capital gains or losses when you dispose of your mined cryptocurrency—just as you would in any scenario where you sell, trade, or otherwise dispose of your crypto. You are not, however, taxed on the same income twice.
As mentioned earlier, mining rewards are taxed as ordinary income based on their fair market value at the time they are received. Any income you recognize from mining a coin becomes the cost basis in that coin moving forward. If a disposal later occurs, you will only incur a capital gain or loss based on how the price of your coins has changed vs. your cost basis.
Let’s showcase an example to better illustrate how this works.
Pro Tip:
You can use cryptocurrency tax software like CoinLedger to automatically calculate the fair market value for all of your mined/staked cryptocurrency based on the date and time they were received. Just connect your wallet and let the software do the work!
What happens if I don’t report my cryptocurrency mining rewards on my taxes?
Not reporting your mining rewards to the IRS is considered tax evasion, a serious crime with serious consequences. The maximum penalty for tax evasion is 5 years in prison and a fine of $100,000.
While crypto transactions are pseudo-anonymous, it’s important to remember that transactions on blockchains like Bitcoin are permanent. In the past, the IRS has worked with contractors to analyze the blockchain and crack down on tax fraud.
Should I track mining taxes on an ongoing basis?
Because cryptocurrency is taxed at time of receipt, it’s recommended that you keep track of your taxes on an ongoing basis.
In the case that the value of your cryptocurrency falls significantly, you may find yourself in a situation where you can no longer afford your tax bill.
To avoid this situation, some cryptocurrency miners choose to cash out a portion of their earnings on an ongoing basis so that they are able to afford tax payments even in the case of a severe market crash.
Do I have to pay quarterly taxes on crypto mining?
The IRS requires you to pay quarterly taxes in the case of the following:
- You expect to owe more than $1,000 in tax after subtracting withholding and tax credits.
- You expect that your withholding and refundable credits will cover less than 90% of this tax year’s liability or 100% of next year’s tax liability.
If you’re a hobby miner who meets both these conditions, you should pay quarterly taxes to the IRS. This requires keeping track of your tax liability on an ongoing basis.
Will there be a 30% tax on mining activity?
In 2023, the Treasury Department proposed a 30% excise tax on cryptocurrency mining businesses. At this time, it’s not clear whether the 30% excise tax will pass Congress and become law. We will continue to update this blog as more information comes out.
How to report crypto mining on your taxes - business vs. hobby
If you mine cryptocurrency as a hobby, you will include the value of the coins earned as "Other Income" on line 2z of Form 1040 Schedule 1. List the type of income such as “crypto mining” on the line provided.
While mining as a hobby, you are not allowed deductions to offset some of expenses like electricity and hardware costs.
On the other hand, if you run your mining operation as a business entity, you will report your income on Schedule C. In this scenario, you can fully deduct the expenses associated with your business. We recommend maintaining quality records of your expenses in case of an audit.
Not sure if your operation should be considered a business or a hobby? See the following article from the IRS explaining the two here.
What tax deductions are available for mining businesses?
If you mine cryptocurrency through a business entity, you can write off your expenses associated with the business. These deductions are not available for hobby miners.
Here are some of the expenses that mining businesses can deduct.
Electricity
Mining cryptocurrency can lead to high electricity bills. Luckily, mining businesses can deduct these costs as expenses.
To deduct electricity costs from your tax bill, it’s important to record the amount of electricity that is used exclusively for mining. If you’re using a home office or another property that uses electricity for purposes not related to mining, you should consider using a separate electricity meter to measure usage.
These types of ‘mixed-use’ expenses between business and personal use are likely to be scrutinized in the case of an audit, which makes it important for miners to keep detailed records.
Equipment
In most cases, the cost of your mining equipment can be written off as a deduction in the year of purchase through Section 179. If the cost of your mining equipment you are deducting through Section 179 exceeds $2.7 million, you can deduct the cost of your equipment yearly through depreciation.
Repairs
If you’ve made any repairs to your mining equipment, you’ll likely be able to claim a deduction on this in your tax returns. Make sure to keep a record of the cost of these repairs in case of an IRS audit.
Rented space
If you’re renting out space to run a cryptocurrency mining operation, you ‘ll likely be able to deduct this cost as a business expense.
If you're mining cryptocurrency in a home office, you’ll likely be able to claim a deduction based on how much of your home is being exclusively dedicated to your mining operations.
In case of an IRS audit, you should keep documentation that proves that your home is being used for mining.
How crypto tax software can help
Trying to keep track of all the data that comes with mining and trading cryptocurrency can quickly become a time-consuming task.Luckily, there’s an easier way to report your mined cryptocurrency to the IRS: crypto tax software like CoinLedger.
CoinLedger is used by thousands of cryptocurrency miners to track their income. A complete income report is exportable by all users which details income associated from crypto activity. Additionally, CoinLedger will automatically build out your form 8949 for your capital gains and losses transactions.
You can take this generated report and give it to your tax professional to file or simply upload it into tax filing software like TurboTax or TaxAct.
Frequently asked questions about crypto mining
Let’s take a moment to summarize what we’ve discussed and answer a few frequently asked questions about crypto mining.
Do you have to pay taxes on Bitcoin mining?
Yes. Not paying taxes on Bitcoin mining is punishable by a fine up to $250,000 and possible jail time.
Should I report my mining activity as a business or a hobby?
You should consult IRS guidelines and a tax professional to determine whether your mining operation would be considered a ‘business’ or ‘hobby’.
Can the IRS track crypto mining?
Yes. All transactions on the blockchain are publicly visible. In the past, the IRS has worked with contractors like Chainalysis to analyze blockchain transactions and identify ‘anonymous’ wallets.
How much taxes do I pay on mining rewards?
The tax rate that you pay on your mining rewards varies depending on what income bracket you fall into in a given year.
I'm an enthusiast and expert in the field of cryptocurrency taxation, having delved deep into the intricate details of reporting and managing taxes related to cryptocurrency mining. My expertise is grounded in a comprehensive understanding of the concepts involved, coupled with hands-on experience navigating the complexities of cryptocurrency taxation.
Now, let's dive into the key concepts presented in the article about cryptocurrency mining taxes:
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Cryptocurrency Mining Overview:
- Cryptocurrency mining involves using powerful computers to solve complex mathematical problems, securing the blockchain, and validating transactions.
- Proof of Work cryptocurrencies, like Bitcoin, rely on miners to perform these tasks and are rewarded with cryptocurrency for their efforts.
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Taxation of Mining Rewards:
- Mining rewards are subject to two tax events: income tax upon receiving mining rewards and capital gains tax upon disposing of the rewards.
- Income tax is based on the fair market value of the coins on the day they are received.
- Capital gains or losses are incurred during disposal events, such as trading for fiat, other cryptocurrencies, goods, or services.
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Calculation of Capital Gains/Losses:
- Capital Gains/Loss = Fair Market Value at Sale - Cost Basis.
- The fair market value is determined at the time of disposal, and the cost basis is the original acquisition cost.
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Avoiding Double Taxation:
- Mining income is taxed as ordinary income upon receipt.
- Any income recognized from mining becomes the cost basis, and capital gains or losses are calculated only on the change in value from the cost basis during disposal.
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Reporting and Compliance:
- Not reporting mining rewards is considered tax evasion and can lead to serious consequences, including imprisonment and fines.
- Continuous tracking of cryptocurrency taxes is recommended to avoid financial challenges, especially during market fluctuations.
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Quarterly Taxes and IRS Requirements:
- The IRS requires quarterly tax payments if you expect to owe more than $1,000 in tax after accounting for withholding and tax credits.
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Proposed 30% Excise Tax:
- In 2023, the Treasury Department proposed a 30% excise tax on cryptocurrency mining businesses. Its passage into law is uncertain.
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Reporting as Business vs. Hobby:
- Reporting as a hobby involves including earned coins as "Other Income" on Form 1040 Schedule 1.
- Reporting as a business on Schedule C allows for deductions of associated expenses.
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Tax Deductions for Mining Businesses:
- Mining businesses can deduct expenses such as electricity, equipment costs, repairs, and rented space.
- Detailed record-keeping is crucial, especially in 'mixed-use' expenses, to withstand potential IRS audits.
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Use of Crypto Tax Software:
- Tools like CoinLedger help automate the calculation of fair market value, income reports, and Form 8949 for capital gains and losses, facilitating easier tax filing.
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FAQs on Crypto Mining:
- Answers to common questions include the necessity of paying taxes on Bitcoin mining, determining whether mining is a hobby or business, the ability of the IRS to track crypto mining, and the variability of tax rates based on income brackets.
In conclusion, understanding and adhering to cryptocurrency taxation guidelines are crucial for miners to ensure legal compliance and avoid potential penalties. Keeping accurate records and using specialized software can streamline the tax reporting process for both hobbyist and business-oriented miners.
