The Beginner’s Guide to Crypto Mining Taxes
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If you’re mining cryptocurrency, you are incurring income that needs to be reported on your taxes.
If you’re selling or trading your rewards, reporting your taxes becomes even more complicated. You’re required to keep detailed records of the fair market value of your assets when you receive them and when you trade them away.
Crypto mining taxes might sound difficult to navigate — so let’s walk through the entire reporting process. In this article, we’ll cover how you can properly report mining income, save money on your tax bill, and stay in compliance with IRS guidelines.
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 taxes upon receiving mining reward payouts
- Capital gains taxes when you dispose of your payout at some future date
Income taxes
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 ETH on February 15th, 2022, you will pay income tax based on the price of Ethereum 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 in the 2021-2022 tax year.
You may be subject to additional state income taxes depending on where you reside.
Capital gains taxes
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.
In this case, how much you incur in capital gains or capital losses depends on how much the price of your tokens has fluctuated since you originally mined them.
Here’s a simple formula to help you calculate your capital gains or losses:
Capital Gains/Loss = Fair Market Value at Sale - Cost Basis
Similar tax rules also apply to cryptocurrency staking taxes.
Is mining income taxed twice?
Just as you would report gain or loss on the sale or exchange of any token, you would also report the gain or loss on the sale or exchange of a token earned through mining. You are not, however, taxed on the same income twice.
As mentioned earlier, earned tokens from mining are taxed as ordinary income based on their fair market value at the time they are received. If a disposal occurs, you will only incur capital gains or losses based on how the price of your tokens has changed since you originally received them.
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!
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. This highlights the importance of keeping quality 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 $2.6 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.
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 which category your mining activity would fall under.
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.
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.
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.
This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.
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