If youâre mining cryptocurrency, youâre required to report your income on your tax return.Â
Crypto mining taxes can be difficult to navigateâso letâs walk through the entire reporting process. In this article, weâll cover everything you need to know about mining taxesâincluding how you can properly report mining income and whether you can report expenses to save money on your tax bill.Â
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.Â
How are mining rewards taxed? If you are mining cryptocurrency, you are subject to two different tax events:Â
Income tax when you receive your mining rewards Capital gains tax when you dispose of your mining rewards VIDEO
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.Â
For example, if you successfully mined 0.25 BTC on March 15, 2024, 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. Hereâs a breakdown of federal income taxes in the 2024 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.Â
Your capital gain or loss will vary on how the price of your crypto has changed since you originally received it.
Hereâs a simple formula to help you calculate your capital gains or losses:Â
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? Youâll incur capital gains or losses when you dispose of your mined cryptocurrencyâjust 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.
Letâs showcase an example to better illustrate how this works.
Example: Capital Gains and Income Tax on Mining Charlie mines 1 BTC worth $40,000.
Charlie later sells his BTC for $42,000.
Charlie recognizes $40,000 of income and $2,000 of capital gain.
In this example, Charlie only recognizes capital gain based on how the price of his BTC has changed since he originally mined it.
Pro Tip: â
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 donât 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.Â
While crypto transactions are pseudo-anonymous, itâs 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.Â
Should I track mining taxes on an ongoing basis? Because cryptocurrency is taxed at time of receipt, itâs recommended that you keep track of your taxes on an ongoing basis.Â
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.Â
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.Â
Do I have to pay quarterly taxes on crypto mining? The IRS requires you to pay quarterly taxes in the case of the following:Â
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 yearâs liability or 100% of next yearâs tax liability. If youâre 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.Â
Will there be a 30% tax on mining activity? The Treasury Department recently proposed a 30% excise tax on cryptocurrency mining businesses. At this time, itâs 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 âcrypto miningâ on the line provided.
While mining as a hobby, you are not allowed deductions to offset some of expenses like electricity and hardware costs.Â
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.Â
Here are some of the expenses that mining businesses can deduct. â
Electricity Mining cryptocurrency can lead to high electricity bills. Luckily, mining businesses can deduct these costs as expenses.Â
To deduct electricity costs from your tax bill, itâs important to record the amount of electricity that is used exclusively for mining. If youâre 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.Â
These types of âmixed-useâ 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.Â
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 the mining equipment you are deducting exceeds $3.05 million, you can deduct the cost of your equipment yearly through depreciation .
Repairs If youâve made any repairs to your mining equipment, youâll 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.Â
Rented space If youâre renting out space to run a cryptocurrency mining operation, you âll likely be able to deduct this cost as a business expense.Â
If you're mining cryptocurrency in a home office, youâll likely be able to claim a deduction based on how much of your home is being exclusively dedicated to your mining operations.Â
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, thereâs 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 .