Mining

The Cryptocurrency Miner’s Guide to Taxes

Photo by Andre Francois on Unsplash

With the approaching April 17th tax deadline, miners are pressed to complete their taxes. This article looks to dispel some of the confusion surrounding cryptocurrency mining and taxes.

Taxes on Cryptocurrency Mining

Another taxable event occurs whenever you successfully mine some cryptocurrency. Depending on how seriously you mine cryptocurrency, the IRS either treats it as a hobby or a business.

Whether your mining constitutes a hobby or business has tax ramifications – a business allows for more deductions reducing the amount you pay on taxes.

Based on the IRS website, the distinction between a hobby and a business is a subjective assessment that includes some of the following factors:

  • Time and effort are expended on mining with the intention to make a profit.
  • You depend on income from the activity.
  • You had changed methods of your operation to improve profitability.
  • Your mining activity is profitable and has was profitable in the previous year.

Essentially, if you have a mining rig and are seriously involved in cryptocurrency mining, then you can argue that you are a business. If you casually mine cryptocurrency on a home computer, it is probably a hobby.

If you have earned cryptocurrency as part of a hobby, then it is considered income with a few limited deductions. If you earned the income as part of a business, then your income is the fair-value of the mined cryptocurrency less any qualifying expenses.

Mining as a Hobby

If you mine as a hobby, then it is treated as ordinary income, taxed at your marginal tax rate. Thus, its tax treatment is identical to the first problem in the Calculating Short-Term Capital Gains section.

The one nuance to this is capital gains or losses between when you mined the cryptocurrency to when you sold it.

Suppose this time you mined $1,000 worth of cryptocurrency after your costs. However, you waited a month to sell the cryptocurrency. During that time the value of what you mined decreased to $900.

In this scenario, you would recognize $1,000 in mining revenue, and you would also recognize a $100 capital loss. Net, you would have a taxable income of $900 for the year from mining.

Mining as a Business

If you are a large-scale miner then calculating your revenue may become complicated.  The easiest way to calculate your total revenue from mining is through an Excel table.

To calculate daily revenue take the amount mined in that day and multiply it by the trading price on a reputable exchange to find your daily revenue. Note that you may use the open, close, or average price so long as you are consistent.

An example Excel table for calculating daily revenue.

Then, take your electricity bill and calculate the amount incurred because of mining. Net this amount against your monthly mining revenue to find your gross profit.

Then, qualifying business expenses such as depreciation are also subtracted from this amount. So for example, if you assume a $500 1070Ti will last you two years, and you will be able to sell it for $250 at the end of the two years, then depreciation for the month is as follows:

  • (Purchase Price – Residual Value) / Time Period = Depreciation
  • ($500 – $250) / 24 months = $10.4 per month

Wages and Other Kinds of Income

US Crypto Taxes
Related Article: The Current State of Cryptocurrency Taxes in the U.S.

If you’re one of the pioneering few who are paid in cryptocurrency for your wages, then the cryptocurrency you receive is treated as if they were wages.

Simply take the fair-market value of the coins to get your income, and calculate that against your marginal tax bracket table above.

If you’re a business and you make or receive a payment of $600 more to an independent contractor for work, then you are required to report that payment to the IRS and tender the payee a 1099-Misc.

These payments are again reported at the fair-market value at the time of the transaction.

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DISCLAIMER: Our writers’ opinions are solely their own and do not reflect the opinion of CryptoSlate. None of the information you read on CryptoSlate should be taken as investment advice. Buying and trading cryptocurrencies should be considered a high-risk activity. Please do your own due diligence before making any investment decisions. Finally, CryptoSlate takes no responsibility should you lose money trading cryptocurrencies.

Mitchell MoosAuthor

Mitchell Moos

Mitchell is the founder of the Blockchain Society, a student group at the University of Washington that studies blockchains and cryptocurrencies. He is also the controller at a startup that researches and develops mining software.

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