Intro to Crypto Mining Taxes

Earnings from cryptocurrency mining are taxed as income in the United States. Learn more about how to report profits and what expenses might be deductible.

Andrew Perlin
ByAndrew Perlin, CPAUpdated on September 12, 2022 · minute read

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Key Takeaways

  • Mined crypto is taxed as income when earned and as capital gains when disposed of.

  • If you mine crypto as a business, you may be eligible to deduct certain costs.

Intro to Crypto Mining Taxes

Do you pay taxes on mining crypto? 

Yes, mining bitcoin, Ethereum, or other cryptocurrencies is taxed in two ways:

  1. As regular income at the time of mining

  2. As crypto capital gains when the mined tokens are disposed of at a later date

A crypto taxable event is triggered when earned crypto is deposited into your wallet. This means you will owe cryptocurrency mining taxes on its value at the time it is earned, regardless of any gains or crypto losses to its value during the rest of the tax year. For this reason, it is very important to keep detailed records on bitcoin or other crypto mining: when coins were earned, how much was earned, and what its value was when earned. 

Ordinary income

You will also owe capital gains taxes on mined crypto if when you ultimately dispose of it, it has increased in value. To use the example above, if you sold the .25 BTC you mined when it worth $9,000, you would owe capital gains tax on the $1,500 increase in its value.

How are nodes taxed? 

Validator nodes constantly run online software, staying up-to-date on all or part of the chain's ledger in order to validate transactions and reach consensus. On proof-of-work (PoW) chains like Bitcoin, validator nodes are not financially rewarded; rather, their work enables miners, who compete to calculate a hash this quickest in order to add new blocks to the ledger and receive bitcoin in return.

However, on proof-of-stake chains, like Ethereum 2, blocks are not "mined," rather they are "forged" or "minted" by the validator nodes themselves, which are required to have staked coins to the network. When a node is selected to add a new block, the staker is rewarded with coins.[1] These rewards are taxed as income, just as mined crypto would be.

How do I report crypto mining income on my taxes?

How you will report your crypto mining income depends on whether you’ve mined it as a hobby or as a business. The determination is left up to you; there are pros and cons to each approach. 

Crypto mining as a hobby

Bitcoin, Ethereum, or other cryptocurrencies mined as a hobby is reported on your Form 1040 Schedule 1 on Line 8 as “other Income.” It is taxed at your income bracket's tax rate

Schedule 1 Other income line

This approach to mining taxes is the simplest. However, hobby mining is not eligible for business deductions. 

Crypto mining as a business

To establish your mining operation as a business, you need to incorporate it or set it up as a sole proprietorship. Although sole proprietorships require no legal filing, they also offer no liability protection. For this reason, many choose to incorporate their crypto business as a  pass-through entity (a partnership, LLC or S Corp), or a C corporation.

Depending on the legal structure you choose for your mining business, you may need to report and pay crypto self-employment taxes.

If you choose to treat your mining as a business, earned bitcoin is reported as income on your Form 1040 Schedule C.

Schedule C 2021


Once your mining operation is established as a business, you may deduct some of your mining costs as business expenses. 

Deductions for crypto mining business expenses

Mining is a costly process, so there are incentives for treating it as a business to write off expenses. Miners should always consult with a crypto tax professional to determine which deductions are appropriate. Make sure to keep careful documentation of any claimed deductions in case of a crypto tax audit.  

Some common mining business expenses include: 

Equipment 

In most cases, the purchase price of a rig may be deducted in the year of its purchase using a Section 179 depreciation deduction, which allows companies to treat tangible business-related purchases as expenses rather than requiring them to be capitalized and depreciated. [2]

If your crypto tax professional does not find a Section 179 depreciation deduction appropriate for a mining-related purchase, the cost of that equipment may be deducted over the course of several years (typically 3 to 5) using the modified accelerated cost recovery system (MACRS).[3]  

Additionally, the cost of repairs made to mining equipment may be deductible as a trade or business expense. 

Electricity 

Electricity is one of miners’ largest expenses. Power used exclusively for mining may be deducted as a business or trade expense. This means that if you are mining in your home or another property that uses electricity for purposes other than mining, you may only deduct the portion of your electricity bill attributable to bitcoin mining.

Make sure to keep careful documentation of your business’ electricity usage. A separate meter may help with this calculation. Consult a crypto tax accountant for additional guidance. 

Office space 

If you rent space to house your mining rig, the rental expense may be deductible.

If you mine out of your home, regardless of whether you rent or own, you may be eligible for the home office deduction. If so, you can use the IRS’s guidance to calculate the portion of your housing costs that you can deduct, or use the simplified option, which deducts a set rate of expenses based on the amount of square footage occupied solely by your business

Losses

The hardware and electricity expenses of a mining rig, combined with a volatile crypto market, mean that it is possible for a mining business to lose money over the course of a tax year. In this case, losses may be able to offset other income. 

Finding the cost basis of pre-mined coins

Miners sometimes have the opportunity to "pre-mine," or mine coins prior to an Initial Coin Offering. Because these coins are mined before there is a market for them, it is not clear how one would determine their cost basis for tax purposes. There is no explicit guidance from the IRS on this topic. We recommend working with your crypto tax accountant to determine a fair market value; however, if the coin is truly illiquid it is likely that reporting a cost basis of $0 is not unreasonable.

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References

Last reviewed by Andrew Perlin, CPA on September 12, 2022 · Sources

Andrew Perlin
Andrew PerlinAccounting at TokenTax
Andrew Perlin is a CPA specializing in crypto taxes. After working as a financial controller, he co-founded CryptoCPAs, which was acquired by TokenTax in 2018.

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